Outsourcing: the next generation

CIOs are re-assessing their relationships with providers of technology and services and in particular their relationships with outsource service providers. Analysts and CIOs have explained to CIO UK the changing ­nature of their operations and why this is in turn changing the demands they place on the outsourcing community.

“We as leaders of the industry now look at growth opportunities in the next 18 months,” says Myron Hrycyk, CIO at Severn­ Trent Water. “Our sourcing plans now have to include capabilities that let us scale, adapt, be agile, flexible and deliver­ rapidly.” In the recent past an outsourcing deal was expected to deliver results within a timescale of two to three years, Hrycyk says.

Cost is still a big component for the utilities CIO, but it now comes second to the forward thinking he wants an outsourcer to provide his company.

Hrycyk says that smaller, shorter-dur­ation selective outsourcing deals secure both best of breed and greater commercial flexibility for the organisation.

“It also injects a degree of competition between their sourcing partners. More ­importantly, it allows the CIO the flexibility to keep pace with the changing business demands, make changes in the delivery or commercial arrangements or include new technologies, which may not have existed at the start of the engagement,” he says.

Duncan Aitchison, President and Partner at outsourcing advisors TPI says that the more mature outsourcing markets in the US and UK have led the move towards this multisourcing model. This, he says, is in direct response to the perceived limit­ations of the earlier large, bundled, single vendor IT outsourcing agreements.

The Indian service providers, with their access to a scalable workforce, are well placed to answer the latest demands of the CIO, says Ian Marriott, Research Vice President at Gartner.

Recent analysis of the major outsourcing players in India suggests they are performing well and continue to win deals from with western IT leaders.

“Indian companies’ last quarter results demonstrated the growth of the offshore industry, fuelled primarily by the UK and the US,” says Partha Iyengar, VP at Gartner India. “There has also been an increase in the number of first-time offshorers. While not a new phenomena, what is interesting is the increase over such a short period.”

Tridip Saha, UK head at outsourcing­ consultancy MindTree, confirms this. “Over­ the last two to three quarters there are companies that have stated their commitment or are in their evaluation phase and on the lookout for vendors,” he says. MindTree has faced an overwhelming response from the UK, especially from firms outside the FTSE 50-75 bracket which are now ­attempting to catch up with their peers.

With the economy showing some signs of revival, companies confident of their business growth and investments now want to embark on the offshore journey. “We have seen a big spurt in the number of requests,” Saha says.

But while UK firms invest heavily in Indian­ outsourcing, some analysts feel that Indian service providers have missed their chance to make an impact on the European scene. Pascal Matzke, VP & ­Res­earch Director at Forrester Research, says that large Indian service providers hardly have a role to play in Germany and France.

CIOs there prefer a mix of one or two Indian vendors in their strategy, acting as junior partners. He cites the lack of a ­local presence in continental Europe, and it’s the Tier II Indian service providers like NIIT and Hexa­ware, who made a strong commitment to the local markets early on in the game, that are the successful players in Germany.

Gartner’s Marriott says that CIOs in Europe expect the local presence of both delivery and engagement professionals, and this means that discussions go beyond technology.

Indian service providers have grown their market share in Europe, albeit from a relatively small base, says TPI’s Aitchison. “From being almost nowhere in 2000, they are now winning 20 per cent of the number of outsourcing contracts valued at €20m or more in the commercial sector.

“The third-quarter TPI EMEA Index revealed that the Indian providers have demonstrated a double-digit services revenue growth over the last three years, whereas the multinationals experienced a modest decline over the same period. This growth is in part a result of both the clear and ­focused strategies of the India heritage providers and the success of their ‘pene­trate and radiate’ modus operandi,” he says.

Staff attrition is a major concern at outsourcing providers, according to Marriott. “With knowledge constantly walking­ out of the door, it will be difficult for outsourcers to move up the value chain,” he adds.

Derek Kemp, EMEA President at services giant Patni, is looking to contain the attrition with an effort to cultivate entrepreneurship. He explains that an employee will spend 24 months incubating an idea, and that by encouraging them to work on their ideas both employee and outsourcer will benefit in the longer term.

Strategic partners Although Indian providers were winning and exe­cuting large deals there remains a perception, according to Marriott, that while CIOs view Indian providers as technically sound, offering great access to skills at attractive price points, they do not see them as true strategic partners.

Jora Gill, formerly CTO at global credit ratings agency Standard & Poor’s, feels that having previously pushed the cost-saving benefits of an outsourcing deal, the Indian providers are finding it difficult to sell the perception of themselves as value-added integrated business partners.

“Although some of the larger Indian service providers have bright people leading them who understand the need to move up the value chain, the problem is in articulating and convincing this paradigm shift to their existing and prospective clients due to the fact that for many years low-cost arbitrage has been sold as the reason to do business with the Indian service providers,” says Gill.

“Secondly, the sheer size and scale of some of the larger providers will make it difficult to change the internal culture and mentality of the organisation from one of cost reduction to one of value addition.”

Gartner’s Marriott, however, acknowledges that larger outsourcers are making inroads. “Companies like TCS, Wipro, Infosys, Cognizant, HCL and Mahindra Satyam are beginning to move into the strategic category with some of their customers, while Tier 2 Indian vendors, more likely in a niche area, fall under the tactical or emerging category,” he says. These companies have been able to bring not just technology but their understanding of capability and local skills and apply that within the context of business needs.

Severn Trent CIO Hrycyk also vouches for the Indian providers’ high-end capabilities. His firm’s recent deployment of a £70m SAP programme used outsourcers for data migration and testing. Hrycyk says that as long as CIOs are comfortable and reassured of security, SLAs and quality of service, the less reticence there will be. Hrycyk also touched upon the ‘yes man’ ­attitude of an Indian service provider.

“A client prefers an open conversation. There is also some element of asking a ­client to think differently,” he says.

Matzke at Forrester Research believes that Indian companies have come a long way. He does, however, stress the importance of marketing, which he feels they need to strengthen to make the industry aware of their various offerings and tackle any negative perceptions.

Changing demands CIOs today specifically seek providers who will work with them as partners and take greater ownership of their outsourced work. This model focuses on results as opposed to headcounts. According to Kemp, Patni is moving to a model whereby its pricing is directly related to the business model of their customers. In the telecommunications sector, for example, their pricing could reflect the number of subscribers that their clients have on a per-subscriber basis. Rather than having a fixed annual cost, their customers then have a pricing model scaled against the number of subscribers they themselves have. The fewer subscribers they have, the less they pay, and vice-versa.

TCS too works with output-based pricing for its clients but also has in place contracts and relationships without output-based pricing. “Certain clients state end objectives of a programme at the beg­inning of the project as part of their business case evaluation, such as expected savings of x per cent by the time the project is completed. They develop metrics to achieve this. Some of these metrics change over time and pricing may migrate towards a more transaction-based model as more data is available. This shows maturity in our rel­ationship model and the importance of a partnership approach,” says TCS’s ­European chief AS Lakshminarayanan.

Gartner’s Marriott explains that the Indian providers have been smart in the way they package the output-based and outcome-based models. Their openness to being flexible in constructing commercial arrangements helps bolster the view of their customers that they are agile, adaptive and flexible in their approach.

Unlike pure IT providers, the Indian outsourcers have not been quick to adopt cloud computing, but Marriott believes that the Indian providers do have the potential. The lack of significant investment, he says, is due to a difference in mentality. He believes that some Indian organisations will continue to deliver the success through the resource-based approach, and that there is a worry that converting their relationships from a resource-based service­ to an asset-based or cloud-based service will cannibalise that revenue.

“While there has not been a massive ­intent to convert from a resource-based approach to an asset-based IP approach, the view maybe that Indian providers would want to take this as a gradual move to address business opportunities rather than displacing existing business relationships,” adds Marriott. Companies like TCS and Infosys are doing a lot of cloud work, but it is a component. It is part of their overall portfolio of services and they will continue to invest more and more in these areas as they see an upturn in the market.