Transcript Executive Boardroom AV Upgrade

BUSINESS CASE FOR
IT OUTSOURCING &
LINUX APPLICATION
MGMT 396- Autumn 2003
S. Kohli
Kaustuv Mukherjee
25th November 2003
Contents

Introduction

Process/Best
Practices

Current Scenario /
Future Trend
2
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
3
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

4
North American IT Services Market
Worldwide IT Services Spending 1997 - 2005
$700
$700
$624
L. America
3%
$555
$494
$500
$440
$395
$349
$400
$310
$279
$300
Asia/Pacific
4%
Japan
13%
Other
2%
$200
2005
2004
2003
2002
2001
2000
1999
$0
1998
$100
1997
US$ in Billions
$600
Worldwide IT Service Spending by Region 2000
Europe
29%
Canada
3%
United
States
46%
Source: International Data Corporation, 2001
5
U.S. Offshore IT Services Spending
US Offshore IT Services Spending
$20
$17.7
6.0%
5.3%
5.0%
4.8%
US$ in Billions
$15
4.3%
$14.3
3.9%
3.3%
$10
4.0%
$11.3
$9.0
2.9%
3.0%
$6.9
$5.5
2.0%
$5
1.0%
0.0%
$0
2000
2001
2002
Offshore IT Services
2003
2004
2005
% of Total U.S.
Source: International Data Corporation, 2001
6
Challenges facing CIO’s today…
Talent constraints faced by
IT department
Business pressures



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-tomarket. 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 fullburdened IT employee
Key challenges

CIOs cannot rely
solely on internal
organizations to
develop and
maintain enterprise
IT systems

Traditional
“outsourcing”
service providers
are not costeffective
7
Source: McKinsey analysis;IDC, Giga; client interviews
… can be addressed by outsourcing to vendors
More cost
effective use
of IT dollars
Challenges
faced by
the CIO



Compressed
time-to-market
30-40% lower costs than
traditional IT service
providers
Likely to sustain lower costs
for the next 5 years



Source: McKinsey analysis, Satyam, Infosys, Wipro, Morgan Stanley Dean Witter

Tested and
robust
business
model with
manageable
risks

Well
established
and
competitive
vendor
base
Up to 40% shorter
development cycles

Higher quality
and
performance
standards

Shorter learning curves
24/7 production runs
Ramp-up capacity faster
Shorter rework cycles
More established
methodologies and
processes for meeting higher
performance standards
8
Country Comparison
Skills surplus
countries
Regional hubs
User countries
US
India
Germany
China
Indonesia
•
•
Number
Cost
Skills
•
Talent sophistication
High
UK
France
Philippines Ireland
Singapore
Low
Low
High
Vendor sophistication
•
•
Number
Quality
9
Contents

Introduction

Process/Best Practices

Current Scenario/Future Trend
10
Evolvescape’s RightSourcing Model
Satellite Based
Communication
Client / Off-site
Location
Project Near Shore



Approach/Model







Near Shore Process
Offshore Process
Optimum mix between onsite, off-site,
and off-shore
Analysis and planning
High level design
User interface design
Project coordination
Onsite testing
Implementation
Post implementation support

Rapid reaction support
Use of dedicated development centers
around the world
Project

“24 X 7” delivery model

Offshore
Development
Centers
(Key elements
of cost
savings
approach)




Offshore
Project management
Detailed design
Coding
Testing
Documentation
Post implementation support



Bug fixes
Warranty support
Maintenance
11
Customers need to address key
outsourcing process issues
Outsourcing Strategy




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?
Outsourcing Execution




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?
12
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
Best
Practices
Follow a staged approach for transition to an offshore
partner with a careful selection of projects
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
13
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.)
14
Think partnership not transaction
“Transaction” approach
“Partnership” approach

No long term commitment

Medium/Long term commitment

RFP issued for every project


Vendors not expected to invest


Vendors follow customer orders
with limited value add

Competency based vendor
selection
Vendors expected to invest in
infrastructure, knowledge transfer,
etc.
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
15
 Projects involving confidential and proprietary knowledge, etc.
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
Quality



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
Time to market
16
A staged approach helps transition to
offshore partner
Test the
partnership
Increase
scope and
scale
Complete
outsourcing
Key Success Factors
in a Transition

Typical
projects


Presentation
screen rewrites
Database
cleansing



Back-end

systems
maintenance 
24x7 QA*
E-business 
front end
Re-architect
back-end
Implement
middleware
Server
consolidation

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
Increasing management complexity and mission criticality
* Quality Assurance
17
Careful selection of projects
required
… and also those
requiring low customer
interaction
Large projects are
generally more
successful...
Project Size
Actual
Savings
<$10 million
21%
$10-$100 million
27%
>50% of low interaction
projects deliver greater
than 40% savings
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
18
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
Management Complexity

Requiring
vendor with
high
management
abilities
May require longer transition and Requiring vendors
Medium higher onshore presence, medium with high
interaction
saving potential of 30 - 40%
handling
capabilities and
Suitable;
tools
Low
high saving
potential of
40 - 60%
Low
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
Not
recommended
to offshore
Medium
High
Interaction Requirements

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
19
… technology provider successfully
followed a phased approach
CASE STUDY
Started
attending
partner
conferences
Marked up
SLAs
Scaled
down SLAs
to give time
to vendor

Year : 1997
No. of people: 6-8


Development
project to test
vendor capability
Low priority and
low complexity
maintenance of a
small component


Medium priority
and medium
complexity
maintenance
Regression
testing

Year : 1999
No. of people: 90
Year : 1998
No. of people: 60
Year : mid 1997
No. of people: 30
Year : 2000
No. of people: 125
Medium priority
and medium
complexity
maintenance
(including
analysis and
design)


High priority and
high complexity
Full testing of
products
Contribution to
new releases
(development)
Jointly
bidding for
implementing
solutions
Started
presenting at
partner
conferences
Moving up the value chain with increasing customer confidence in vendor capabilities
20
A detailed transition plan is required for
each individual project
Steps for offshoring project – Application Maintenance example
Project Planning
Knowledge
Acquisition
Onshore/Offshore Transition
Offshore
Offshore
Simulation
Training/Pilot
Duration
2-4 weeks
2-3 months
Description
 Establish project
scope, expectations
and criteria for
success
 Set team
composition,
infrastructure
requirements and
performance
metrics
 Members of off Execution of
shore team work
maintenance
on site to
requests in a
simulated off– Work with client
personnel to
shore
understand
environment
 Validation of
issues
maintenance
– Document
system/
infrastructure
application
 Finalize
transition plan
1-2 weeks
Offshore
Execution
2-3 weeks
Ongoing
 Establishment of
maintenance
process,
procedures, and
metrics program
at off-shore site
 Incremental
transition of low
and medium
difficulty tasks
 Complete
fulfillment of
maintenance
requests offshore to agreed
upon service
levels
Client staff
FTE*
Off-shore
vendor staff
FTE
21
Further details on Outsourcing Processes available in the ‘Outsourcing Processes’ section of the ODC Boot Camp binder
Strong governance and management
oversight is critical
Key Levers
Best Practices

Partnership
Board


Relationship
Management



Performance
Management



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
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
Performance tracking should be automated
 Performance scorecard (SLA’s) 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
22
Risks associated with outsourcing to vendors
manageable
Perceived risks
Why we believe risks can be managed

High attrition rates due to
large demand

Leading vendors are investing
heavily in training, compensation
and partnerships with universities
to train more students

Complex projects have
many failure points

CMM level 4 and level 5
certification
Active governance policies with
interactions at all levels
Talent
Project


Differences in work
culture

Leading IT vendors proactively
manage culture gaps

Electricity and telecom not
reliable
Different IPR laws

Government actively promoting
uninterrupted power supply and
telecom to technology companies
Established legal system
Cultural
Infrastructure



Political/Country
Geopolitical events can
destabilize trade e.g. with
India

US and Indian governments agreed
to de-link the IT trade from politics
23
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
24
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
25
Contents

Introduction

Process/Best Practices

Current Scenario/Future Trend
26
Historical Market Maturity
Pre-2001

Traditional key drivers to the market:




Therefore, offshore deals were focused on:





Inability to retain IT staff internally
Lack of internal skills to support key strategic initiatives
Ability to scale staff
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
27
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!
28
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
29
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
30
Questions
Thank You !
31