Top companies lead the way in IT outsourcing

By Colleen Taylor, Contributing Editor -- Electronic News, 4/4/2007

As the need for proficient information technology (IT) infrastructure services continues to grow, analysts at market research firm Aberdeen say that outsourcing is an increasingly popular option that leading companies are turning to for efficiently fulfilling IT needs.

Outsourcing IT infrastructure is nothing new; the practice has been on a steady rise since around 2003, when Aberdeen reported that worldwide IT spending began picking up from a low one percent growth in 2002. That same year, Ericsson made waves with a decision to outsource its worldwide IT infrastructure to Hewlett Packard.

But while now many companies are currently outsourcing parts of their IT infrastructures to save money, Aberdeen said in its latest report that "leading organizations" are continuing to set themselves apart by making substantial gains in worker productivity and end-user satisfaction.

"The survey results tells us clearly that outsourcing IT infrastructure is paying off big time in internal IT service delivery," Rick Saia, research analyst for IT services at Aberdeen, said in a statement. "That's very important today as companies compete for customers and rely on technology to help end users be more productive, which can lead to lower costs, higher revenues, and more profit."

The survey also found that twice as many leading, or "best in class," organizations, cite asset reduction as a driver of their infrastructure outsourcing strategies. Aberdeen said this points to the emergence of asset management as a component of IT outsourcing strategies.

In addition, best in class companies cite the service-level agreement (SLA) as an important tool in managing an infrastructure outsourcing relationship, Aberdeen said. 44 percent of the best in class surveyed by the firm believe a provider's inability to meet an SLA's provision makes it difficult to outsource a function- while only 25 percent of all other companies represented in the survey made the same assertion.

Across the board, the market for IT infrastructure services is expected to grow this year and in 2008, according to Aberdeen. 50 percent of the firm's survey respondents said their organizations will buy more services through the end of next year, while another 32 percent said they have yet to decide what their plans are.

Global, local BPO biz not the best mix

NEW DELHI: Global and domestic BPO businesses are as different as chalk and cheese. In fact, the differences are so stark that companies hoping to share infrastructure for the twin operations (domestic and global) may find it better to separate the two rather than try and blend them.

Experts point out that the experiment of working international at night and domestic BPO operations in day from the same facility has not worked. How different the two businesses are is revealed by the numbers. Everything from billing rates and profit margins to employee salaries and quality of infrastructure is different. Mixing the two businesses and operating them from same premises is difficult.

The Department of Telecom had, in 2005, allowed BPOs with more than 50 seats to share infrastructure for both domestic and international call centre operations. While a domestic BPO worker’s salary starts at Rs 6,000 sometimes even lower, an international BPO worker gets Rs 10,000-12,000 per month.

While international BPO workers get food and transport facilities, domestic BPO workers don’t. Different HR policies for employees working in the same premises can be demotivating for some, and they may feel harshly treated.

Billing rates in both businesses are entirely different. Domestic BPO businesses carry billing rates almost one-fourth that of an international process. While a domestic client pays $450 (Rs 20,000) per seat per month, an international BPO pays $1,760-$2,000 per seat per month.

In hourly terms, the billing rates break down to $3-$4 per seat per hour in a domestic BPO versus $10-$12 per hour for an international BPO. So, an MNC bank outsourcing the same work for its India customers would pay a BPO $3 per hour versus $12 per hour that it would pay for serving its UK customers.

“The economics change completely with different profit margins. While domestic BPO businesses operate at an EBIDTA margin of 13-14%, an international BPO works at 18-20% margins. Simply put, about 4-5 seats in a domestic BPO will generate the kind of revenue generate by a single seat in an international BPO for the same duration,” says Aditya Gupta, President of 6,000 strong InfoVision, India’s third largest domestic BPO. Intellenet and Essar owned Aegis are the other two large domestic BPOs.

A company also cannot possibly provide the same kind of infrastructure — workstations, building, ratio to a domestic BPO. An international setup runs on a 200% power backup at any point of time. Maintaining this in a domestic BPO will hit overall margins.

Of course, SLAs with clients also come into play. Some international clients want exclusive seats, workstations, and even floors for themselves, regardless of the call flow. And the time difference over global locations is a major dampener.

The UK shifts start at about 12:30 pm IST ending at 0030 hours IST. The US shifts start from 7.30 pm and continue till 6:30 am India time. The Australian shift starts at 3:00 am and continues till 11:00 am India time. Thus, nowhere can a BPO find a 8 am - 8 pm time slot exclusively free for allocating seats for domestic operations.

International BPOs like HCL, IBM Daksh, MphasiS, HTMT have started dabbling in domestic BPO operations. All MNCs that outsource international call queries to India also have domestic BPO operations, which they keep captive while outsourcing to third parties.

Citibank, HSBC, GE Money, American Express have outsourced domestic BPO operations. ICICI and HDFC also have large domestic BPO operations, apart from mobile operators like Hutch, Airtel, Spice and BSNL. The domestic BPO industry is estimated to be over Rs 6,000 crore, growing at over 40% per annum.

Trends in IT Outsourcing Prompts New Guidance from The IIA on Considering Risks, Navigating the Process

ALTAMONTE SPRINGS, Fla. - Trends in information technology (IT) outsourcing have prompted The Institute of Internal Auditors (IIA) to focus its seventh Global Technology Audit Guide^® (GTAG) on this topic. Written in straightforward business language, GTAG 7 will help C-level executives and boards of directors understand various risks when navigating the complex task of IT outsourcing.

"IT outsourcing has grown in popularity as an efficient and cost-effective way to meet IT management demands such as systems implementation, maintenance, security, and operations," says IIA Manager of Technology Practices Lily Bi. "There are benefits from outsourcing this function, but they come with complexities, risks and challenges. It's important that executive management and boards understand how to conduct a comprehensive review of an organization's outsourced operations, evaluate the risk management process, and comply with applicable laws and regulations. When it comes down to it, those at the top are the ones accountable for ensuring that things are as they should be. Chief audit executives and audit supervisors can use GTAG 7 to help people who have limited technical knowledge to better understand these risks."

GTAG 7 describes some of the most common outsourcing risks and their potential strategic impact on an organization throughout the outsourcing lifecycle. Key issues discussed in this GTAG include: the outsourcing strategy and feasibility; selecting an IT service provider; drafting and managing contractual agreements; ensuring a smooth transition of internal operations to service providers; return on investment; effective frameworks for establishing outsourcing controls; and termination and renegotiation of services. The guidance also stresses the importance of evaluating the service provider's internal controls, and establishing a clear governance structure over the outsourcing activity to ensure accountability and effective project management.

The 30-page document, available in a printed version or for free download on The IIA's Web site, also reviews recent and expected trends in IT outsourcing.

• Application development continues to be one of the most outsourced IT activities, followed by application maintenance and support.
• Though mega deals in excess of US $1 billion represent a significant share of the total outsourcing contract value, they are set to decline in the near future and will be replaced by an increase in mid- and large deals in the US $100 million to $999 million range.
• Contract term lengths are declining. The average length of an IT outsourcing contract declined from 6.2 years to 5.3 years from 2003 to 2005. The trend is for shorter contracts that enable organizations flexibility and don't lock them in a particular service.
• Cost savings continues to be the key driver for IT outsourcing, though outsourcing arrangements that have focused solely on delivering savings have failed to meet client and service provider expectations.
• Europe will come close to catching up with the U.S. market share of IT outsourcing. India will continue to be the most preferred destination for IT outsourcing, although China is expected to emerge as a formidable competitor in the near future.
• The supplier landscape in the IT outsourcing industry will become more competitive as clients seek greater levels of domain experience in potential service providers.
• More companies are relying on pilot projects to ensure a good fit between the client organization and service provider. Often, companies will conduct a proof of concept with various service providers to compare results and choose the best service provider.
• Multi-sourcing will be one of the most visible trends, resulting in organizations' need to develop the competencies necessary to manage a multi-service provider environment.
• IT service providers will evolve their businesses around distinct models including the "global champion model," offering multiple service lines and solutions to large organizations; the "IT specialist model," focusing on three to four major IT industry or cross-industry services; and the "ADM factory model," positioning themselves as low-cost developers of applications and maintenance services.

GTAG 7, Information Technology Outsourcing, was authored in partnership with Parthasarathy Ramaswamy, Mayurakshi Ray, and Jaideep Ganguli, with PricewaterhouseCoopers in India. The authors also received input, review, and comments from 37 IIA members and various affiliates and chapters, professional organizations, universities, professionals, and practitioners working in a wide range of industries and positions all over the world.