Strategic Decision to Outsourcing
Does strategic outsourcing actually benefit an organization? Or will it backfire in the long run? Here’s how outsourcing has impacted organizations in India, and how it can benefit you. by Soutiman Das Gupta
What do companies like Hero Honda Motors, Bharti Tele-Ventures Limited, the National Stock Exchange (NSE), HDFC Bank, Sony Entertainment Television, Hyatt Services India Pvt. Ltd, and HPCL have in common?
The common thread running through these large organizations is that all of them have chosen outsourcing as a strategic business decision to garner tangible and intangible benefits in the near and long run.
Indeed, it’s difficult to find a successful and growing organization in India, irrespective of size, that does not outsource a certain amount of its IT infrastructure services or management.
Does it work?
Does it make sense for an organization to outsource its IT needs? Most of the CIOs and analysts we spoke to felt that strategic outsourcing helps an organization to save on cost and speed up delivery while focusing on core business needs.
To elaborate on the benefits, let’s look at Infrastructure Strategies (IS 2004), the CIO annual survey conducted by Network Magazine to analyze technology investment patterns in the Indian enterprise. The survey, conducted amongst India’s top corporates, shows that nearly 54 per cent of the CIOs outsource “to reduce costs”.
A similar view is echoed by Michele Caminos, Vice President, Team Manager, IT Services, Asia/Pacific, Gartner. “The most compelling reason why companies get into outsourcing engagements is to save costs,” she agrees.
According to Infrastructure Strategies, other impor-tant drivers for strategic IT outsourcing are focus on core competencies, access to special expertise, higher speed of delivery, and access to new technologies.
Focus on the core
Given the pressures of a competitive market, organizations tend to focus on their core activities — activities that link-up directly with the revenues and hence the profitability. In such a scenario, companies tend to outsource their non-core tasks to focus on business decision-making. And IT infrastructure easily lends itself to outsourcing.
Hero Honda Motors is a good example of an organization that uses strategic outsourcing to focus on core competency. “We wanted to outsource all routine (IT maintenance) tasks so that we could concentrate on the main business issues. With the headache of dealing with routine complaints taken away, our staff focuses on user requirements and is able to deliver services to users on time,” explains SR Balasubramanian, Vice President – Information Systems, Hero Honda Motors Limited.
The IS 2004 survey reports that 46 per cent of the CIOs who outsource or have plans to do so, consider “focus on core competencies” as the second most important reason to outsource.
“There are definite cost savings in terms of resource management and less manpower costs. As an IT team we can focus more on providing new infrastructure solutions to enable various requirements of our core media business rather than get caught up with the daily maintenance requirements of the existing set-up,” explains Aneeta Pankaj, Senior Manager, Information Technology, Sony Entertainment Television (SET) India Private Limited.
Competitive Business Strategy
Outsourcing is best adopted after a careful look at business needs and available options. It is essential that the outsourcing relationship provides strategic business benefits in the future.
“Outsourcing provides a competitive strategy benefit in a number of ways to an organization. It allows ease of management, reduction in cost, lesser manpower, and frees up internal resources,” says Pankaj.
“Outsourcing can, and frequently does, provide both long- and short-term benefits to companies that outsource, provided they have a strategic objective for outsourcing. Medium and long-term gains are best realised by selecting a vendor who brings value to your core business, rather than one who can provide you with the lowest prices,” explains Sharad Sanghi, Managing Director & CEO, Netmagic Solution Pvt. Ltd.
It’s important to understand that outsourcing is a business-related decision and not simply an IT need. The ultimate goal of outsourcing is to bring benefits to the business and subsequently the customer.
Hero Honda’s Balasubramanian says, “We believe an outsourcing service provider could better handle our day-to-day management needs than our own team. We’ve not added numbers to our staffing in spite of increased business activity. Since the outsourcing agency manages the data centre round the clock, our staff has been relieved from working in shifts.”
Bharti Tele-Ventures Limited has cut one of the largest outsourcing deals in Asia on the IT infrastructure and network management areas. Dr Jai Menon, Joint President, Enterprise Business, Bharti Tele-Ventures, says that the outsourcing relationship has brought, “unparalleled value to the company for our customers, employees and shareholders.”
“For customers, it brings innovative and streamlined products and services like billing, CRM and data warehousing. For employees, it brings enhanced performance-critical applications like intranet, e-mail and online collaboration. And at an overall level, the strategic alliance provides predictable IT spends, and additional revenue streams to further enhance shareholder value,” he adds.
The changing landscape
In the past, Indian companies were not very keen to outsource their IT needs, primarily because their enterprise IT environments were relatively less complex, easier to manage, and inexpensive to maintain. Besides, few outsourcing service providers offered a number of outsourcing options under one roof.
But now, IT environments in companies have become more complex. There has been growth in terms of volume of business, range of services, number of employees, number of competitors, nationwide locations, and enterprise applications. This calls for more attention to IT as a service to provide strategic business benefits.
To help organizations get optimum value out IT and use it as a strategic tool to further the cause of business, many CIOs think it worth their while to outsource IT infrastructure management.
Indian enterprises today have a variety of outsourcing options from which they can choose the right fit. Outsourcing solution providers offer services that include desktop client management, server management, cable management, firewall management, patch management, software license management, IT audits, backbone and connectivity, website hosting, and IT infrastructure management.
Thus the available services are innovative, significantly more customised, and better aligned with individual customer requirements. An enterprise can pick-and-chose specific services and build a reliable mode of service delivery. A company can outsource basic desktop management needs, or the management of the entire nationwide IT infrastructure if needed.
To introduce more flexibility, many service providers offer clients hire-purchase schemes, infrastructure on-demand, and pay-as-you-use options.
Hyatt Services India Pvt. Ltd has given a three-year contract to a service provider to outsource network monitoring services. Says Harcharan Singh, the company’s Director of Information Systems, “The service provider has to upgrade and buy back the existing hardware as per the depreciation cost agreed in the SLA. This clause protects us from technology obsolescence, since technology changes rapidly.”
IndusInd bank has entered into an infrastructure-on-demand agreement with IBM India, which includes building an IT infrastructure, implementing server consolidation, and setting up disaster recovery systems. The partnership supports the bank’s goal to become totally customer-centric by providing more secure, responsive and efficient service, in line with its renewed focus on retail banking. It allows the bank to scale up operations and pursue aggressive growth plans.
Before you outsource
All things said, outsourcing is a strategic business decision that should be made only if a company sees true business benefits accruing from it. Badly-planned outsourcing could result in erosion of service value and cost escalation, but a well-planned outsourcing decision can help you sleep better at night, knowing that the responsibility of deliverables is in safe hands.
Michele Caminos of Gartner highlights a few steps that can lead you to take a proper decision in this context.
- What type of a service is it? Identify characteristics of service and the respective type.
- What perspective is driving the effort? Identify decision rights (service owner) and input rights (other stakeholders).
- How are other perspectives affected? Identify conflicts and work them out. Check ‘killer’ factor. Improve solution.
- Check compliance with principles and fit with architecture.
- Who should carry it out? Evaluate different staffing possibilities. Select best from combination.
- Who should participate in the decision? Submit service proposal to specific decision process. Follow it up.
She recommends the following:
- Understand different business perspectives and how they affect sourcing decisions.
- Understand how perspectives must be harnessed to drive sourcing decisions.
- Develop a structured sequence of steps to sourcing decisions.
- Develop evolving governance architecture to support sourcing decisions.
- Develop internal sourcing decision roles.