Title: Business Value of IT Outsourcing
1Business Value of IT Outsourcing
Gopal Kuchibhotla
8th February 2006
2Agenda
- IT Outsourcing An Overview
- Outsourcing Drivers
- The Outsourcing Journey
- Managing Relationships
- Outsourcing landscape 2006-2008
3IT Outsourcing An Overview
4The Business Context of Outsourcing
- The issue is that if you dont do it, you wont
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.
5The 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.
Indias 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
6IT 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
7Outsourcing Drivers
8Why 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
9Typical Results
10Typical Results
11The Outsourcing Journey
12Evaluation of Outsourcing Opportunities
- Evaluation of outsourcing opportunities is
successful only if the current and target
business process environment is accurately
understood. - Defining todays 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.
13Roles
Client
Business Planning
Organization
Implementation
Strategy Leadership Requirements Tactics Coordi
nation Planning Operations Management Executio
n
Service Provider
14Choosing 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
15Choosing 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
16Choosing 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.
17Information 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
18Gathering the Information
Source Wipro Analyst Presentation, 2005
19Multisourcing 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-Haves Deep domain
experience, Larger number of clients Client
Must-Haves Manager of Managers, well-defined
SLAs Competencies to measure costs of vendor
management
20Managing Relationships
21Finalizing 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
22Finalizing 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 SLAs
- Volume of work
- Quality of work
- Responsiveness
- Efficiency
23Volume 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
24Quality 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 0800 AM and
0600 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
25Responsiveness 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
26Efficiency 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
27Transitions - 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.
28Transition 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
29Project 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).
30Project 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.
31Project 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.
32Outsourcing Landscape 2006-2008
33Looking 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 RD 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
34Looking 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),
35Looking 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).
36Thank You
- gopal.kuchibhotla_at_in.pwc.com