Outsourcing: Give it away now

As India Inc grows at a rampant pace, outsourcing can ease a company's overheads by letting it focus on its core competencies. By Varun Aggarwal

India is already the preferred choice for outsourcing business processes like customer services, telemarketing and even collections. The emerging market which is showing stratospheric growth is that of IT infrastructure outsourcing. We are not just talking about global outsourcing here; even domestic outsourcing has reached a peak. A number of reasons are attributed to the popularity of IT infrastructure outsourcing in India, one of the fastest growing markets in the region. One of them is the country’s economic growth.

For people who find the 9.2 percent GDP growth rate to be impressive, they should take a look at the growth rates of leading Indian companies which are in double digits and that too, quarter by quarter. Indian companies are out to conquer the world with major acquisitions. The deals surely boost their stock prices; however, withstanding the market’s expectations isn’t that easy. To meet that kind of expectations, it is important that IT not only play the role of a supporter of business growth, it should also act as a catalyst.

The end result of all this is that CIOs have to bring in a lot of new technologies, expand the IT infrastructure which, in turn, brings about a lot of obligations to accelerate business growth. To achieve this, CIOs have two options—either build an infrastructure on their own or outsource it. If they do it themselves, they will need to invest in building the infrastructure, hiring staff and training them which takes time if nothing else. Or the other hand, the easier option would be to leverage existing service providers and save time to focus on the company’s areas of specialisation.

Some key trends in 2006 included high attrition rates in IT departments, in-house availability of expertise on new technologies, and vendors enjoying a cost advantage. Networks are becoming far more integrated into the enterprise computing architecture, but most IT organisations lack the depth of knowledge to deal with this area.

Outsourcing can provide access to new and increasingly complex IT capacity and functionality without requiring capital expenditure. Infrastructure and application outsourcing continue to be high-growth areas.

In India, many corporate executives are trying to understand the benefits that IT outsourcing can deliver and the impact that it can have on their companies. A recent IBM CEO study identified that companies engaging in IT outsourcing realised significant long-term improvements in business performance, compared to their sector peers. The decision as to what extent a company will outsource is primarily driven by the underlying objective behind outsourcing.

According to Balakrishna Adiga, Vice President - Strategic Outsourcing - IBM India/SA, “Enterprises that go for full scope outsourcing are driven more by the core competency theory. Such CEOs want to focus on their own business and let experts manage the rest with a strong governance mechanism. Whereas partial outsourcing is driven by other objectives such as cost issues, resource constraints, comfort with adopting an incremental approach or a focus on initially addressing tactical problems. Many large and mid-sized companies have outsourced their entire IT setup to IBM. At the same time some companies are content with outsourcing only part of their IT infrastructure such as just the applications or helpdesk.”

The most common IT component that tends to be outsourced is IT infrastructure. Even in IT infrastructure, some companies only outsource the desktop management or helpdesk or data centre management portion. Application management outsourcing is another common area. Today, outsourcing is subtle and organic, and it will continue to be so. The shift that we saw towards full-scope or strategic outsourcing from selective outsourcing is likely to continue this year.

"Although staff augmentation was the most popular form of IT outsourcing in the past, the trend is changing towards service providers who can take up a particular service area and deliver an end-to-end SLA for the same"

- Anil Raibagi
General Manager
Sales & Operations at TOS
Wipro Infotech

Anil Raibagi, General Manager - Sales & Operations at TOS, Wipro Infotech says, “Wipro’s TOS model aligns IT to business and realises a tangible business value from IT. In the Total Outsourcing model, Wipro is responsible for complete IT operations management (including assets provisioning, business process transformation and IT Strategy) and delivers on a pre-agreed set of SLAs which can include business SLAs. Thus, the client is free to focus on his core business and can clearly measure the “business value” he is realising from IT—something that is not easy to define and measure in any other outsourcing scenario or in an in-house IT setup.”

According to Adiga, some of the prevalent outsourcing models are full scope outsourcing, application management outsourcing, IT infrastructure outsourcing, multi-vendor outsourcing, business process outsourcing and out-tasking. The newer models that are emerging are hybrid combinations of earlier models where more risks are transferred to the service provider. Also, among newer ventures the tendency is to go for output based outsourcing.

Changing business models

Historically outsourcing models have been ad-hoc. Companies would outsource entire IT departments or a part of the same to large outsourcers. This involved asset transfer of existing IT employees to the outsourcer with a tiny team being retained by the company doing the outsourcing.

In determining how to best source services to support business dynamics, organisations use different sourcing strategies and business models. Outsourcing business models can be domestic or non-domestic. In the external outsourcing model, companies engage external providers providing the required services at a specified service level and of a specified quality. Depending on the location of the resources, outsourcing business models could be Onsite or Onshore for resources based on the client’s premises or in the same country but at a different location respectively. A much talked about outsourcing business model is the Global Delivery Methodology (GDM) which could be either nearshore or offshore. In a nearshore outsourcing business model, services are delivered from an adjacent country and in an offshore one services are delivered from a far off geography, generally from India or China.

As companies become more mature in their outsourcing engagements and as organisations start developing formal sourcing strategies which in many ways remains ad-hoc in nature, in 2007 and beyond the industry will start seeing a combination of all these outsourcing business models in a completely integrated manner in order to optimise services delivery in their sourcing strategies which would include a systematic and methodical evaluation of the source and location of resources.

We are yet to witness Indian domestic companies using offshore or nearshore outsourcing business models in their sourcing strategies in a full-fledged manner. So far the domestic landscape has seen end-to-end outsourcing deals with a vendor who may be an Indian transnational or an MNC. Although some aspects of the entire services delivery are sourced from different geographies and with mounting pressure of skilled resources, we might also see Indian companies participating in the offshore global sourcing market in the near future. Utility type services delivery models are also gaining ground in India (as in other parts of the globe) and in 2007 we would see more outsourcing business models wherein companies will be paying for only what they use and will have the flexibility to rapidly scale up or down in accordance with their business requirements.

Raibagi observes that staff augmentation was the most popular and well known form of IT outsourcing in the past. He however feels that the trend is swiftly changing towards service providers who take up a particular service area and deliver an end-to-end SLA for the same. “Wipro itself follows the Total Outsourcing Service (TOS) model. This can be defined as a long term contractual arrangement in which the Service Provider takes ownership and responsibility for managing all or part of a client’s IT Operations or department, based on an SLA that typically covers asset takeover and refresh, people takeover, infrastructure services and application services.”

Besides expanding beyond traditional discrete, tactical ‘out-tasking’ projects or facilities management into strategic outsourcing projects, another trend is catching on with regard to the timeframe of outsourcing projects. From a two or three year term contract, the relationship is extending to over a decade. Flexible contracts are what end-customers seem to prefer and that’s exactly what vendors are offering.

Choosing what to outsource

"The areas which the customers are outsourcing vary in terms of the
maturity of the company, their IT environment, in terms of how much IT is aligned with business, and also how they are growing"

- Heera John
Regional Marketing Manager
Outsourcing Services
HP Asia Pacific & Japan

The decision to outsource has been taken, but the question still remains, ‘what part of IT do I outsource?’ The answer to this question varies from enterprise to enterprise based on factors such as the maturity of the company and its growth rate. A company needs to thoroughly evaluate the risks behind outsourcing its infrastructure to a third party. It should look at its businesses and determine the core capability that it wants to retain and what tasks it wants to outsource. That said, it is easier to wrap stringent SLA (service level agreements) around these arrangements.

According to Arup Roy, Senior Research Analyst, Gartner, “Indian companies are mostly in their first generation outsourcing deals and generally outsource a part of their IT setup however some user companies in India are trying to leapfrog to an advanced stage and are also going in for total IT outsourcing deals.”

Talking about the areas which the customers are outsourcing, Heera John, Regional Marketing Manager - Outsourcing Services, HP Asia Pacific & Japan feels, “It varies in terms of the maturity of the company, its IT environment, in terms of how much IT is aligned with business, and also how they’re growing. For example, large enterprises which are on a high growth path would prefer to go for outsourcing the entire IT setup, which could cover the end-user environment, the network, the data centre, and the applications.”

In India, large enterprises are going in for strategic outsourcing because they are in expansion mode, and are facing fierce competition from global players, and they have to get to the market fast. They need to bring in new technologies, best practices in terms of compliances or practices such as ITSM (IT Service Management) and ITIL (IT infrastructure Library). These companies go for strategic outsourcing as they can’t wait. Attrition is so high in the IT industry that it’s difficult for IT managers to keep their staff motivated within the company. Even getting people is a big challenge.

John insists, “SMBs on the other hand, prefer to outsource in phases. The first part is usually the end user work environment and then the network, after which they might also move towards data centre outsourcing. These are the enterprises which are not really mature and not looking at very high growth, who are at a steady state where they do not want to take a risk and want to control their IT infrastructure. Thus, these companies look for outsourcing areas with the least risk that are more problematic such as the end user environment. They sometimes would even go for outsourcing the network rather than the entire data centre where the risk is high.”
Points to remember before outsourcing

* Before deciding what areas to outsource, one should evaluate the criticality of that particular application or process, the benefits that can be derived after outsourcing and the budget required.
* Outsourcing your IT applications enables you to focus on core business activities while at the same time ensuring that you have skilled and qualified professionals to manage your IT infrastructure.
* Before deciding on a third-party, one should consider factors such as cost, service support, technical competence and the reputation of the vendor.
* Keep in mind that whatever application or process is outsourced, you must have strategic control; everything should not be left to the vendor or partner.
* The decision-making power should be given as per the need of the organisation.
But the business heads as well as top management should be involved when taking the decision to outsource.

Security concerns over outsourcing

"Some well known challenges are in the area of data security. There are several operating models through which clients can mitigate
their security related challenges"

- Mohan Sekhar
Member of the Board & Chief Delivery Officer
iGATE

Security metrics almost invariably forms a necessary part of outsourcing contracts in the present day. Strong IP, security and privacy requirements as well as extensive regulatory constraints drive companies to setup captive service centres in an offshore and onshore delivery model.

The security challenges in outsourcing are not very different from the day-to-day challenges an IT department encounters as it manages a public and private facing IT infrastructure. SlashSupport’s approach has been to develop an extensible framework of technologies and processes that allow the company to incorporate its client’s security policies within their environment. Ahmar Abbas, Senior VP SlashSupport says, “We routinely undergo audits by our client’s security department to make sure we are in compliance. In addition, we believe that it is also important to measure ourselves against industry benchmarks. Hence we routinely work with third party firms that conduct a security analysis of our environment.”

Apart from technology, security breaches in networks and applications with viruses, hacking, data theft; security threats from people and employees and terrorist strikes are also causes for concern. Apart from implementing stringent security standards such as BS 7799, vendors are also coming up with stringent employee background check to minimise security breaches.

According to Mohan Sekhar Member of the Board & Chief Delivery Officer, iGATE, “Some well known challenges are in the areas of data security. There are several operating models through which clients can mitigate their security related challenges. These include dedicated facilities, isolated networks, state of the art monitoring devices and metrics processes and tighter contracts with penalties.”

A tangled web of SLAs

SLAs are dependent on a customer’s business objectives. For some customers a high availability environment (24x7, remote and onsite) is a pre-requisite and hence an SLA that mandates end-user application availability is a must. For other customers, specific SLAs for various components of the IT infrastructure are required. These SLAs can be based on response or resolution times (Incident resolution time, change management) and adherence to the same.

Abbas feels that outsourcing a defined set of activities that are wrapped in solid SLAs delivers the best results. A simple governance framework can be put in place to manage these activities and hence the output or deliverables are generally in sync between the client and the vendor.

An additional service that Wipro TOS (Total Outsourcing Service) offers to customers is Business Aligned SLAs. Based on a particular customer’s business and requirements, business SLAs are developed so that the customer can see Wipro being a “strategic partner” that delivers on business parameters rather than just IT.

The SLAs established with the client are typically extensive and vary with each of the service offering. For example, in case of helpdesk or support services the SLAs would include targets on First Call Resolution (FCR), Average Handling Time (AHT) etc. When monitoring and managing IT infrastructure the SLAs include Response Time to Alerts, Mean Time to Resolution (MTTR), percentage of escalations, average downtime etc.

It’s here to stay

Outsourcing looks set to grow as most organisations that have tried it are satisfied with the value that they have received. Analysts believe that, having experimented with piecemeal outsourcing deals, more Indian organisations will start outsourcing their entire IT infrastructure. Clearly, Indian companies are realising that IT outsourcing is not just a cost saver but also a business growth enabler. Keeping in mind the risks involved and careful evaluation of the service provider can help India Inc to breathe easy and let IT boost its already rampant growth. While there is no way to completely eliminate risk, there is a need to be pragmatic. So the only way to go ahead is to deal with acceptable risks.