Changing Approach to Outsourcing

With changing times, the CIOs are also changing their approach to outsourcing. It has been a while since we recovered from the economic slowdown. What happened then had its ripple effect on India as well. Companies started looking at cost optimization, started focusing on core-competence, and giving away the redundant jobs to third party. CIOs changed their strategies to not only embrace outsourcing more closely but also in a cautious way.

Seepij Gupta, senior analyst, IT Services India and APeJ, Forrester Research shared that outsourcing in India does not follow a specific trend, while we see some examples of game-changing and transformational IT outsourcing model, a majority of them would still be related to body shopping. The clients would ask for a definite headcount of engineers/professional to work on a contract under them.

In a typical outsourcing model, the employees on contract with the clients are responsible for ensuring that the IT is up and running. He says, "CIOs outsource discrete IT parts in silos. All they want is to keep the lights on. There are rare examples where we have seen companies outsourcing entire function like customer servicing or back end. In one of our latest research reports, we found that the average deal size value is coming down globally for the last 7-8 years. Deals are now smaller in terms of size and even value."

Interestingly in India, the clients and vendors both operate in the same field and have equal access to the talent pool. So a conversation between them is not just about cost arbitrage and talent pool but taking the redundant jobs away, providing domain skills, and hand holding for increasing business value. Let us understand the market demands and its stance:

Market Demands

While outsourcing is not a new concept that suddenly gained acceptance among the enterprises post-downturn, it has been an ongoing trend. What has changed or is starting to change as a result of the volatile market conditions is the dynamics of the relationship. Both customers and vendors prefer deep relationships and more value out of the partnership and risk aversion.

For TG Dhandapani, CIO at Tata Motors, while there were no blocks in the budget pipeline despite the hard times, instead the IT budgets increased by 10% y-o-y basis. The plan was to achieve more business value out of the IT investments. The company outsourced facility management, call center, CRM services, and other non-critical businesses.

For TVS Motors, the outsourced piece is just 8-10% of the overall IT budget available, but it is the caution and risk aversion that go behind, especially before choosing the right partner. According to Dhandapani, a CIO should look at partnering with the service providers with proven track record, references, domain skill, and balance sheet. He says, "What we look for in a partner is the ability to understand our industry requirements, our requirements, and provide solutions faster and at the best rate." Furthermore, while the company should look for a longer contract term and deeper relationship, it is equally important to have the clause of checking and monitoring the performance of the service provider.

Observing the Change

Taking the example of airtel-IBM, where both the companies were willing to share risk and reward, and were ready to take forward the change in business metrics while many other companies have been conservative in their approach. There are multiple factors that work behind the partner-vendor relationship. Here, we saw the partner and business together come up with a new business process which they could use in many environments, while the CIO prefers following the exiting business processes.

Rajeev Batra, CIO, MTS India, who has also been a part of the landmark airtel-IBM, says that India has been equally progressive in outsourcing. He says, "As an industry trend, telecom and BFSI have been quite forward looking and have been outsourcing up to 85% of their IT functions.

We also have examples of telecom companies like airtel and Idea that outsourced their entire IT stack to the service provider or Uninor and Vodafone that went for majority outsourcing. In this stage of maturity level at MTS, we felt a need for more strategic and selective outsourcing; wherein we looked at multiple partners who were the best-of-breed in their domains.

For example, we looked at different partners for each specialization like ERP, desktop management, office infrastructure, etc. We looked at partners who could give the best solution at the best price." Around 60% of the overall IT function is handled by our partners, he adds, which is around 300 people team. While there have been a marginal rise in the overall y-o-y IT budgets, we have done a lot of deployment with the help of selective outsourcing." For MTS, while the internal team under Rajeev is around 300, he works with an equally big team through partners.

"Traditionally, CIOs have been following the time and material and fixed deal. Today, this counts for around 60-70 % of the deals signed. However riding the wave of change, new models are taking shape in the market namely: Gain sharing model, incentive based pricing model, consumption based and shared risk model. While the numbers (as a percent of the overall share) are still low, but they are showing signs of high adoption, as they help both the parties share their risks and rewards equally," adds Gupta.

Now, non-telecom/BFSI verticals are also slowly waking up to the change and we would see more transformational and business-side deals rather than pure BPO outsourcing. And one of the early movers is Welspun. According to the Mukund Prasad, group CIO, who also heads the HR functions, the company is in advanced talk with the service providers for a larger 10-year transformational deal. Interestingly, he was working around the strategy for almost one-and-a-half years defining every bit and piece of the SLA.

"We are in talks with the service providers for a large deal. We are looking for a service provider to handle around 80% of the basic functions end-to-end. This would be spread in phases of 3 years and would include around 25 different small projects. We are retaining the complete enterprise architecture, procurement, contract management, and SLA registrations. So apart from the key decision points, the contract would include platform upgrade, application development, and integrated solutions for bringing more business value." While a few CIOs prefer multiple partners to avoid dependency on a single service provider, Prasad believes that a single partner means single point of contact and lesser trouble of SLA management.

Beyond the Tradition

This was unlike the traditional outsourcing that has been around development, management, and other services on infrastructure management, network management, security management, and application maintenance, where again infrastructure formed a major part than applications development. Before opening up to outsourcing, CIOs still invest time in due diligence, like understanding their current strengths, pondering over factors like where do they stand and what it is that they want to outsource and why, etc. Their next step is to identify the partner, negotiate, and sign the deal off.

For Zoeb Adenwala, CIO (global), Essel Propack, the partner evaluation starts from company balance sheet, followed by client reference, expertise or skill set offered, and finally the overall competitiveness. While not a part of the above list, relationships play a significance role in decision-making. CIOs prefer working with tried and tested partners and familiar teams. Having said that, SLA is another big task to tackle. A lot of hard work goes in the building the SLA. It is a key component of any partnership and helps in partners management. A lot of CIOs spend time in tracking and monitoring SLAs because they focus on the micro points and end up having a complex one.

The Way Forward

The new partnership model of deeper relationship not only helped the vendors manage and retain their existing clients and build deal pipeline, but also for the buyers/CIOs as it helped them leverage the new technology to gain a competitive advantage. But one of the major challenges that vendors have to deal with is the mismatch of demand and supply. Larger enterprises are largely conservative towards spending on new technology since they have already invested in legacy IT, because of which a lot of time the vendors bag only low hanging fruits of smaller size, shorter term and value.