BUSINESS CASE FOR IT OUTSOURCING

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BUSINESS CASE FOR IT OUTSOURCING LINUX
APPLICATION
MGMT 396- Autumn 2003 S. Kohli Kaustuv
Mukherjee 25th November 2003
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Contents

• Introduction
• Process/Best Practices
• Current Scenario / Future Trend

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Business 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

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Key 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

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North American IT Services Market
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U.S. Offshore IT Services Spending
26.4 CAGR
Source International Data Corporation, 2001
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Challenges 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
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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
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Country 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

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Contents

• Introduction
• Process/Best Practices
• Current Scenario/Future Trend

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Evolvescapes 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

• Rapid reaction 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

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Customers 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?

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Best 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
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Outsourcing 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.)

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Think partnership not transaction
Transaction approach
Partnership approach

• No long term commitment

• 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.

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Partnership 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
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A 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
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Careful 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
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10-100 million
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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

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A 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

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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
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Steps 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
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Strong 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
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Risks 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
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Linux 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

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In 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

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Contents

• Introduction
• Process/Best Practices
• Current Scenario/Future Trend

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Historical 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

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Current 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!

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New 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

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World 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
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QuestionsThank You !