Title: BUSINESS CASE FOR IT OUTSOURCING
1BUSINESS CASE FOR IT OUTSOURCING LINUX
APPLICATION
MGMT 396- Autumn 2003 S. Kohli Kaustuv
Mukherjee 25th November 2003
2Contents
- Introduction
- Process/Best Practices
- Current Scenario / Future Trend
3Business Issues
- What are the critical buying criteria in the
offshore market? - What is the potential of the North America market
for growth? - How do different industry segments use offshore?
- What applications are most ripe to outsource
offshore? - What countries are providing offshore services
- What Linux Application are Business Ready?
- Advanced Linux technology
4Key Drivers for Offshoring
- Time differences advantages
- 24 x 7 x 365 work cycles
- Cost benefits
- Quality Processes CMM and ISO
- Talent/Skill Pool
- Capacity Issues resolved
- Higher value chain
5North American IT Services Market
6U.S. Offshore IT Services Spending
26.4 CAGR
Source International Data Corporation, 2001
7Challenges facing CIOs today
Business pressures
Talent constraints faced by IT department
- More cost effective use of IT dollars. Demand for
IT spend continues to outpace the increase in
budget forcing CIOs to postpone/rationalize spend
- Compressed time-to-market. Application
development cycles have reduced from 12-24 months
in early 1990s to 3-6 months in early 2000 - Higher quality and performance standards. Use of
enterprise applications in more mission critical
areas, e.g., eCRM has reduced the tolerance of
errors/faults
- Intense war for technical talent.
- Increasingly difficult to win against ISVs,
service providers and new economy players - Overall shortage of technical talent increasing
to 8-9 million worldwide by 2004 - Rapid escalation in professional services fees.
- Average US based consultant costs twice as much
as a full-burdened IT employee
Key challenges
- CIOs cannot rely solely on internal organizations
to develop and maintain enterprise IT systems - Traditional outsourcing service providers are
not cost-effective
Source McKinsey analysisIDC, Giga client
interviews
8 can be addressed by outsourcing to vendors
- 30-40 lower costs than traditional IT service
providers - Likely to sustain lower costs for the next 5
years
More cost effective use of IT dollars
- Tested and robust business model with manageable
risks - Well established and competitive vendor base
Challenges faced by the CIO
- Up to 40 shorter development cycles
- Shorter learning curves
- 24/7 production runs
- Ramp-up capacity faster
- Shorter rework cycles
Compressed time-to-market
Higher quality and performance standards
- More established methodologies and processes for
meeting higher performance standards
Source McKinsey analysis, Satyam, Infosys,
Wipro, Morgan Stanley Dean Witter
9Country Comparison
Skills surplus countries
Regional hubs
User countries
High
- Talent sophistication
- Number
- Cost
- Skills
US
India
UK
Germany
China
France
Indonesia
Ireland
Philippines
Singapore
Low
Low
High
- Vendor sophistication
- Number
- Quality
10Contents
- Introduction
- Process/Best Practices
- Current Scenario/Future Trend
11Evolvescapes RightSourcing Model
Satellite Based Communication
Client / Off-site Location
Near Shore
Project
- Analysis and planning
- High level design
- User interface design
- Project coordination
- Onsite testing
- Implementation
Post implementation support
Offshore
Project
- Project management
- Detailed design
- Coding
- Testing
- Documentation
Offshore Development Centers(Key elements of
cost savings approach)
Post implementation support
- Bug fixes
- Warranty support
- Maintenance
12Customers need to address key outsourcing process
issues
Outsourcing Strategy
Outsourcing Execution
- How do we maximize benefit from outsourcing to
vendors? - What kind of relationship should we establish
with vendors? - How do we select vendors for specific projects?
- How do we manage the transition to offshore
development?
- Which projects are suitable for offshore
development? - How do we manage the transition of individual
projects? - What kind of organization and governance is
required to manage vendor performance? - How do the vendors customize its processes to
customer requirements?
13Best practices in outsourcing processes
Outsourcing to vendors should be much more than
offshoring and staff augmentation
Adopt a partnership based approach to IT
outsourcing and move towards a competency based
vendor selection
Follow a staged approach for transition to an
offshore partner with a careful selection of
projects
Best Practices
Prepare detailed transition plans for each
project, especially maintenance projects
Establish strong governance and management
oversight to manage relationship and performance
Ensure that outsourcing processes are tailored to
business requirements
14Outsourcing to vendors is more than offshoring
and staff augmentation
Traditional Mindset
Winning Mindset
- Use vendors for project components
- Outsource complete projects
- Maximize offshore component
- Use offshore, offsite and onsite presence
judiciously
- Use staff augmentation approach for onsite
presence
- Maintain onsite presence for managing and
delivering solutions
- Focus on software outsourcing only
- Extend IT organization virtually (includes
software development, network management, call
centers, infrastructure projects, decision
support systems, etc.)
15Think partnership not transaction
Transaction approach
Partnership approach
- Medium/Long term commitment
- RFP issued for every project
- Competency based vendor selection
- Vendors not expected to invest
- Vendors expected to invest in infrastructure,
knowledge transfer, etc.
- Vendors follow customer orders with limited value
add
- Vendors expected to leverage their knowledge base
and contribute to overall strategy and planning
issues
- Vendors not involved in technology strategy and
planning
- Vendors expected to be actively involved in
technology planning
- Insufficient focus on risk mitigation
- Proactive measures for mitigating risks
- While a partnership approach is recommended, in
certain situations a transaction approach may be
more appropriate. For example - Initial engagements to test the capabilities of a
vendor - Projects involving confidential and proprietary
knowledge, etc.
16Partnership model has benefits
- Enables vendors to offer lower pricing because
they have better visibility into revenue streams - Reduces the vendor total cost of doing business
which can be passed to customer.
Cost
- Learning curve benefits help in improving quality
- Allows vendors to prepare resource plan in
advance and staff projects with appropriate
resources - Helps achieve best practice transfer by vendors
- Learning curve benefits help in faster time to
market - Releases important customer resources for more
value added work - Reduces time spent in the RFP process
Quality
Time to market
17A staged approach helps transition to offshore
partner
Complete outsourcing
Key Success Factors in a Transition
Increase scope and scale
Test the partnership
- Involve the end user closely in the transition
- Discuss in existing IT governance forum
- Involve end user in oversight
- Management of the CMM level gap between offshore
partner and user organization is critical
- Presentation screen re-writes
- Database cleansing
- Back-end systems maintenance
- 24x7 QA
- E-business front end
- Re-architect back-end
- Implement middleware
- Server consolidation
Typical projects
Increasing management complexity and mission
criticality
Quality Assurance
18Careful selection of projects required
Large projects are generally more successful...
and also those requiring low customer
interaction
Actual Savings
Project Size
gt50 of low interaction projects deliver greater
than 40 savings
lt10 million
21
10-100 million
27
Best Practice
- More emphasis on projects requiring low level of
user interaction - Less emphasis on choosing small projects
- Generally favors projects with less schedule
pressure but higher business priority
19A simple framework for planning transition and
selecting projects
- Business Stability
- Quality of scoping
- Changing market (e.g., Internet applications)
- Release version - higher versions are more stable
- System Complexity
- Number of interfaces to other systems, some of
which are also under development
High
Requiring vendor with high management abilities
Not recommended to offshore
Management Complexity
May require longer transition and higher onshore
presence, medium saving potential of 30 - 40
Requiring vendors with high interaction handling
capabilities and tools
Medium
Suitable high saving potential of 40 - 60
Low
Medium
High
Low
Interaction Requirements
- There will be exceptions to the above framework
in certain situations. Examples of projects
typically not outsourced - Applications related to core business processes
- Pioneering technology work
- External interactions
- Customer input on interface design
- Third party input (e.g., JV partner)
- Internal interactions
- Missing or bad documentation forcing interactions
with other developers - Complex business knowledge requirement forcing
interactions with business partner
20 technology provider successfully followed a
phased approach
Started attending partner conferences
Year 2000No. of people 125
- Contribution to new releases (development)
Marked up SLAs
Year 1999No. of people 90
Scaled down SLAs to give time to vendor
- High priority and high complexity
- Full testing of products
Year 1998No. of people 60
Jointly bidding for implementing solutions
- Medium priority and medium complexity maintenance
(including analysis and design)
Year mid 1997No. of people 30
- Medium priority and medium complexity maintenance
- Regression testing
Started presenting at partner conferences
Year 1997No. of people 6-8
- Development project to test vendor capability
- Low priority and low complexity maintenance of a
small component
Moving up the value chain with increasing
customer confidence in vendor capabilities
21Steps for offshoring project Application
Maintenance example
A detailed transition plan is required for each
individual project
Knowledge Acquisition
Project Planning
Onshore/Offshore Transition
Offshore Execution
Offshore Simulation
Offshore Training/Pilot
Further details on Outsourcing Processes
available in the Outsourcing Processes section
of the ODC Boot Camp binder
22Strong governance and managementoversight is
critical
Best Practices
Key Levers
- Partnership board consisting of senior management
from both sides is the final decision making
authority - Every quarter, partnership board reviews the
level of outsourcing and the performance
scorecard - Every year, partnership board conducts joint
strategic technology planning sessions
Partnership Board
- Day-to-day project management is performed by
dedicated relationship managers from each side - Relationship managers facilitate smooth project
execution, define processes and act as trouble
shooters
Relationship Management
- Performance tracking should be automated
- Performance scorecard (SLAs) for off-shore
vendor - Commitment tracker for US partner
- Clear definitions of success and failure
- Predefined processes for increased and decreased
collaboration - Exit clauses that define responsibility and
timelines for knowledge transfer, documentation
and intellectual property rights
Performance Management
23Risks associated with outsourcing to vendors
manageable
Why we believe risks can be managed
Perceived risks
- High attrition rates due to large demand
- Leading vendors are investing heavily in
training, compensation and partnerships with
universities to train more students
Talent
- Complex projects have many failure points
- CMM level 4 and level 5 certification
- Active governance policies with interactions at
all levels
Project
- Differences in work culture
- Leading IT vendors proactively manage culture gaps
Cultural
- Electricity and telecom not reliable
- Different IPR laws
- Government actively promoting uninterrupted power
supply and telecom to technology companies - Established legal system
Infrastructure
- Geopolitical events can destabilize trade e.g.
with India
- US and Indian governments agreed to de-link the
IT trade from politics
Political/Country
24Linux Business Application
- 66 of the Internet Server market
- 2 Billion investment by IBM HP
- Office Automation to Space Travel (NASA)
- Runs in Multiple Hardware Architecture PC,
Mainframes, phones embedded systems - Security and Availability
25In summary. . .
- Move towards competency based vendor selection
- To obtain the largest benefit from offshoring
- Adopt a partnership based approach
- Not rely heavily on staff augmentation
- Move the vendor up the value chain in a phased
manner
- Successful execution of outsourcing strategy
requires - Careful selection of project
- Detailed transition plan for each project
- Strong governance and management oversight
26Contents
- Introduction
- Process/Best Practices
- Current Scenario/Future Trend
27Historical Market MaturityPre-2001
- Traditional key drivers to the market
- Inability to retain IT staff internally
- Lack of internal skills to support key strategic
initiatives - Ability to scale staff
- Therefore, offshore deals were focused on
- Staff augmentation
- Speed to completion
- Shorter-term non-strategic relationships
- Little due diligence
- Offshore Provider sales structures were
- Delivery-oriented
- Mid-level technical focus
- In-bound client vs. company generated demand
- Repeat/referral (word of mouth) business
28Current Market Conditions
- Current market drivers include
- Return on Investment
- Cost containment
- More extensive due diligence/strategic partnering
- Industry references
- Third-party evaluations
- Domain/application experience/expertise
- Market Leverage
- Shifting to the next phase of market maturity!
29New Market Realities
- To be effective, offshore providers must retool
their sales and marketing in the following areas - Business requirements must be addressed in tandem
with technical requirements - Value propositions that differentiate your
company will be required - Share of client will become a meaningful
success metric - Domain, application, and industry knowledge will
become increasingly important - Emphasis on sales process and methodology
- Emphasis on client creation
- Sales and marketing not driven by delivery
30World business leaders bullish on India
"A truly global company will be one that uses the
intellect and resources of every corner of the
world. And, India is a developed country as far
as intellectual capital is concerned. The opening
of the research center marks a new level of
commitment by GE in India. Jack
Welch August 2000
"Three years ago during my first visit to India,
the country was emerging as an IT super power.
Today the country is handling the most
sophisticated projects in the world. Going ahead,
we would be investing over 50 million dollars on
the development activities of the center. Bill
Gates September 2000
31QuestionsThank You !