I wrote an Op-Ed piece for Sandhill.com on “Cloud Powered Outsourcing” available here. The focus is to highlight how services firms can leverage the disruptive nature of cloud computing to deliver new value to their enterprise clients. Thought I shall leave here a quick synopsis.
In the fast changing world of technology and outsourcing, many forces are at play. And for the outsourcing industry, any development – be it hardware, software, service delivery or something new – will change the business significantly. Cloud computing is rapidly changing the climate of enterprise IT – and the outsourcing business along with it. The disruptive nature of the cloud model will mean outsourcers will have to adapt for success in the next era.
Two significant factors are currently creating a new wave of change in the outsourcing industry. First, enterprise software is increasingly being delivered over the cloud. This is impacting the hardware commitments that a business makes.
Second, we are now seeing a situation where high quality IT infrastructure capacity is quickly becoming a commodity. With delivery models being disrupted, IT service providers should get into a mode of investing massively in creating/provisioning an infrastructure that their outsourcing customers can leverage sooner rather than later. This translates to an investment cycle from the service provider side as IT service providers invest heavily in capacity, virtualization, globalization and automation. With these investments, service providers begin to get positioned as players that are able to offer capabilities that can transform the way organizations access and use IT services.
The advantages of employing a cloud-based model of service delivery are well established now. In certain types of computing environments, embracing clouds can provide significantly lower costs, higher reliability, assured uptime, greatly enhanced flexibility , robust availability and up-and-down scalability configurable in real-time. The contention here is that outsourcing contracts can block move to the cloud. The separation of service lines in outsourcing that forces distinct blocks of services outsourced to different service providers creates significant challenges to embracing a cloud-based service model because both application and infrastructure management services typically come together in the cloud and normally would get supported by a single service provider. Here is a case where the incumbent service provider’s interests conflict with a client trying to adopt a cloud model. Many enterprises have a range of services contractually assigned to different service providers. Today, many buyers have a range of IT services contracts spread across multiple service providers. Under such arrangements, by default, we see that contracts get optimized at the tower level and by extension, the cost and value get sub-optimized at the tower level. Conflicts between the designated service providers managing the different towers get managed by differing contractual terms and it is quite common to see such partners in a conflict. This is a “first order challenge” – a conflict rooted in the existing models of engagement and so typically calls for a fundamental rethink on the outsourcing model per se!
Moving further, adoption issues could come in the way . However attractive the benefits, the determination as to what, how, where and when to launch a new model of cloud service is always an issue that businesses have to grapple with – like any other operational decision. Enterprise outsourcers also find the need to find a solution to the dilemma: Do they continue, modify or disband their existing outsourcing arrangements to embrace the new model and reap the benefits in terms of savings, ease of use and performance.
In a nutshell, a revised cloud/SaaS model of outsourcing through service providers can help buyers in new ways resulting in lowered costs and improved operational performance - never ending requirements in today’s business world. This calls for a majority of businesses with mature IT environments and outsourcing arrangements in place to look at recasting their existing contracts and embrace a new model of outsourcing governance. This transition won’t happen by the flip of a switch. Moving into a cloud environment for consuming IT services requires a fundamental change in the delivery mechanisms that would impact almost all the stakeholders inside business. Read the full article here.
With outsourcing as a given way of life, we are seeing that the offshoring phenomenon for tech work is seeing an unprecedented growth and shows propensity for more aggressive volume growth. Writing on IBM's progress on this path, the NYTimes article highlights that
the idea is to build networks for producing and delivering technology services much like the global manufacturing networks that have evolved over the last couple of decades. Look inside a computer or automobile and the parts come from all over the world. High-end technology services projects increasingly will follow that formula, combining skills from across the globe and delivered on-site or remotely over the Internet.
As I see it, clearly distributed model of development/support is working well. Ranging from lower complexity, shorter duration, utility-type projects to more strategic ones, outsourcing to countries like India (as long as internal company controls are in place) has proven to be a cost saver and in many ways a performance accelerator. It takes some time for companies to get the rhythm right and once a critical mass is reached things are in general zipping ahead. The issues of improved productivity and enhanced quality wrapped around more robust tools to manage and administer these distributed development efforts. In this evolution, it may also make sense to keep some residual work addressed closer home and this is an integral part of the sourcing framework. A customer-imposed changing of the vendor guard forcing some old school Big 6 leaders to be replaced by a newly ruling set of global industry influencers means that the industry is in the cusp of a major change and with offshoring bringing some cases, the order of fifty percent saving, through well thought out mechanisms, this space will see lot more action for sometime to come. Over a period of time the volumes of residual work onshore may also come under constant review for being offshored. The dynamism and competitiveness in this industry would mean that all stakeholders benefit uniformly.
As I wrote recently, the key thing would be to see the level of innovation and differentiable IP’s that service firms can showcase – this needs to be tied to increased productivity and reduced cost for customers. Ultimately, service players that have invested in emerging areas well ahead and in right measures, stayed close to customers, and focused on efficient execution are well positioned to capitalize on the market as it improves. Companies that will succeed in the services market going forward will be those that embrace the evolution of the software environment, collaborate closely with partners and customers, possess a strong understanding of industry-specific business processes, and have a mature and seamless global delivery capability – all these are achievable only by making right quantum of focused investments in the right direction at the right time.
While writing on captives, I concluded that today’s reality is that barring those that are focused on product development, or support functions involving multiple of hundreds of people working or those focusing on research – the R part of the R&D line item, most of them are grappling with which exit option to choose - ranging from closure to outright sale.
Vinnie points out that the drivers for setting up captive units are margin protection, IP protection, ability to realize some capital gains upon eventual sale. Vinnie – you are definitely right, Symphony & GlobalLogic have reportedly bought over a few captives( Forrester points out that those bought out were actually stagnating/struggling units).I have also pointed out earlier that firms that are focused on product development on a medium to large scale, or support functions involving multiple of hundreds of people working or those focusing on research – the R part of the R&D line item would find it attractive to run captives. Software product majors employing huge numbers or those focusing on niche(s) generally manage to run captives to their corporate satisfaction. But cost advantages and scaling up are proving to be far more difficult things to achieve.
My experience in talking to captive managers who have run captives suggest a sense of dissatisfaction and a majority of them have failed to meet their HQ expectations – on multiple fronts. The issues that run captives to the ground include busting of the myth that they can be in general be more profitable – the loaded costs of captives are on an average more than the loaded costs of third party service providers( even when factoring in a reasonable margin for service providers). Forrester is bang on when it reports that generally, over time, service providers can manage the inflationary pressure, improve productivity measures much better, for high end works.
Hindustan Lever sold its captive unit Indigo recently to Cap Gemini. The valuation, it was widely believed was very subdued as Levers made it look as if a cost center was getting sold. HLL, one of the largest multinational operating in India (it recently lost its largest multinational status in India to Nokia) unarguably India’s corporate icon and Unilever’s crown jewel would not have taken such a decision without working out its near and medium term benefits. Its likely the case that HLL must have thought that sustaining captive BPO center may not be the best option available in front of it – seem from an expertise, economics ascaling up perspective & near-medium-long term valuations. Apple failed in running a successful captive unit in India. There are number of additional examples that come to my mind - Citi, Deutsche and a lot more. Firms like Yahoo & BEA are fine tuning their approach. Amongst the notable exception in running a successful captive is Dell,which seems to be going from strength to strength. In my view, where having a captive is not a strategic decision( should be well justified and unbiased), the era of having captives for the sake of having one, in the hope that in present or in future, in some form benefits may be forthcoming looks doubtful.
TPI's Q1 index shows a changing trend : - 1Q07 TCV and ACVSoft market, especially in the Americas and in BPO - Adoption of Outsourcing activity in managed network services outsourcing within the relatively flat ITO market. - Lessened restructuring impact on broader market - Business Process Outsourcing recorded a recent low point by number and TCV - Shift away from large multi-process BPO agreements to single-function contracts of a smaller size
This is surprising - one hopes that this is a passing trend considering that the year 2006 ended on a positive note for the outsourcing industry. Several positive datapoints clearly pointed to that. Some of them were:
- Market indices for contract length and value rose for the first time since 2003. - "Megadeals" were on track to match or exceed 2005 levels. - The number and value of outsourcing deals above $1 billion for an individual service provider, or megadeals, are poised to increase in 2006 after seven years of gradual declines. - The average outsourcing deal contract value increased 55%, from $201 million in 2005 to $312 million in 2006.
Today no one is feeling the pinch owing to reduced contract awards that much because there's no erosion of marketshare. Service players maintain that while there has been a talk about slowdown and all those things, they believe that the global IT service industry continues to show a strong growth.
Hopefully things will change moving forward vindicating this position.
I have been travelling a lot in the last ten days and there had been times when I just could not even manage to get internet connections. Most part of the time, I just could not get the time for connecting while where I could manage to squeeze some time, the connections were simply non-existent. Where on earth you wonder – well, I was for most part of the time in Perth, Western Australia!!. Now in my travel , a key executive of a major corporation sitting next to me asked me to answer the question - What are the primary qualities that you should look for in an outsourcing partner, and is there a mechanism to measure and rank them? The last thing that I wanted to do in a long flight was to talk business and anyway it was an interesting conversation. The gist of my response: First and foremost it would depend on the nature of service that is planned to be /getting outsourced. Every type of service shall have its own set of measures of effectiveness when it comes to outsourcing. Besides every outsourcing deal is contextual in nature and has to be therefore measured in relation to its objectives. While cost, scale & speed, quality would matter for every deal at all times – the mix and sensitivity could vary depending on the deal. Besides traditional models of outsourcing may not be the most relevant for business competitiveness related deals – say a transformation initiative. In regular nearly commoditized nature of services like IT maintenance (even here there can be a range of differences in the nature of the deal), most business feel comfortable about taking near standard deals – or deals structured with minimal variations. In general , for special deals the recommended action would be to test the waters through piloting before reaching the stable zone of outsourcing and scaling up further. The level of executive support and involvement of both sides and relationship management would become a key driver in ensuring continual success of outsourcing initiatives. Also if it relates to outsourcing from a high cost location, offshoring has got to be factored in for better costs and scaling up - substantial benefits and changes would be seldom felt without that. The continual revision /change in metrics in outsourcing is a given for enduring success. The effects of multisourcing also needs to be factored in the overall assessment.
Sadagopan's Weblog on Emerging Technologies, Trends,Thoughts, Ideas & Cyberworld "All views expressed are my personal views are not related in any way to my employer"
