IT outsourcing has undergone tremendous changes over the years, and with enterprise customers digging deeper for that extra value and IT vendors looking at innovative service offerings, the industry is in the midst of yet another transformation. A big one this time
Of all things it has resulted in, a prominent change has been organizations’ growing hunger for transformation. As businesses worldwide dream of makeovers and transformations, largely led by new technologies, their expectations from IT vendors has also skyrocketed.
For years, IT outsourcing was seen as a way of procuring cheap resources and gaining operational efficiencies. Not anymore. Shrinking IT budgets and the increasing pressure to align technology with business outcomes is pushing organizations to dig out deeper value out of outsourcing relationships. The inability on the part of the service providers in meeting client organization’s demands leads to non performing contracts. This is a scary realization that many service providers are waking up to. It is now an accepted reality that the old and traditional sourcing models are not going to work anymore and it is time for the next generation IT models to take over.
Conversations are moving beyond the traditional cost objective and what enterprises want to know from their IT vendors is if they can enable business transformations, working together as a partner. The emphasis is on adding strategic value and that is a lot more than merely reducing the IT spends. “Sourcing has seen some dramatic changes in the past few decades,” says Rajeev Suman, Senior Analyst, Pierre Audoin Consultants (PAC), a global market research and strategic consulting firm for the software and IT services industry. Traditionally, the motive was to attain cost benefits and the outsourcing providers focused on cost minimization on a time and material model. With outsourcing models gaining maturity, it then moved to fixed price arrangements with some element of gain sharing and risk sharing commitments thrown in from service providers.
Today it is a whole new ball game. The advent of disruptive technologies and enterprises’ growing desire for business transformation is driving the services landscape to a new level of maturity where service providers are expected to be partners enabling end-to-end transformations for their clients. The ownership is moving into the hands of IT vendors and they are expected to assume risks and throw some skin in the game. Hence we are seeing sourcing models being linked to business outcomes. “The suppliers are looking for end-to-end transformational deals thus taking the whole IT landscape from the CIOs to manage it themselves. Delivery of services is now done via global delivery network,” adds Suman.
So, Is Traditional IT Outsourcing Dead?
As the industry evolves to new best practices, sourcing mechanisms and pricing strategies there are many who argue that IT outsourcing in its traditional format is going to die. Industry experts have mixed views though.
“It is too strong a statement to make that traditional outsourcing is dead,” says, Arup Roy, Research Director, Gartner. He adds that there is going to be a transition for sure, but all of it will not move to new models. 50-60% of IT services work is likely to transform to new models. “The transition is gradual and will happen over the course of years,” says Roy.
Some industry experts also share a stronger view on this. Bobby Varanasi, Chairman & CEO, Matryzel Consulting, says, “Traditional outsourcing is dead in the form and manner that generally professed operational efficiency and standardization through provisioning of competent (and cost competitive) labour.”
The speed or level of transition also varies for different enterprises. Anupam Govil, Partner, Avasant, gives an interesting classification for enterprises and the different ways in which they are approaching IT outsourcing. “There are different categories of outsourcer today,” he says. We have the conservative firms in the manufacturing, insurance and public sector that are still largely relying on FTE based models. These enterprises still depend a lot on on-premise infrastructure, legacy ERP, CRM and PLM systems. Then we have the relatively matured class of outsourcers in the Banking, Energy and Telecom sector that have transformed to a Managed Service our outcome-based engagement model. “And there is the third class of outsourcers comprising of the re-born digital companies in the media, retail and pharma sectors that are embracing digital transformation to align with the new digital economy,” Govil adds.
Digital Transformation Impact
As organizations nurture their digital dreams, they are looking at IT vendors as their transformation partners. Hence, service providers face the immense pressure of being able to lead the digital transformation roadmap for their clients and at the same time have a whole new world of opportunities facing them. Many are quick to respond and are ramping up their capabilities in new technology areas and are pumping in big investments, as they understand and acknowledge the fact that to help their clients transform, they need to transform first.
The tolerance level on the part of customers has also gone down massively. They are ready to walk out of contracts that fail to deliver value or help attain their transformation objectives. Also, it is no longer the traditional set of service providers who dominate the scene.Chirajeet Sengupta, Vice President, Everest Group, says, “The traditional providers are not the first set of players that come to enterprise customers’ minds. They are increasingly moving to technology start ups and niche providers with capabilities in new technology areas like cloud services and mobility.” Also the relevance of the traditional FTE models is being questioned in the new digital context. It calls for a new way of sourcing style and approach altogether and significant changes on the part of the service providers and the clients.
To realize true value out of digital objectives, enterprise buyers need to be more sophisticated and need to know what exactly they are seeking from the transition. “It also brings higher obligation on the part of service providers to deliver the desired business outcomes,” says, Akhilesh Tuteja, Head, IT/ITeS Practice, KPMG in India. As revenues are more and more linked to results, the impetus is on the service providers to push for faster and tangible results.
The innovation mandate
It is clear that outsourcing vendors can no longer satisfy customers with the same old plain vanilla services. The mandate is to innovate and help your customers innovate. Enterprises want IT services that are flexible and offer new and improved ways of doing things. So, how do service providers drive this much wanted innovation? And more importantly what would qualify as ‘innovation’ in the IT services context? Is it all about employing and building new technology capabilities?
“In the sourcing industry, innovation would mean solutions that impact business functions directly, increasing visibility, flexibility, and adaptability in the face of uncertain futures,” says Varanasi. He adds that the impact of such solutions will not be in operational efficiency but in functional resilience and deeper areas like revenue alignment, product superiority, and strategic competitiveness.
In their attempt to offer innovative services, many vendors are trying to move away from headcount-based revenue models to non-linear business models. “Service providers are increasingly focusing on IP-driven software and solutions to ensure higher growth in revenue than personnel since 2010. Since then the IT services and BPO sector achieved annual revenue growth of 14%, whereas the average growth in headcount was around 9%,” says, Suman. The non linear growth journey has begun for Indian service providers with biggies like TCS, Infosys, and Wipro creating more and more IP driven software, platforms and services. Suman adds that these players will have to keep on innovating to sustain this growth model.
Many large and some mid-sized Indian service providers are investing big in areas like analytics and mobility. “All the tier-1 and some of the tier-2 providers have adapted to the new business realities by launching digital business streams, but with a varying degree of success,” says, Govil.
While acquiring digital technology capabilities is important in moving towards non linearity, it doesn’t work in isolation. Varanasi believes that though SMAC technologies are surely helping companies create non-linearity, the current rhetoric that SMAC is the solution for all things is quite misplaced. “There are many other core aspects that add to the non-linear opportunity (which are not technologies) like demand forecasting, category management, new (risk-based) business models, vendor consolidations (driven by capability-tiering), new financial models, and new pricing models which are all as big contributors to non-linearity as SMAC,” says, Varanasi.
Some industry experts are also of the view that despite the transition to new and complex models, revenues still remain linked to headcounts in most cases. “Some providers are able to charge for the value they deliver but in order to do that, the provider needs deep domain knowledge, the ability to sell value and a buyer who is on the same page. Indian providers have been trying to build this kind of expertise,” says, Uday Tembulkar, Co-founder, Empacus Outsourcing Management Services.
Service providers also have their own perspectives of looking at innovation. “It is not just about the technology but the capability it brings in to the organization that makes the difference. The biggest question is not do you have a lot of skillsets in SMAC, but can you translate it into business outcomes for your clients,” says, Vikram Duvvoori, Chief Technologist and Corporate Vice President, Enterprise Transformation Services, HCL Technologies. He adds that the company’s strategy in the recent past has been to try and become a good system integrator, understand the strength of partner ecosystem, take ownership, and have the right capabilities.
The next phase of growth for the Indian IT services industry is going to be driven by non linear models and all players will be trying to achieve it. “With the huge talent shortage in the industry, non-linearity in the business has become mandatory. Each one is trying to achieve it using different mechanisms, such as IP & platform based services, managed services, outcome based pricing model and reuse programs,” says, Madhusudhan KM, Chief Technology Officer, Mindtree. According to him, process innovation is another space that is extremely important while managing large programs and the company has invested in implementing agile and lean models to add value to its customers.
As we go about finding new meanings and perspectives, what lies intact is the fact that there is no one path or solution that defines innovation. Some will be technology led while others will result from a combination of various factors. At the end of the day, it is an organization’s own choice of how and in what ways it wants to innovate. As long as your customer sees value in what you are doing, it’s all good.