Offshore Outsourcing – Trends and Practices :Offshore Outsourcing – Trends and Practices Presentation to Swedish Delegation from DFS, ISA & REVAST 0


Contents :1 Contents Outsourcing Background and Trends Why offshore-outsource: Business Drivers for offshore outsourcing Where: the choice of an offshore location How: Developing and Implementing a Sourcing Strategy


The IT and Business Process outsourcing industry is experiencing rapid growth, with offshore outsourcing leading the trend :2 The IT and Business Process outsourcing industry is experiencing rapid growth, with offshore outsourcing leading the trend By 2008, approximately USD 300-400 billion worth of services will be moved offshore Source: Gartner, Dataquest, Aberdeen Group, McKinsey Analysis’ Evalueserve Analysis, Infosys Analysis Market size figures include offshoring of IT and business processes In-Sourcing / Shared Services Onshore Outsourcing Outsourcing and Offshoring CAGR: 12% CAGR: 38% CAGR: 0% Captive Offshoring CAGR: 26% Onshore Captive Outsourced Offshore Location Ownership 17 164 0 20 40 60 80 100 120 140 160 180 2001 2008 (in USD billion) 3000 3000 0 500 1000 1500 2000 2500 3000 3500 2001 2008 (in USD billion) 35 182 0 20 40 60 80 100 120 140 160 180 200 2001 2008 (in USD billion) 304 664 0 100 200 300 400 500 600 700 2001 2008 (in USD billion)


Contents :3 Contents Outsourcing Background and Trends Why offshore-outsource: Business Drivers for offshore outsourcing Where: the choice of an offshore location How: Developing and Implementing a Sourcing Strategy


Global Sourcing now beyond providing cost savings – it has become a competitive necessity :4 Global sourcing is becoming a core component of F500 companies’ corporate strategy The scope is expanding beyond traditional ITO or transaction processing to Centers of Excellence or Specialized Skills Companies are using global sourcing as a means to position themselves for long-term capability building (both skills and capacity) Global sourcing has become a competitive necessity The new frontier is to integrate process and IT operations to improve effectiveness and efficiency Global Sourcing now beyond providing cost savings – it has become a competitive necessity “The board of directors of virtually every big company are now insisting on very articulated outsourcing strategy” – Businessweek, 2006 “Don’t tell me how much I can save. Show me how we can grow by 40% without increasing our capacity in the US” – Client executive, Jan 2006 This isn’t about labor cost…the issue is that if you don’t do it you won’t survive – MD of Deutsche Bank Global Business, Jan 2006 Cisco wants to raise revenue productivity to $1M per employee by enhancing operational effectiveness and focusing employees on value-adding activities - John Chambers, CEO Cisco Systems Key Trends in Global Sourcing


There are 3 strong business drivers for this rapid growth in Offshoring – (1) Reduce Costs (2) Build Competencies and (3) Increase Revenue :5 There are 3 strong business drivers for this rapid growth in Offshoring – (1) Reduce Costs (2) Build Competencies and (3) Increase Revenue Source: AT Kearney, Outsourcing Strategically for Sustainable Competitive Advantage, 2005 Key Cost-Related Drivers Key Competency-Related Drivers Key Revenue-Related Drivers


Therefore an optimal sourcing solution should offer multiple benefits, besides of course, that of low-cost :6 Therefore an optimal sourcing solution should offer multiple benefits, besides of course, that of low-cost Fast scalability – flexible cost structures Fast and easy scale up and –down of resources Cost reduction Up to 30% less, taking advantage of first class workforces in low cost countries Reduced time to market Leverage time zones and availability of “right” resources, high ratio of on-time delivery Pool of knowledge workers and experts Leveraging on labor market in other countries Improved predictability and transparencyFormal processes (CMM), defined and measurable SLAs Elimination of non-core activities Allows to focus on core-activities Improved quality due to process orientation Improves also own processes, reduces risks and dependencies on individuals Typical Benefits


Contents :7 Contents Outsourcing Background and Trends Why offshore-outsource: Business Drivers for offshore outsourcing Where: the choice of an offshore location How: Developing and Implementing a Sourcing Strategy


Slide 9:8 Source: McKinsey Global Institute 2005 Infosys has proactively invested in development centers worldwide to offer clients Flexibility, value and stability against cost escalation Offshore Destinations Infosys Presence Nearshore Destinations Source (Onsite) Global Sourcing locations can belong to one of three categories: Onshore, Nearshore and Offshore, depending on the location of the customer


While several countries are improving their standing as destinations, India retains its leadership as the destination to achieve both cost and scale goals :9 While several countries are improving their standing as destinations, India retains its leadership as the destination to achieve both cost and scale goals


Contents :10 Contents Outsourcing Background and Trends Why offshore-outsource: Business Drivers for offshore outsourcing Where: the choice of an offshore location How: Developing and Implementing a Sourcing Strategy


Infosys’ Modular Global Sourcing (MGS) is an approach to sourcing that allows acquisition of seemingly-conflicting capabilities simultaneously :11 Infosys’ Modular Global Sourcing (MGS) is an approach to sourcing that allows acquisition of seemingly-conflicting capabilities simultaneously Desired Sourcing Capabilities Optimize for Speed and Innovation Optimize for Efficiency and Predictability The Sourcing Black Box MGS takes a more comprehensive view compared to traditional outsourcing, including elements such as alignment, flexibility, and predictability, besides costs Aims of an MGS solution


Through MGS, this ‘problem of conflicts’ is addressed by using the principles of modularity across the tiers of infrastructure, application, business process :12 Through MGS, this ‘problem of conflicts’ is addressed by using the principles of modularity across the tiers of infrastructure, application, business process Design Build Operate Business Process Business Applications H/W & S/W Infrastructure Functions / LOB Execution processes IT and Business Process Assets Traditional Sourcing The New “Modular” Approach


Slide 14:13 Infosys leverages a suite of time-tested frameworks to develop a modular global sourcing strategy by answering the 5 fundamental questions 1. What? 2. How? 3. Who? 4. Where? 5. When? Enterprise Assessment Framework What functions drive competitive advantage? Hence what are your desired Business Process and IT capabilities? What are the “source-able” processes, applications and infrastructure in your enterprise? What is your global sourcing maturity? What are the metrics you can use to measure current and desired sourcing effectiveness? Modular Structuring Framework How can you bundle key functional processes with underlying apps/ infrastructure and align business with IT? How do you determine sourcing imperatives for the various bundled “Modules”? Sourcing Decision Framework Who could carry out potential activities in each module? (Potential Sourcing Strategies / Models / sourcing options for each Module) Where could the activity be best performed? (Near-Shore/ Captive/ Global Source Vendor/ offshore JV etc) Global Execution Framework When do you roll out across modules? (Overall Implementation Planning and Roadmap) When do you undertake key change initiatives? (Transition and Change Management) When do you institute a steady state Governance structure?


Answering these questions leads to an execution roadmap for effective global sourcing :14 Answering these questions leads to an execution roadmap for effective global sourcing “Siloed” sourcing decisions driven by IT project managers Centralized sourcing decisions, driven through Global Sourcing organization Current State Future State Sourcing Decisions Low proportion of IT staff offshored High proportion of offshoring Offshoring Mix Fragmentation across hundreds of vendors High proportion of onsite contractors Consolidation to few, selected, strategic partners / vendors Vendor Model Staff augmentation model, with ad-hoc search for required resources and skills Managed services model, with predictable delivery fully managed by vendor, freeing up client resources for strategic work Resource Model Shifts in Sourcing Practices for Effective Sourcing Focused creation of competency-centers based on technology, deep skills, and joint capability planning Ad-hoc acquisition of competencies and skills on as-needed basis Competency Building Standard execution framework with predictable quality, outcomes, and efficient execution Fragmented, non-standard processes used to deliver services Execution Framework


Custom applications are evaluated for feasibility and attractiveness of Global Sourcing using the Fit-Value framework :15 Custom applications are evaluated for feasibility and attractiveness of Global Sourcing using the Fit-Value framework The key parameters of Fit & Value dimensions VALUE Attractiveness of global sourcing FIT Feasibility (execution ease) of global sourcing


The fit-value matrix categorizes application clusters based on their readiness for offshoring :16 The fit-value matrix categorizes application clusters based on their readiness for offshoring Business Value Global Sourcing Fit App Data Interchange Packages, others Web Apps Transaction Mgmt Systems DW/Reporting Sun-setting App App App CCAM App App “Less suitable” means that compared to the status quo, there is benefit of off-shoring, but the increased benefit is small Example of Fit-Value matrix for your application portfolios


From a sourcing perspective, there are four commonly pursued offshoring models, with the last three models being ‘ownership based’ models :17 From a sourcing perspective, there are four commonly pursued offshoring models, with the last three models being ‘ownership based’ models Classical client-supplier arrangement where the client enters into a contract with the supplier The supplier operates a dedicated facility for the client. In most cases the center functions under a ‘look and feel’ that is very similar to the client environment rather than the supplier’s The client and offshore supplier set up a JV vehicle to predominantly service the client’s businesses The offshore supplier brings the local expertise and service skills while the client brings its knowledge of existing business functions. The client and the supplier set up an arrangement, through which the supplier is contracted to establish the operation and then to provide the services for a defined period At a point where the center and services are properly established, management and ownership is transferred to the client In-source Co-source Outsource The business sets up its own subsidiary offshore so that all assets and staff are owned by the client business The client then sets up its own operations through hiring local staff and leveraging expatriate staff Offshore Development Center (ODC) 2. Captive Unit Source: Gartner + Infosys analysis 4. Build, Operate Transfer (BOT) Off-shoring Ownership-driven Models of Sourcing 3. Joint Venture


There are different levels of maturity in Global Sourcing, with their own drivers and benefits :18 There are different levels of maturity in Global Sourcing, with their own drivers and benefits Step 1 Inception – Tactical Global Sourcing Cost reduction the primary driver “Discretionary” decision making on offshoring Ad-hoc requirements based staffing model Joint program and change management office Collaborative project and budget planning SLA based incentive system, not necessarily tied to business outcomes Improved Business-IT Alignment Strategic partnership with few selected vendors Balanced scorecard and program level metrics for measuring business value Managing outsourced projects, not FTEs Outcome based relationship SLA pilots in key business areas Training vendor resources on domain and company managers on global delivery processes “Staff augmentation” approach for offshore resources Managing FTEs, not projects Organization change initiation for adjusting to Global Delivery Fully “bought-in” global delivery model SLA driven governance tied to program and business outcomes Workforce globalization a strategic imperative at top management level Collaborative co-existence of captive with strategic partner-vendors Step 2 Early Maturity Step 3 Strategic Global Sourcing Characteristics Outcomes Characteristics Outcomes


Sourcing Maturity Model :Sourcing Maturity Model 2. Out-Tasking Client retains overall control while asking vendors to perform certain functions Vendors responsible for the functions (eg programming) outsourced, and not for end-to-end projects Clients outsource operational control of IT to vendors but retain control over business outcomes dependent on IT Vendors are held accountable to project failure our success 3. Project Outsourcing Clients outsource entire gamut of IT services to one or more vendors Vendors are responsible for the entire operations including managing the other vendors 4. Managed Services Vendor provides specific skilled resources to supplement client personnel Vendor takes on very little accountability or risk Managing FTEs not projects. 1. Staff Augmentation Degree of Client Control Model Model Highlights High Low Generation 1 Outsourcing Generation 3 Outsourcing Generation 2 Outsourcing


Performance Management in Outsourcing: Moving towards what is important to the business :Business SLAs are based on business-relevant service metrics – at this level – thus committing upon those things that are relevant to the business community Performance Management in Outsourcing: Moving towards what is important to the business Process 1 Process 2 Process N Service Users Processes Enabling Technology Link Application Database Service 1 Service 2 Service M Application Application Application Application Application Server Server Server Database Link Infrastructure Applications Common SLAs are at these levels, predominantly focusing on technology metrics – those related to these enablers E.g., availability, response time Process SLAs are closer to the idea of Business SLAs, measuring process throughput etc


Following transition, the client-vendor relationship changes to one of partnership – smaller span of direct responsibility :21 Following transition, the client-vendor relationship changes to one of partnership – smaller span of direct responsibility Span of Direct Control Span of Indirect Control Partnership Model Eco-system InitialSourcing Model Emerging Eco-system Span of Responsibility Span of Responsibility Span of Responsibility Manage Processes Manage Processes and Results Manage Results Client organization is new to global sourcing and will leverage vendors as pure-play contractors Operate in an environment where the majority of IT efforts are managed and executed internally CIO’s span of direct control is very large and span of indirect control relatively small Will leverage vendors to source non-core / non-critical applications and process Client organization is experienced with global sourcing and leverages vendors as partners Operate in an environment where a large proportion of IT efforts are sourced to the strategic partner(s) CIO span of direct control has decreased, proportionate increase in span of indirect control Will leverage vendors (strategic partners) to support core / critical application and process efforts


Slide 23:22 Setting up of a centralized Global Sourcing Organization (GSO) instead of very decentralized decisions Upfront sourcing strategy assessment – arrive at and share the vision of the desired ‘To-Be’ landscape Upfront determination of appropriate metrics, baseline values, target levels and sources for actuals Monitoring dashboards with varying levels of data aggregation Proactive assessment of desired skills and capabilities for the IT team Governance and Change Management practices What has worked What has not worked Excessive focus on costs – inadequate attention to the other benefits that Global Sourcing can provide Underestimating the effort involved for internal buy-in and focusing too much on partner / vendor selection Permitting various internal groups to follow their own sourcing processes Letting partners develop their own scorecarding systems Best Practices from organizations with successful global sourcing efforts The key to success in any global sourcing initiative is a top-down (CXO-driven) approach with a focus on transparency and commitment