Advantage Outsourcing

What is common between these organizations-Tata Steel,
Colgate-Palmolive, Bank of India, YES Bank, ABB, Bharti, Bank of Baroda, Dabur,
Sanmar, ING Vysya Bank, and Tata Teleservices? You would not get the connection
in the KBC hot seat, but ask any observer who keeps a close eye on India Inc and
he would tell you these are some of the organizations that have outsourced their
IT infrastructure, in some way, during the last five years. What started as a
trickle during 2000 has gained momentum now. IT outsourcing, including ownership
of assets and manpower resources, is now becoming commonplace.

Many Indian enterprises have realized the advantages of
outsourcing their IT functions so that they can focus on their core business.
But the success of an outsourcing deal depends on other business dynamics, too.
Sanjay Raina, head of Services Delivery at IBM, believes that no two companies
can sustain an outsourcing deal unless they generate value mutually. The Bharti
deal with IBM is an ideal example: Apart from a fixed component, rest of IBM's
revenues from this arrangement are linked to Bharti's performance. This
ensures that the service provider has enough incentive to provide the best
services to the outsourcing organization.

Typically, outsourcing of information systems and networking is
resorted to by companies that have large ERP installations, databases,
manufacturing systems, multiple production facilities and so on. This is obvious
from the case studies of the eleven companies earlier mentioned. The list is not
restricted to just these eleven. Other large enterprises like Hindustan Lever,
Tata Honeywell, Whirlpool India, Ashok Leyland, Indo-Rama Synthetics, Optimix,
Ballarpur Industries, and HDFC Bank too have bitten the outsourcing bait.

Outsourcing of non-production-related IT applications enables a
company to not only focus on its main business activity, but also achieve cost
savings-on IT initiatives, of course-to the tune of up to 30%. Most vendors
point out that this opportunity translates into a market size of more than Rs
1,000 crore in the present domestic environment. MNC vendors like IBM, HP,
Accenture as well as Indian vendors like Wipro Infotech and TCS are all joining
the race to garner a share of the pie.

However, in the long run, collaboration between Indian and MNC
vendors probably holds the key to the success of an outsourcing deal. Agrees
Sanjay Jain, country managing director at Accenture India: "Collaboration
between vendors brings out the best-of-breed solutions." A best example for
such an collaborative arrangement would be Tata Steel, which has outsourced its
hardware maintenance to IBM, software application development to TCS, and
management of distributed IT environments to HP. Another would be Bank of India,
where HP closely works with Infosys to deploy Finacle across its branches.

Anand Sankaran, VP of total outsourcing division of Wipro
Infotech, opines that Indian enterprises prefer outsourcing contracts with
multiple vendors. As such, selective outsourcing is still a more prevalent trend
against total outsourcing. Many organizations still believe in maintaining small
in-house IT teams and retaining their own control particularly over the
enterprise applications as well as purchase-related information. However, the
movement towards consolidation of vendors has started, primarily because the
vendors are getting better equipped in terms of capabilities, methodologies,
tools and processes, and in implementing the SLAs catering to the requirements
of Indian corporates.

Regarding the SLAs, both Sankaran and Raina feel that even
Indian organizations are now demanding stringent parameters, involving both risk
and reward clauses. "Since most Indian enterprises are now anyway guided by
international consultants, their expectations are as demanding as global
clients," feels Sankaran. Naturally, the SLAs too are getting enhanced. But
cost competitiveness, according to Raina, is an important consideration for SLAs
in India Inc, especially since IT expenditure is not keeping up with the growth
rate of the organizations here.

Another reason why many of these Indian outsourcing contracts
fail: base erosion over the years. Since these are annuity-based deals in some
years, owing to obsolescence and depreciation, the contract has no more value.
Raina believes the trick is to always try to grow and protect the base value of
the contract. Sankaran feels that it is the reason why most enterprises prefer a
fixed-plus-variable revenue model, with more emphasis on the fixed component.

The transition from the earlier model of facilities management,
where vendors were taking the entire manpower themselves, to the current model
of asset stripping, where device-based resources are outsourced, has changed
life for most enterprises. IT is now looked as an operational expenditure, not
capital expenditure, in the balance sheet by most corporates. The shift has been
good news for vendors too since facilities management was also getting
commoditized and margins were getting squeezed.

IT infrastructure outsourcing can thus help drive growth in many
ways. It can reduce operational costs by turning what is a fixed cost into a
variable, getting assets off the balance sheet, and freeing up cash for
investment. Both CIOs and vendors agree that the value of outsourcing is derived
only in long-term contracts, especially those beyond three years. While there
are the dangers of base erosion, providers need at least three years so that
they can give sufficient inputs for process re-engineering to their customers.

With IT outsourcing in India at such an interesting threshold,
Dataquest has presented a case study of eleven enterprises, selected not in any
particular order, but at random. They do give a flavor of how this is panning
out as a trend in India Inc.

Rajneesh De