Business Value of IT Outsourcing

1
Business Value of IT Outsourcing
Gopal Kuchibhotla
8th February 2006
2
Agenda

• IT Outsourcing An Overview
• Outsourcing Drivers
• The Outsourcing Journey
• Managing Relationships
• Outsourcing landscape 2006-2008

3
IT Outsourcing An Overview
4
The 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.

5
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.
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
6
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
7
Outsourcing Drivers
8
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

9
Typical Results
10
Typical Results
11
The Outsourcing Journey
12
Evaluation 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.

13
Roles
Client
Business Planning
Organization
Implementation
Strategy Leadership Requirements Tactics Coordi
nation Planning Operations Management Executio
n
Service Provider
14
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

15
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
16
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.

17
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

18
Gathering the Information
Source Wipro Analyst Presentation, 2005
19
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-Haves Deep domain
experience, Larger number of clients Client
Must-Haves Manager of Managers, well-defined
SLAs Competencies to measure costs of vendor
management
20
Managing Relationships
21
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
22
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 SLAs
• Volume of work
• Quality of work
• Responsiveness
• Efficiency

23
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
24
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 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
25
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
26
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
27
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.

28
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

29
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).

30
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.

31
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.

32
Outsourcing Landscape 2006-2008
33
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 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
34
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),

35
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).

36
Thank You

• gopal.kuchibhotla_at_in.pwc.com