Business Value of IT Outsourcing Gopal Kuchibhotla 8th February 2006
Agenda • IT Outsourcing: An Overview • Outsourcing Drivers • The Outsourcing Journey • Managing Relationships • Outsourcing landscape: 2006-2008
The Business Context of Outsourcing • ‘The issue is that if you don’t do it, you won’t survive’ – Daniel Marovitz, COO for Technology, Deutsche Bank • ‘Some financial institutions realized that they were becoming technology entities as well as banks, which is not always desirable.’ • ‘IT can consume 10% to 15% of the revenues across large firms. That's a big chunk.’ • HSBC decided to outsource mainly because the need to constantly improve technology was becoming difficult for the bank. • "We wanted better service quality than what we had, and more agility to respond quickly to changes in the market," Lars Gustavsson, Group Chief Information Officer, ABN Amro • Outsourcing its tech and back-office functions has proved such a successful move for IndyMac Bancorp that its ranking among the largest U.S. mortgage lenders has soared from No. 22 to No. 9 in just three years.
The IT Outsourcing Market The McKinsey Global Institute estimates $18.4 billion in global IT work and $11.4 billion in business-process services have been shifted abroad so far -- just one-tenth of the potential offshore market. India’s Outsourcing Industry - USD 18 Bn, ~ 70% from IT Within IT Services & Software (USD 12.2 Bn), ~ 27% from IT Outsourcing Source: NASSCOM figures for 2004
IT Outsourcing • Outsourcing is the long term contracting of non-core business processes to a responsible provider. • Outsourcing helps companies be more successful in what they do best. • Building shareholder value is the goal. • IS Strategy & Budgets • Capital Expenditures • Project Management • Technical & Development Direction • Competency Development • Hardware/Software/Operations Decisions • Hardware/Software/Operations Management • Vendor Relationship Management Client • Infrastructure Installation & Maintenance • Infrastructure Performance, Upgrades, Migration • Capacity Planning & Queue Management • LAN/WAN Development & Maintenance • Vendor & Carrier Interfaces • Scheduling & Monitoring • User Support • Problem Logging & Resolution • Coordination • Training Corporate Management Reporting Data Entry • Applications/Systems Installation & Maintenance • Upgrades, Migration & Release Management • Database Support • Prototyping & Planning • Custom Development & Integration • Package Implementation & Customization • Break/Fix & User Support • Problem Logging, Escalation Management & Resolution • Trend Identification • Coordination • Vendor Interface • Training System Control APO Application System Support Hardware OPS Application Support Application Development Telecom OPS ITO IT Services Help Desk Applications Applications Outsourcing Shared Responsibility IT Outsourcing Client
Why Should A Customer Consider IT Outsourcing • Performance and Stabilization • Improve Business Focus • Adopt Best Practices • Manage Complexity & Stabilize Environment • Faster Leverage of Technology Advances • Better Systems & Enhanced Services • Strengthen Control • Improve Scalability • Access to Resources / Technology • Access to Specialists • Management Expertise • Accelerate Benefits • Attrition Management/Depth and Breadth of Resources • Cost Management • Economies of Scale/ Productivity • People • Technology • Committed cost structure • Capital investment avoidance
Typical Results Selective Outsourcing Drivers and Results High Convert Fixed Cost to Variable Cost Free Up Resources Access New Skills Improve Service Priority of Driver Meet Business Timetables Avoid Investment Eliminate Headaches Improve Focus of Business Share Risk Restructure Company Low Relative Level of Success Low-Mixed Consistently High
Evaluation of Outsourcing Opportunities Organization Operations Telecommunications • Organization Chart • Accurate Headcount • Prior Year Actual Costs • Current Year Detail Budget • Current Year Actual Costs • Business Processes • Responsibility Matrix • Volume and Performance Parameters • Personnel Projections • Configuration Diagram • Voice and Data • Local and Remote • Asset Register • Lease Schedule • Maintenance Schedule Special Requirements Hardware Software • Support Hours/Standards • Printing • Distribution • Training • Archival • Configuration Diagram • Hardware Register • Hardware Lease Schedule • H/W Maintenance Schedule • CPU and DASD Utilization • Activity Volumes • Software Lease Schedule • Software Maintenance Schedule • System Diagrams • Software Register • Evaluation of outsourcing opportunities is successful only if the current and target business process environment is accurately understood. • Defining today’s environment or base-lining involves recording the resources, activities and service levels which are currently experienced. • Determining the target environment must involve top management and be consistent with the overall business strategy.
Roles Client Business Planning Organization Implementation Strategy Leadership Requirements Tactics Coordination Planning Operations Management Execution Service Provider
Choosing a Services Portfolio for IT Outsourcing No “one service portfolio fits all”. Services must be selected based on industry and organizational contexts including: • Client Organization: • Strategic: • Integration with core competence • Impact on data security/intellectual property • Level of working capital consumption • Impact on in-house employee base rationalization • Operational: • Measurability/decouplability of process • Impact on upstream and downstream processes • Need for improvement in service quality • Availability of management bandwidth to manage the relation • Industry Maturity: • Level of service development for the industry
Choosing a Services Portfolio Compare ease and benefits to select and prioritize services Product development Application development Benefits of outsourcing Network Maintenance Infrastructure Maintenance IT Helpdesk Ease of outsourcing
Choosing a Services Portfolio • In-house due diligence for selection of service provider to create a “consideration set” for further data analysis • What are the 2-3 must-haves in our vendor, and who fulfills these criterion? E.g. willingness to absorb resources, focus on a vertical etc. • Who are the key players in the industry? • Who are some of the smaller players that may be good to look at? • Do we have existing relations with any service provider? • Who are our competitors outsourcing to? • First-cut discussions with “consideration set” service providers • Softer aspects of cultural alignment, level of interest, competencies etc. may also be assessed • Gathering data from second cut short-list • Data gathered from RFP • Data gathered from client references etc.
Information Heads in an RFP • Human Resources • Typical profile of employees • % of offsite/onsite employees • Training • Attrition • Financial Strength • Revenues & Profits – total, by geography, vertical, service line • Operating margins • Billing rates • Operations • Certifications • No. of transitions • Transition methodologies • Managing work-load peak and troughs • Employee utilization • Metrics used to measure efficiencies • Business continuity arrangements • Cost reduction initiatives • Data security initiatives • Background • Years of experience • Centers and locations – international centers • Employee – total and by service line • No. of clients • Client profile • Repeat business • Senior management team
Gathering the Information Source: Wipro Analyst Presentation, 2005
Multisourcing – Selecting More Than One Service Provider • ABN Amro split its USD 2.2 bn IT contract amongst multiple vendors – IBM (infrastructure support), Infosys, Tata Consultancy Services (application enhancements) and Accenture, IBM, Infosys, Patni Computer Systems and TCS earning preferred-supplier status for development work • Dutch/Shell Group awarded a USD 1 bn IT services agreement to IBM and Wipro Technologies • Bank of America is outsourcing work to EDS and Hewitt Associates • Renault awarded outsourcing contracts to Atos Origin, CSC, HP Service Provider Must-Have’s: Deep domain experience, Larger number of clients Client Must-Have’s: ‘Manager’ of Managers, well-defined SLA”s Competencies to measure costs of vendor management
Finalizing the Contract • Agreement on following key aspects: • Pricing* • Fixed price (~ 35% of vendor revenues) • Time and Material (~ 65% of vendor revenues) • Clients have typically faces a problem in fixed price contract when there is a situation of fluctuating work loads - vendors may not be able to provide consistent service levels • Absorbing in-house employees • Security audits • Contract renegotiation • Termination *Source: Infosys Annual Report, 2004-2005 and PwC analysis based on vendor discussions
Finalizing Service Level Agreements • 3rd party contracts are governed by a Master Services Agreement (MSA) between the company and the service provider. • The MSA establishes the broad framework of agreement between the two parties and results in various Statements of Work (SOWs) for different projects. • SLAs are defined in MSAs • 4 key metrics addresses in SLA’s • Volume of work • Quality of work • Responsiveness • Efficiency
Volume of Work SLAs • Specifies the exact level of effort to be provided by the service provider within the scope of the project. • Any effort expended outside of this scope to be separately charged or to require re-negotiation of SLA terms • Broadly defined as the number of units of a work product or the number of deliverables produced per unit of time, • Should be specified for every major deliverable cited in the SLA. • Pick the simplest volume metrics possible to ensure consistent results. • More complex metrics difficult and costly to obtain & risk inconsistency and subjectivity • Time and materials basis projects discuss volume in terms of number of resources, fixed price project will generally specify volume of deliverables. • Example metrics include number of support calls per month, number of maintenance requests per month, number of lines of code etc. Source: PwC Analysis, Clarity Consulting
Quality of Work SLAs A quality definition may contain several, individual metrics that may form part of the deliverable's acceptance criteria including: • Defect rates • No. of production failures per month, number of missed deadlines, number of deliverables rejected (reworks), etc. • Technical quality • Measurements of the technical quality of application code, normally produced by commercial tools that look at items such as program size, degree of structure, degree of complexity and coding defects. • Service availability • On-line application availability to delivery of reports by a specified time-of-day. Measures can be reported positively or negatively, and usually incorporate some level of tolerance. • Examples include on-line application availability 99% of the time between the hours of 08:00 AM and 06:00 PM, etc. • Service satisfaction • Good double-check on the validity of the other SLA metrics. For example, if an outsourcer meets all performance targets, but receives a substandard satisfaction rating, SLA metrics are not targeting the right factors. Source: PwC Analysis, Clarity Consulting
Responsiveness SLAs • Measure the amount of time that it takes for an outsourcer to handle a client request. • Metrics include: • Time-to-market or time-to-implement • Metrics include time to implementation of an enhancement, time to resolve production problems, etc. • Time-to-acknowledgement • Metrics include time to acknowledge routine support calls, programmer response time to production problems, etc. • Backlog size • Metrics include # of resource-months of enhancements, # of unresolved support requests, etc. Source: PwC Analysis, Clarity Consulting
Efficiency SLAs • Measure the engagement's effectiveness at providing services at a reasonable cost • Examples of efficiency metrics include: • Cost/effort efficiency • Metrics include number of programs supported per person, cost per support call, etc. • Team utilization • Metrics include % of time spent on support, % utilization • Rework levels • Metrics measure rework rates for particular tasks, and for specific processes. Source: PwC Analysis, Clarity Consulting
Transitions - Knowledge Transfer • Typically involves onsite visits by vendor senior project managers • On return, the project managers set up the team structure • Clients may also send key development personnel to vendor • Key personnel involved from client include Senior Managers or Product Directors for set-up • Senior engineers for training and initial hand-holding of the vendor team • Companies have found the average time for migration to be 3-6 months depending on the complexity of the product and the activity offshored.
Transition – Stabilization and Monitoring • Gradual decrease in involvement of client • Change in role from guidance provider to monitor of key parameters. • Constant communication between the teams onsite and offsite is imperative for the success of projects. • Informal communication mechanisms such as telephone calls, Webex or NET meetings, chat sessions, emails and video conferences • Formal project status reporting include weekly and monthly updates highlighting accomplishments, plans for the next period, issues and concerns (if any). • Project related documentation and work in progress artifacts are uploaded onto intranet sites to be accessed by the client team
Project Management Best Practices • Risk Management • Use of standard risk management templates for each project. • Various types of risks (e.g. resources, infrastructure, technical competency) are identified are mitigation plans documented. • Quality Assurance (QA) • Companies typically have a Quality Manual that describes the different life cycle models including phases, roles and responsibilities of personnel involved, standards and templates and criteria for signoff. • Test Planning • The test plan document contains the detailed testing plans for the project along with the type of testing to be done (including regression testing).
Project Management Best Practices • Training Plan • The training plan contains the detailed training requirements for the project team. This is critical for new projects or activities recently outsourced. Key development personnel from onsite visit the vendor for extensive training sessions. Thereafter, training sessions are conducted through video conferencing, Webex or NET meeting sessions. • Minutes of meeting tracker • Vendor teams keep details of all meetings with the teams onsite along with the agenda for next meetings. This ensures that all issues are inputted and tracked for timely completion. • Change Request Template • Companies typically use a standard change request template. This includes the nature of change, priority, scope and reason of the change, and estimated effort.
Project Management Best Practices • Impact Analysis • The impact analysis document contains details about the impact of the change requested on the entire product and individual module. This helps keep track of changes and eliminate unusual bugs in the code. • Formal Project Status Reports (PSR) • The PSR highlights details of project execution and is typically submitted to the onsite team on a weekly basis. Any schedule or effort variance is highlighted in the PSRs. PSRs also include quality and productivity metrics that have been defined in the Project Plan at the beginning of the project.
Looking Ahead • Near steady state regarding the nature of IT services being outsourced/offshored* • The more traditional IT outsourcing service lines such as hardware and software maintenance, network administration and help desk services will account for 45% the total addressable market for offshoring • Service lines that have driven recent growth including application development and maintenance and R&D services are already 30-35% penetrated and unlikely to witness dramatic growth • Europe will continue to witness significant activity in IT outsourcing – will come close to catching with the American market share • Supplier landscape in the future industry to become more competitive • Clients will look for greater levels of domain experience ~ this will allow smaller organizations to offer a compelling value proposition to clients • Organizations may choose to back-source some IT functions to their captive centers *NASSCOM
Looking Ahead • Large Indian service-providers will also reach a higher level of maturity to compete with global majors • An IT skills shortage and poor physical infrastructure could threaten India's position as the leading offshore outsourcing location • Multi-sourcing will be one of the most visible trends • Organizations will need to develop the competencies to manage a multi-vendor environment • IT service providers will evolve their businesses around distinctive models including: • Global Champion (where they can offer multiple service lines and solutions to large customer accounts) • IT specialist (where they can be focused around three to four major industry verticals or cross industry service lines) • ADM Factory (where they can position themselves as low cost providers of applications development and maintenance services),
Looking Ahead • India's offshore IT players will have to bring innovation in their business models (by focusing on new service lines like infrastructure offshoring), in their knowledge domains (develop deep IP-based solutions) and in their ecosystem (by undertaking systematic talent enhancement, better technology research etc.) • Sustaining industry leadership will require India-based players to continue to drive the frontiers of operational excellence. In order to achieve this goal, companies will have to focus on: • Enhancing customer interaction and solution delivery (e.g., effectively influencing customer thinking and decisions) • Improving resource management (e.g., hiring people with the right skills at the right tenure) • Upgrading support processes (e.g., near real time monitoring and accurate and quick reporting to facilitate decision making).
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