4The 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 AmroOutsourcing 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.India’s Outsourcing Industry - USD 18 Bn, ~ 70% from ITWithin IT Services & Software (USD 12.2 Bn), ~ 27% from IT OutsourcingSource: NASSCOM figures for 2004
6IT OutsourcingOutsourcing 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.ClientIS Strategy & BudgetsCapital ExpendituresProject ManagementTechnical & Development DirectionCompetency DevelopmentHardware/Software/Operations DecisionsHardware/Software/Operations ManagementVendor Relationship ManagementInfrastructure Installation & MaintenanceInfrastructure Performance, Upgrades, MigrationCapacity Planning & Queue ManagementLAN/WAN Development & MaintenanceVendor & Carrier InterfacesScheduling & MonitoringUser SupportProblem Logging & ResolutionCoordinationTrainingCorporateManagementReportingData EntryApplications/Systems Installation & MaintenanceUpgrades, Migration & Release ManagementDatabase SupportPrototyping & PlanningCustom Development & IntegrationPackage Implementation & CustomizationBreak/Fix & User SupportProblem Logging, Escalation Management & ResolutionTrend IdentificationCoordinationVendor InterfaceTrainingSystemControlAPOApplicationSystemSupportHardwareOPSApplicationSupportApplicationDevelopmentTelecom OPSITOIT ServicesHelp Desk ApplicationsApplications OutsourcingShared ResponsibilityIT OutsourcingClient
8Why Should A Customer Consider IT Outsourcing Performance and StabilizationImprove Business FocusAdopt Best PracticesManage Complexity & Stabilize EnvironmentFaster Leverage of Technology AdvancesBetter Systems & Enhanced ServicesStrengthen ControlImprove ScalabilityAccess to Resources / TechnologyAccess to SpecialistsManagement ExpertiseAccelerate BenefitsAttrition Management/Depth and Breadth of ResourcesCost ManagementEconomies of Scale/ ProductivityPeopleTechnologyCommitted cost structureCapital investment avoidance
9Relative Level of Success Typical ResultsSelective Outsourcing Drivers and ResultsHighLowPriority of DriverRelative Level of SuccessLow-MixedConsistently HighEliminateHeadachesRestructureCompanyImprove ServiceConvert Fixed Costto Variable CostImprove Focusof BusinessAvoid InvestmentShare RiskFree Up ResourcesAccess New SkillsMeet Business Timetables
12Evaluation 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 ChartAccurate HeadcountPrior Year Actual CostsCurrent Year Detail BudgetCurrent Year Actual CostsConfiguration DiagramVoice and DataLocal and RemoteAsset RegisterLease ScheduleMaintenance ScheduleSupport Hours/StandardsPrintingDistributionTrainingArchivalHardware RegisterHardware Lease ScheduleH/W Maintenance ScheduleCPU and DASD UtilizationActivity VolumesOrganizationSpecial RequirementsOperationsTelecommunicationsHardwareSoftwareBusiness ProcessesResponsibility MatrixVolume and Performance ParametersPersonnel ProjectionsSoftware Lease ScheduleSoftware Maintenance ScheduleSystem DiagramsSoftware Register
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 competenceImpact on data security/intellectual propertyLevel of working capital consumptionImpact on in-house employee base rationalizationOperational:Measurability/decouplability of processImpact on upstream and downstream processesNeed for improvement in service qualityAvailability of management bandwidth to manage the relationIndustry Maturity:Level of service development for the industry
15Choosing a Services Portfolio Compare ease and benefits to select and prioritize servicesProduct developmentApplication developmentBenefits of outsourcingNetwork MaintenanceInfrastructure MaintenanceIT HelpdeskEase of outsourcing
16Choosing a Services Portfolio In-house due diligence for selection of service provider to create a “consideration set” for further data analysisWhat 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 providersSofter aspects of cultural alignment, level of interest, competencies etc. may also be assessedGathering data from second cut short-listData gathered from RFPData gathered from client references etc.
17Information Heads in an RFP BackgroundYears of experienceCenters and locations – international centersEmployee – total and by service lineNo. of clientsClient profileRepeat businessSenior management teamOperationsCertificationsNo. of transitionsTransition methodologiesManaging work-load peak and troughsEmployee utilizationMetrics used to measure efficienciesBusiness continuity arrangementsCost reduction initiativesData security initiativesHuman ResourcesTypical profile of employees% of offsite/onsite employeesTrainingAttritionFinancial StrengthRevenues & Profits – total, by geography, vertical, service lineOperating marginsBilling rates
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 workDutch/Shell Group awarded a USD 1 bn IT services agreement to IBM and Wipro TechnologiesBank of America is outsourcing work to EDS and Hewitt AssociatesRenault awarded outsourcing contracts to Atos Origin, CSC, HPIBM won a $1.9-billion IT infrastructure outsourcing component, including servers, storage systems and desktops, Infosys and Tata Consultancy Services drew $125-million and $250-million contracts, respectively, for application support and enhancements; and Accenture, IBM, Infosys, Patni Computer Systems and TCS earned preferred-supplier status for an unspecified amount of development workBut from a financial point of view, multisourcing raises a lot of questions. There are administrative costs associated with each vendor, Tapper says.Additionally, the piecemeal approach to outsourcing isn't immediately compatible with the overall trend toward system and process integration, he says. "From a long-term perspective, the problem is that we are moving to more integrated model. Our applications are getting integrated to each other, they run over a network which is integrated, our client devices are integrate -- so who is going to be responsible for the service levelService Provider Must-Have’s: Deep domain experience, Larger number of clientsClient Must-Have’s: ‘Manager’ of Managers, well-defined SLA”s Competencies to measure costs of vendor management
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 levelsAbsorbing in-house employeesSecurity auditsContract renegotiationTermination*Source: Infosys Annual Report, 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 MSAs4 key metrics addresses in SLA’sVolume of workQuality of workResponsivenessEfficiency
23Volume of Work SLAsSpecifies 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 termsBroadly 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 subjectivityTime 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 SLAsA quality definition may contain several, individual metrics that may form part of the deliverable's acceptance criteria including:Defect ratesNo. of production failures per month, number of missed deadlines, number of deliverables rejected (reworks), etc.Technical qualityMeasurements 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 availabilityOn-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 satisfactionGood 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 SLAsMeasure the amount of time that it takes for an outsourcer to handle a client request.Metrics include:Time-to-market or time-to-implementMetrics include time to implementation of an enhancement, time to resolve production problems, etc.Time-to-acknowledgementMetrics include time to acknowledge routine support calls, programmer response time to production problems, etc.Backlog sizeMetrics include # of resource-months of enhancements, # of unresolved support requests, etc.Source: PwC Analysis, Clarity Consulting
26Efficiency SLAsMeasure the engagement's effectiveness at providing services at a reasonable costExamples of efficiency metrics include:Cost/effort efficiencyMetrics include number of programs supported per person, cost per support call, etc.Team utilizationMetrics include % of time spent on support, % utilizationRework levelsMetrics 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 managersOn return, the project managers set up the team structureClients may also send key development personnel to vendorKey personnel involved from client include Senior Managers or Product Directors for set-upSenior engineers for training and initial hand-holding of the vendor teamCompanies 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 clientChange 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, s and video conferencesFormal 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 ManagementUse 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 PlanningThe 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 PlanThe 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 trackerVendor 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 TemplateCompanies 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 AnalysisThe 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.
33Looking AheadNear 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 offshoringService 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 growthEurope will continue to witness significant activity in IT outsourcing – will come close to catching with the American market shareSupplier landscape in the future industry to become more competitiveClients will look for greater levels of domain experience ~ this will allow smaller organizations to offer a compelling value proposition to clientsOrganizations may choose to back-source some IT functions to their captive centers*NASSCOM
34Looking AheadLarge Indian service-providers will also reach a higher level of maturity to compete with global majorsAn IT skills shortage and poor physical infrastructure could threaten India's position as the leading offshore outsourcing locationMulti-sourcing will be one of the most visible trendsOrganizations will need to develop the competencies to manage a multi-vendor environmentIT 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 AheadIndia'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).