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									Business Value of IT Outsourcing
                   Gopal Kuchibhotla

                   8th February 2006

 • IT Outsourcing: An Overview

 • Outsourcing Drivers

 • The Outsourcing Journey

 • Managing Relationships

 • Outsourcing landscape: 2006-2008

IT Outsourcing: An Overview
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

  • 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
• Infrastructure Installation &
                                                                   •    Technical & Development Direction
  Maintenance                                     Corporate        •    Competency Development
• Infrastructure Performance,                    Management
                                                                   •    Hardware/Software/Operations Decisions
  Upgrades, Migration
                                                 Reporting         •    Hardware/Software/Operations Management
• Capacity Planning & Queue
                                                 Data Entry        •    Vendor Relationship Management
• LAN/WAN Development &                                                                 • Applications/Systems Installation
  Maintenance                                                                             & Maintenance
• Vendor & Carrier Interfaces                                 System
                                                              Control                   • Upgrades, Migration & Release
• Scheduling & Monitoring                                                       APO       Management
• User Support                       Hardware                                           • Database Support
                                                  System       Application
• Problem Logging & Resolution          OPS                                             • Prototyping & Planning
                                                 Support        Support
• Coordination                                                                          • Custom Development &
• Training                                                                                Integration
                                Telecom OPS                     Application
                                                                                        • Package Implementation &
             ITO                                                                        • Break/Fix & User Support
                              IT Services              Help Desk Applications           • Problem Logging, Escalation
                                                                                          Management & Resolution
   Applications Outsourcing                                                             • Trend Identification
                                                                                        • Coordination
   Shared Responsibility                                                                • Vendor Interface
   IT Outsourcing                                                                       • Training
Outsourcing Drivers
Why Should A Customer Consider IT Outsourcing

Performance and Stabilization                   Access to Resources / Technology

• Improve Business Focus                        • Access to Specialists

• Adopt Best Practices                          • Management Expertise

• Manage Complexity & Stabilize Environment • Accelerate Benefits

• Faster Leverage of Technology Advances        • Attrition Management/Depth and Breadth
                                                  of Resources
• Better Systems & Enhanced Services

• Strengthen Control

• Improve Scalability                Cost Management

                         • Economies of Scale/ Productivity
                             • People
                             • Technology

                         • Committed cost structure

                         • Capital investment avoidance
Typical Results

      Selective Outsourcing Drivers and Results


                                           Convert Fixed Cost
                                           to Variable Cost                     Free Up Resources
       Priority of Driver

                                                                                   Access New Skills

                                        Improve Service
                                                                                           Meet Business Timetables
                                                           Avoid Investment
                                                  Improve Focus
                                                  of Business
                                                                              Share Risk


                            Low-Mixed                     Relative Level of Success                    Consistently High

Typical Results

The Outsourcing Journey
Evaluation of Outsourcing Opportunities

  • 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.

          Organization                         Operations                    Telecommunications
      • Organization Chart            • Business Processes               •   Configuration Diagram
      • Accurate Headcount            • Responsibility Matrix            •   Voice and Data
      • Prior Year Actual Costs       • Volume and Performance           •   Local and Remote
      • Current Year Detail             Parameters                       •   Asset Register
        Budget                        • Personnel Projections            •   Lease Schedule
      • Current Year Actual Costs                                        •   Maintenance Schedule

      Special Requirements                     Hardware                            Software
      •   Support Hours/Standards     •   Configuration Diagram          • Software Lease Schedule
      •   Printing                    •   Hardware Register              • Software Maintenance
      •   Distribution                •   Hardware Lease Schedule          Schedule
      •   Training                    •   H/W Maintenance Schedule       • System Diagrams
      •   Archival                    •   CPU and DASD Utilization       • Software Register
                                      •   Activity Volumes


          Business Planning   Organization   Implementation

          Strategy            Leadership      Requirements

          Tactics             Coordination    Planning

          Operations          Management      Execution


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

 •   Background                     •   Operations                        •   Human Resources
      •   Years of experience            •   Certifications                    •   Typical profile of employees
      •   Centers and locations –        •   No. of transitions                •   % of offsite/onsite employees
          international centers          •   Transition methodologies          •   Training
      •   Employee – total and by        •   Managing work-load peak           •   Attrition
          service line                       and troughs
      •   No. of clients                 •   Employee utilization         •   Financial Strength
      •   Client profile                 •   Metrics used to measure           •   Revenues & Profits – total, by
      •   Repeat business                    efficiencies                          geography, vertical, service
      •   Senior management              •   Business continuity                   line
          team                               arrangements                      •   Operating margins
                                         •   Cost reduction initiatives        •   Billing rates
                                         •   Data security initiatives

 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

•   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

Managing Relationships
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

•   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

•   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
     •   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

•   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.

Outsourcing Landscape: 2006-2008
 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

 •   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                                             33
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

•   IT service providers will evolve their businesses around distinctive models
     •   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

•   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
     •   Upgrading support processes (e.g., near real time monitoring and accurate and
         quick reporting to facilitate decision making).

              Thank You

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