Bill Piatt, CIO of the International Finance Corporation (IFC), sits in his Washington, D.C., office just three floors above the company's primary data center. But for all he cares, that server room could be halfway around the globe. After all, many of the people who manage that infrastructure are. Satyam Computer Services provides global network monitoring, database administration and mail server maintenance from a network operations center in Chennai, India.
"Why would anyone think this is unusual?" wonders Piatt, who, in the past, worked for IT services providers Unisys and CGI and was CIO for the General Services Administration. "All infrastructure is managed remotely. No one's ever sitting inside your data center anyway, even if it is in your basement. Admins are working from a different building or a different city or, if it's a weekend, logging on from home. Remote infrastructure management is something that virtually every organization does every single day. But people somehow think there's a material difference if that work is done offshore."
In fact, the offshore delivery of infrastructure management services—from network services and help desk support to server maintenance and desktop management—is becoming more mainstream. And while Piatt sees that as no big deal, it's a huge deal for providers of these services. Depending on whom you ask, the total market for remote infrastructure management services is anywhere from $80 billion to $120 billion. Today, for traditional, large global outsourcers, less than 5 percent of revenue from infrastructure outsourcing is derived from services delivered from an offshore location back into North America or Western Europe, says Kurt Potter, research director for Gartner. But experts say that offshore take is growing at 20 percent to 30 percent annually, as global IT services providers amp up their offshore delivery capabilities and CIOs look to cut infrastructure costs. Approximately 70 percent to 80 percent of vendor IT outsourcing proposals hitting the market today contain some form of offshore infrastructure delivery of services, says Adam Strichman, senior partner of Nautilus Advisors.
Offshore vendors—particularly the bigger, Indian multinationals such as Wipro and Tata Consultancy Services (TCS)—see infrastructure management as the next big source of revenue as demand for offshore application development and maintenance stabilizes. Between 2003 and 2005, the number of offshore vendors capable of handling infrastructure tasks tripled to 15,000, according to McKinsey. In February, India's National Association of Software and Services Companies (Nasscom) published a report (compiled by McKinsey) proclaiming that up to three-quarters of all infrastructure management roles could be offshored, creating a $26 billion to $28 billion revenue opportunity by 2013, of which Indian companies could capture about half. Meanwhile, more established U.S. and European infrastructure outsourcing providers view offshore delivery as a way to compete on price with their offshore rivals and improve their own slim margins.
How Much Can You Send Offshore?
Some IT services are more easily shipped abroad due to skills availability and proximity requirements.
Percent of infrastructure support functions that can be offshored:
- Network Services 80%
- Internal Help Desk 75%
- Servers 70%
- Maintenance 60%
- Administration 35%
- Mainframe 30%
- End-user Devices 15%
Both these legacy and emerging infrastructure services providers are counting on plenty more CIOs like Piatt willing to sign on the dotted line. "You have to get better and better at driving operational costs down so you can do more project work," says Steve Bandrowczak, CIO for Nortel. CIOs have "consolidated their data centers, rationalized their servers, implemented ITIL," says Potter. "This holds promise."
Promise, certainly, but no guarantees. While the offshoring of many infrastructure management services is possible, it is not the best choice for every company, situation or type of work. (See "How Much Can You Send Offshore," above) The risks and additional management overhead incurred when offshoring discrete projects or application development work are only compounded when sending critical, real-time operational support around the world. Issues like training and governance can be tricky.
While there are some labor cost savings to be reaped by offshoring infrastructure management tasks, the limited savings may not be worth it for some IT leaders. Others may be constrained by compliance requirements or political considerations. "CIOs have to step back and ask themselves what they're trying to accomplish with infrastructure outsourcing. Cost savings? Optimization? Transformation? Efficiency?" advises Peter Iannone, head of the IT practice for outsourcing consultancy EquaTerra. "You have to take a look at the range of options, the business value and trade-offs of each."
Infrastructure Outsourcing in the Age of Convergence
Once upon a time—as recently as five years ago, in fact—the typical infrastructure outsourcing deal involved an IBM or EDS taking over the whole shooting match (data center, machines, people) with the stated purpose of "transformation." Service providers could manage IT operations about 30 percent more cheaply because the cost of delivery was spread out among its customers and amortized over as much as a decade. Sure, customers ceded some control. But many viewed it as handing over a headache, with a cost benefit to boot. At the time, few customers would consider sending such work offshore, says Iannone: "The cost and reliability of telecom services offshore prohibited it." What CIO would have been comfortable outsourcing work to a country where blackouts were the norm and redundant systems and networks weren't?
Over the years, however, those telecom roadblocks were removed, redundancies were built into systems and tools for remote infrastructure management matured. "Customers started to look at the application development being done for 30 cents on the dollar in India, saying, If we could do that with operations, wouldn't that be great?" says Ross Tisnovsky, vice president of research for the Everest Research Institute. India's IT services providers, looking at network operation centers (NOCs),
which supported application work and then sat idle 12 hours a day, saw an opportunity, too. Their logic, says Iannone: "I can continue to run this through the night, do infrastructure work for U.S. customers and make money while I sleep." The offshore vendors had little appetite for customers' expensive assets and staff that the legacy providers gobbled up as part of their deals. But no matter. They had an infrastructure management sales pitch of their own. They called it "asset-light." "They could match that 30 percent savings customers could get from the transformational deal with a legacy provider through labor arbitrage," explains Tisnovsky, without taking control of assets, rebadging any employees or really changing a thing.
Today, offshore providers are starting to compete head-to-head with legacy providers, says Paul Roehrig, principal analyst for Forrester. In their hunger for this new market segment, some India-based providers have shown more of a taste for asset acquisition than in the past—making some of their offerings more like those of legacy providers. Last year, for example, Wipro acquired U.S.-based infrastructure services provider InfoCrossing, and TCS is promising to build out its delivery infrastructure in Ohio. Meanwhile, IBM and EDS are supporting their established infrastructure deals with lower-cost, offshore labor. That data center may be in Plano, Texas, or Boulder, Colo., but the people aren't.
"If the contract doesn't spell out restrictions for offshore infrastructure support," says Strichman of Nautilus Advisors, "it's going there." (Both the India-based providers and legacy multinationals have thus far built the majority of their infrastructure management systems and staff in India, though they are expanding to other offshore locations, including Latin America and Eastern Europe.) Notes Rob Finkel, a partner in the global sourcing group at the law firm Milbank, Tweed, Hadley & McCloy: "It's hard to find a pure, domestic deal anymore." (For more, see "It's 2008. Do You Know Where Your Infrastructure Is Managed?")
Competition for Your Infrastructure Dollars
U.S. and European vendors do a hefty business in infrastructure management. But with aggressive growth strategies, India's IT services providers are poised to win more.
|Company||Percent of Revenue from Infrastructure Management (2006)||Annual Growth Rate|
|Top U.S. Providers|
|Computer Sciences Corp.||27%||4%|
|Top Indian Providers|
|Tata Consultancy Services||6%||94%|
Source: Forrester Research
Still, differences remain. "You can't get away from the issue of scope and scale," says Forrester's Roehrig. Legacy infrastructure providers "have years of expertise taking on massive deals, large amounts of people and large amounts of assets. The Indian providers have good profitability, cash flow and a pretty decent growth strategy. The real question is, Can they grow fast enough to get the scale that they need to compete?" (For a list of the top infrastructure vendors, see "Competition for Your Infrastructure Dollars," above)
Winners and losers will be determined at a later date. But the movement of infrastructure management services offshore creates new options—and new challenges—for CIOs.
The Lure of (Really) Remote Infrastructure Management
"Where on earth are you?" is one of the last questions IFC's Piatt says he asks of a potential infrastructure provider. He wants to assess their domain knowledge, their experience managing the technologies IFC has chosen and the work they've done for similar organizations. "Electrons need no visas," says Piatt whose full portfolio of infrastructure support is done by a combination of onshore, offshore and nearshore resources, both in-house and outsourced. "Anyone can do this work from anywhere," Piatt says.
Even before Piatt arrived at IFC last year, the company was on the bleeding edge of remote infrastructure management adoption. The finance arm of the World Bank had signed a deal with Satyam to set up an offshore network operations center in 2003. It was successful enough that "we went through all of our services and cataloged what else could be done from Chennai," explains Zafar Azhar, IFC's information officer who manages the company's offshore relationships. "The only thing we won't let them touch is our production servers."
Piatt and Azhar aren't alone. One reason offshore infrastructure management makes perfect sense to some CIOs is that the technology for managing and monitoring IT operations is relatively standard. Furthermore, whether answering a help desk call or monitoring a server, processes like ITIL for managing services and Cobit for governance give service providers "a common language," says Gartner's Potter.
When Bill Maguire signed on as CIO for Virgin America in 2006, he knew he wanted to offshore infrastructure management. Given that the airline was in start-up mode, he didn't expect to have a big staff. Rather than fight to increase IT headcount, he opened up the bidding to U.S. and Indian vendors. "You have to consider the big guys who are good at that stuff," says Maguire, who had past experience with CSC, IBM and EDS. Ultimately, he hired Cybernet-SlashSupport (CSS), which, although it is based in San Jose, Calif., manages Virgin America's production applications, infrastructure and help desk from Chennai. IBM could have done the work offshore, too. But Big Blue cost three to four times more and, says Maguire, wanted a bigger piece of the airline's infrastructure pie. Then there was the issue of leverage. "We don't have a huge operation," says Maguire. "We'd be like a flea on an elephant's butt (with a big vendor)." Maguire also thought CSS was better able to support Virgin America's largely open-source shop. For others, a legacy provider proves the better choice for offshore support.
Nortel's Bandrowczak has a NOC in India, run, not surprisingly, by Nortel Services. The company outsources other infrastructure support, including system management to HP and database administration to CSC, which provides the services from points around the globe. "Absolutely I'd consider a Wipro or Infosys or Tata. They're all great partners," he says. "It's just that the system integrators have a leg up. They know their own equipment. And we've got a lot of HP equipment." Like most companies that outsource infrastructure management to an offshore provider, Virgin America still owns all its IT assets. Recent stateside acquisitions aside, most India-centric providers remain selective about buying their customers' equipment or hiring their staff.
That's fine with Piatt. In a traditional "asset-heavy" deal, unexpected changes in technology require renegotiation. "If someone else owns all those assets, each time you want to make a change to the network topology or server configuration, they have to reprice that contract. It's a big administrative discussion rather than a technology decision," says Piatt. With technology cycles shortening, having to bring in the lawyers every time you want to make a change "may make it difficult to nimbly respond to market opportunities," says Jim Meadows, partner in the global technology and outsourcing practice at law firm Hunton & Williams. Say you're a midsize company with Intel servers and you decide you want to move to Linux. "If you signed away your assets for seven years, you're out of luck," says Everest's Tisnovsky. "That deal has a technology road map and a refresh schedule that the vendor has amortized over seven years."
With an asset-light remote infrastructure management deal, the customer retains control. "IBM has built up very rigid operational procedures and processes over the years," says Maguire. "If I need to make a change in two hours, and I'm dealing with the big boys, it would be difficult given that overhead." Not that dynamic IT operations don't create challenges for CIOs who send infrastructure support offshore. It can be hard to keep the distant team up to speed. "As you're making changes, you have to train the remote people. Training someone 12 hours away takes much more effort," says Maguire, who ends up doing a lot of teleconferences and webinars with the offshore team. Sometimes a key CSS employee has to hop a plane from Chennai to California to learn new systems and go back to train the rest of the team.
After enduring some hiccups with Satyam early on, IFC had to bring key members of the offshore team to Washington for six months to be trained on its systems. IFC's offshore manager Azhar also learned that offshore support personnel tend to be less experienced. Some skills—like Citrix expertise—are hard to find abroad, "but all in all," Azhar says, "we've still been able to pull this off at a lower cost." IFC has even started to give the Satyam team special products like designing network infrastructure.
The Limits of Offshoring
For some IT leaders, however, sending infrastructure support offshore is a leap they're not willing to take. Even Maguire gets it. "You have to know your environment very well and you have to have extreme confidence in the vendor," he says. "If they miss something on the infrastructure side, it could cost a company millions. Execution has to be flawless."
Given uncertainty in the U.S. economy, many vendors and analysts tout the cost benefits of offshoring infrastructure work. McKinsey claims that early adopters of infrastructure management offshoring are saving from 20 percent to 60 percent on labor costs. But labor costs are just a slice of the pie—around 20 percent of a company's IT infrastructure spend. "If you save 30 percent on labor, which is just 20 percent of the overall spend, you end up saving 6 percent on infrastructure costs," says Howard Rubin, president of consultancy Rubin Systems and an MIT researcher. "You'd do yourself more good ripping apart the whole thing and rebuilding it—especially if you're talking about moving to an offshore market, where you suddenly find turnover at 18 percent and there are geographic issues and times zone issues. That's a lot of grief to go through for 6 percent." Rubin is not anti-offshoring, but he warns that sending infrastructure support offshore is not a "one-dimension value proposition." At IFC, for example, offshore support makes sense not only because it shaves some costs, but also because the organization itself is global. "Most of our employees are plus or minus four hours from India," says Piatt, "not plus or minus four hours from the East Coast of the U.S."
Sometimes its the type of technology support that makes offshoring less attractive. IT leaders with mainframe shops are more likely to want to sign over those boxes to an outsourcer, which rules out a lot of offshore providers. "It's a stable technology, there's little innovation and its viewed as getting rid of a headache," says Everest's Tisnovsky. And it can be hard to find mainframe skills offshore.
JM Family Enterprises handles 70 percent of its business transactions on its mainframes. The $11 billion, privately held automotive services company recently renewed its infrastructure outsourcing deal with mainframe mainstay IBM. But JM Family specified in the contract that the infrastructure support stay onshore. IBM was surprised by the request, says Shawn Berg, JM Family's vice president of technology operations, but ultimately acquiesced. "IBM clearly wanted the option," adds JM Family CIO Ken Yerves. "It's a five-year contract and I'm sure over that period they'd like to make sure they could leverage that cost option."
Berg says his company wanted to have influence over who works on its account. So JM Family negotiated final say on which IBM employees support its system. Berg admits that perhaps it shouldn't matter whether support personnel are in Houston or Hyderabad, India, but it does. "We have a lot of custom code, so our support model is challenging even when the resources are in the state," says Berg. "Adding another layer of complexity with the time zone and everything else doesn't make sense." The deal makes it easier to ensure IBM employees are adequately trained and turnover is a less pronounced issue.
Remote Desktop Management: The Final Frontier
Desktop management is least likely to be offshored for a simple reason: Sometimes an unresponsive computer needs physical resuscitation.
But that could be changing. "Tools to do more remote takeover of PCs are a lot more mature than they used to be," says Peter Iannone, head of the IT practice for outsourcing consultancy EquaTerra.
One example: Intel's new enterprise platform, vPro. The manufacturer says vPro enables hardware to respond to management commands even when the PC is locked up or powered off. -S.O.
JM Family has contracted with both Cybage and Keane to perform application development work offshore for over a year now. But "on the application side, its easier to throw things over the wall," says Berg. In running the business day to day, "if something happens on my box, I need support on the fly." He doesn't want to wait for someone new "to ramp up." In the past, he adds, "the knowledge of JM Family was lost when someone who was working on the account left." (See "Remote Desktop Management: The Final Frontier," above, for reasons why desktop management isn't often outsourced.)
Meanwhile, some CIOs may be constrained by the compliance requirements of government regulations or industry standards. Venky Rangachari, vice president of information technology for StarCite, which provides on-demand meeting management tools, has his infrastructure managed from Shanghai. But it's handled by the company's own employees in China, as well as in the U.S. Rangachari not only wants to make sure that infrastructure administrators understand StarCite's business, he also needs to ensure they handle customer data in a way that complies with Payment Card Industry (PCI) security standards. StarCite has many Fortune 500 customers in the financial services industry. "Access to customer data, financial information and security is critical," Rangachari says. "A lot of companies that do infrastructure support may not be PCI compliant."
For others, the location of contractors is a political concern. Lynn Willenbring, CIO of the City of Minneapolis, would be willing to explore offshoring some infrastructure services. After all, most of the work that Unisys—the city's infrastructure manager—provides as part of its five-year, $48 million deal with the city is done remotely. But she says that she believes government data shouldn't leave the United States, and virtually all the work should be done by U.S. residents.
The Future of Infrastructure Outsourcing
In the end, the globalization of IT services may be a net win for infrastructure outsourcing buyers, whether or not they choose to take advantage of offshoring. "Offshoring is not panacea for all ills," admits Roehrig. "But companies feeling economic pressures have more options than they did five years ago. There's more capability in the market, and that's good for everyone."
India's providers are expanding in an effort to mimic their multinational forebears in infrastructure outsourcing. Some are also starting to offer infrastructure optimization consulting services, says Gartner's Potter. But the India-based vendors may exert as much influence as they receive. Eager for business, they have been known to provide customers greater insight into their business and pricing models than their Western competitors and have been more willing to tailor pricing elements in innovative ways for certain customers, says Forrester's Roehrig. Potter adds that their larger margins give them more room to be accommodating, and that this flexibility and transparency could be a positive influence on the market at large.
It remains to be seen whether in the end, Indian vendors look more like legacy infrastructure providers or vice versa. Some of the India-centric vendors will move more aggressively into the asset-heavy space, predicts Everest's Tisnovsky, while others will stay the asset-light course. "Now that the India-based providers have the ability to credibly deliver these services, it creates a very interesting market dynamic," says Roehrig. "There's a tipping point in the infrastructure outsourcing business that has not yet been reached."
As for Piatt, he has his own thoughts about where the market is heading. He's following the investment of the global services providers, and that money is flowing offshore. With IFC's business growing 25 percent to 30 percent for the past three years, Piatt is looking at how he will support that growth in the future, and all signs point to India. His decisions will be driven by more than just cost savings. "Right now, we're in India because we can get highly qualified support from people who cost one-quarter to one-third of what we would pay people in the U.S.," Piatt says. "But when you fast forward and think about where this work is going to be done five to ten years from now, everyone will be going to Bangalore because those skills may no longer be present in the U.S."