Leadreship: Hindalco

The concept of outsourcing has been in existence probably from ancient times. The kings outsourced their armies to jaagirdars, and vatandars who provided the king with the military personnel. The concept of total outsourcing was even practiced by the descendants of Shivaji, when they outsourced their government totally to the Peshwas. This engagement lasted for a little more than a century, and ended with the beginning of the British rule.

In the last 25 years, IT outsourcing has caught the attention of the world, transforming the image of India as the country of snake charmers as that of a highly skilled, and cost effective knowledge workers. Beginning from low-value manpower supply contracts, it gradually matured into discrete outsourcing, and now has metamorphosed into total outsourcing also known as Strategic Outsourcing.

IT outsourcing in the developed world can be broadly categorized into 3 categoriesDiscreet Outsourcing wherein a few processes are chosen and are outsourced to IT vendors, the bulk remaining with the client; Total Outsourcing, where all the processes and services are outsourced either to one or many vendors while the management of the vendors, and the respective SLAs remains the primary function of the client, and finally Bundled Outsourcing, where all processes are given as a package to a single vendor.

The concept of total outsourcing has worked very well in most cases however it is fraught with challenges, mystified with myths, yet firmly grounded in reality. It has delivered in most cases though not without its own lacunae. Let us take a realistic look at TOS, and explode some myths.

Myth: Total Outsourcing is always good, and beneficial to the client.

Reality: TOS is as good as its drivers, and cannot be considered as a panacea for all the client problems. It is important to examine the drivers behind outsourcingis it cost reduction? Is it staff augmentation? Is to primarily gain business efficiencies? Once this is done, the contracts can then be drafted keeping all these objectives in mind, while the SLAs too need to be meticulously incorporated into the contract.

Myth: TOS can save 60-70% costs.

Reality: Costs savings can be only be realized when outsourcing is done from developed nations to developing low-cost high-efficiency nations. If an Indian company outsources, then the possibility of increase in costs is likely as there is no cost arbitrage, on the contrary the bottom line of the vendor is billed to the client.

Myth: TOS can reduce capex.

Reality: Even in the case of outsourcing to India, capex savings is not evident in most cases. The TOS deals very often entail transformational outsourcing. For instance consolidating multiple data centres into a few transcontinental data centres would obviously see a capex increase, though over a few years the opex will decrease.

Myth: Cost reduction is the only gain in a TOS deal.

Reality: The TOS benefits could be aplenty depending upon the structure of the deal. In domestic market, cost savings are often non-existent, however gains such as revenue impact by cycle time reduction, quicker time to market, and efficiency gains are predominant. Of course the obvious gain is skill augmentation or supplementation.

Myth: TOS will take care of all the travails of the business and IT organization.

Reality: The success of TOS will depend upon the way it is managed. Initially it may add to your travails as vendor management, knowledge transfer, work culture management can be a big challenge. Though tactical challenges may be reduced, the strategic ones will certainly increase. However one should be prepared to address the drudgery in the short term.

Myth: TOS carries minimal risks, as SLAs will mitigate the risks

Reality: SLAs are not a risk mitigating mechanism, instead is a performance benchmark. TOS does carry heavy risks but also high rewards. The risks need to be mitigated by a careful monitoring of the SLAs, and taking corrective action if they are breached. In fact TOS has more risks than discrete outsourcing which by its nature has the risks distributed. Hence the cumulative risk impact is many a times lesser than TOS. However the complexity of managing internal IT staff vs outsourced, can be a challenge in discrete outsourcing.

Myth: Total Outsourcing is just mega outsourcing and nothing more.

Reality: TOS is not just a mega outsourcing deal. It is in fact much more than just outsourcing. It can be a case of classic business collaboration, which generally transforms into partnering. This is the direction TOS should take.

Myth: TOS is a perpetual deal. It is very hard to get out of it.

Reality: It is indeed true that TOS is hard to undo. It is costly, time consuming, and painful however termination clauses need to be drafted carefully. Penalties and rewards need to be worked out while signing. TOS can be rewarding if partnered well. Hence if thought carefully one can balance the risks, and the rewards.

Myth: The bundled outsourcing brand of TOS is better than outsourcing to multiple vendors.

Reality: There is no clear cut answer to this. Bundled outsourcing was the trend in the past decade, that however is slowly shifting to multiple vendor outsourcing. The key success factors in bundled outsourcing areHow did you select the vendor? How will you monitor the contract, and what were your primary drivers in the outsourcing deal? I guess these would also be the drivers for the multiple vendor solution. Decision is to be taken on the basis of heuristics supplemented by sound business logic. Just business logic can be misleading.

Conclusion

Irrespective of the myths, outsourcing is here to stay. Careful consideration of the drivers, vendor selection tenure of the contract can make it a very fruitful experience. Outsourcing of logistics, and non-core functions have always be in vogue for the past century. Since IT is intertwined with business, the risks are high and so are the rewards. A large number of companies have gone for this. Why not you and me?

Good luck, and bon voyage into the ocean of total outsourcing.

As told to PC Suraj
surajp@cybermedia.co.in