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Issue of June 2003 
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Time to let go

In the wake of increased competition and the economic downturn, how do businesses ensure profitability and growth without increasing operational costs? The answer to this question lies in 'Outsourcing.'

The premise behind Outsourcing is simple: Why do something yourself when someone else can do it better and cheaper? In Outsourcing, the key lies in flexibility.

IT infrastructure implementation and maintenance forms an important part of an organization's outsourcing strategy. As per the survey findings, about 45 percent of the companies have already invested in some sort of outsourcing or are planning to invest. About 30 percent of the companies have invested in outsourcing in the last financial year, and the same number plan to invest in the year 2003-04.

Why Outsource?
Outsourcing provides numerous benefits in terms of reduce operational and infrastructure costs. So what are the main factors driving Indian organizations towards outsourcing?

As it will be obvious, 53 percent of the respondents say it is their 'Desire to reduce costs' which is driving them towards outsourcing. This is closely followed by 'Focus on core competencies' (47 percent) and 'Access to special expertise' (41 percent).

In the wake of increased competition and a slump in the economy, CIOs and CTOs are under pressure to extract the maximum from existing infrastructure. Yet at the same time, IT budgets are constrained, and IS managers are expected to reduce costs associa-ted with operating and maintaining IT infrastructure. Companies want to concentrate on their core competence and not worry about developing expertise for IT systems in-house.

An interesting point to note is that in-house resource constraints and reduction of IT staff is last on a CIOs priority list, when it comes to outsourcing.

What's being Outsourced?
To analyze exactly which component of their IT setup is being implemented/ managed externally, we divided outsourcing into six main areas:

  • LAN & Clients
  • WAN & Servers
  • Help desk
  • Data Center
  • Application Development/ Management
  • Business processes

Of these, Application Development/Management, Help desk and WAN & Servers are the top three focus areas for outsourcing.

A substantial chunk of the companies (50 percent) are planning to outsource their Application Development/Management for the year 2003-04. This is understandable, given the amount of time and manpower required to develop/ implement a customized application in-house.

As per the survey, organizations of all sizes (in terms of turnover) have given priority to this area of outsourcing. 40 percent say their investment towards Application Development is more this year. BFSI and the Services segment are the largest outsourcers for this area.

The next area that companies are looking at outsourcing is Help Desk management. As per the survey, 41 percent of the respondents plan to outsource this function.

Outsourcing Help Desk management is of high priority for FMCG/Consumer Durables (64 percent) and Telecom/IT/ITES verticals (58 percent). Both these sectors are clearly customer-focused or service-driven—so help desk or customer support is given high priority.

It makes perfect sense for companies that operate at a national level—in sectors like Telecom, Banking, or FMCG/ Consumer Durables—to outsource their Help Desk functionality.

This way they can provide optimum customer satisfaction without the associated costs/ overheads eating into profitability.

Another major area where companies are planning to outsource is setup/maintenance of 'WAN & Servers'. Outsourcing of 'WAN & Servers' requirement is predominant in large companies (42 percent), which have dispersed offices.

As the WAN becomes more dispersed it grows in complexity, so it becomes increasingly difficult to manage and upgrade infrastructure. That's why large enterprises prefer to outsource WAN & Server management.

In the area of Local Area Networking, it is mainly the small-sized companies (43 percent) that are focused on outsourcing the management of LAN & Clients. Companies that are growing at a fast pace will find their LANs becoming increasingly complex.

In this context it may make more sense to segment the LAN (break it into subnets) and put in good network management software.

At a later stage—in case of a well-developed network—it might make more sense for companies to reduce 100 percent dependence on the service provider and develop a certain level of in-house expertise.

An interesting observation
Not many companies are looking towards outsourcing their Data Center or Business processes. Only 26 percent of the companies surveyed are looking at outsourcing their Data Center needs, while only 23 percent are planning to outsource their core Business processes.

Business Process Outsourcing or BPO is still a new concept in Indian enterprises. Unlike their international counterparts, who are outsourcing a major chunk of their BPO needs to third-world countries, Indian ent-erprises feel more comfortable managing their core processes, rather than let an outside party do it for them.

However, BPO may make more sense in the long run for certain sectors like Tele-com, Travel, or BFSI, and Indian enterprises need to explore that option. Already cellular telecoms and certain banks are outsourcing areas like customer billing to an external agency.

Managing a data center in-house requires high expertise and high investment in support infrastructure (power and environmental conditioning). Unless an enterprise has developed this expertise over the years, it is best to outsource management of the data center.

While many small companies may not require a data center, the medium and large companies, especially those who use the Web to acquire, service, or retain customers, or manage suppliers, need to look at a data center for hosting their servers and applications.

Out of the 26 percent companies planning to outsource their data center requirements, medium-sized companies (29 percent) form a major chunk. Given the high transaction volumes, many large-sized companies (like HDFC Bank and L&T) prefer to build and accommodate their data centers in-house. This explains why a lowly 19 percent of large-sized companies are planning to outsource in this area.

Outsourcing decisions
What are the main criteria that enterprises employ when evaluating an outsourcing vendor?
82 percent CIOs said they were looking for Technical Competence, while 79 percent said ‘Service & Support’ is important. These two criteria are high across companies of all sizes. 'Price' as a selection criterion comes distinct third at 64 percent. This is noteworthy in the Indian context, since India is considered to be a price-sensitive market.

Other criteria are ‘Vendor's understanding of customer requirements’, ‘Past experience with the vendor,' 'Industry Experience,' 'Vendor's specialization,' 'Repu-tation,' and 'Geo-graphic location.'

This brings us to the next query: Who all are involved in decision making when it comes to outsourcing IT infrastructure/ management? The CIO (62 percent) and to a lesser extent the CEO (52 percent) are involved in making outsourcing decisions. Overall, the CIO has the final authority when it comes to outsourcing IT infrastructure and management in mid and large-sized companies. For smaller companies the CEO acts as the main decision maker (about 50 percent).

Planned areas of outsourcing
LAN & Clients 38 43 34 40
WAN & Servers 39 32 34 42
Help desk 41 39 32 42
Data Center 26 14 29 19
Application Development 50 57 49 46
Business Processes 23 21 24 17
Base: All those who have outsourced in IT or are planning to do so
Research Snapshots
  • 30 percent of the companies have invested in outsourcing in the last financial year, and the same number plan to invest in the year 2003-04.
  • The top three reasons why Indian companies go in for outsourcing are desire to reduce costs (53 percent), focus on core competency (47 percent), and access to special expertise (41 percent).
  • In-house resource constraints and reduction of IT staff have the least influence on the outsourcing strategy.
  • The major planned areas that companies will outsource in 2003-04 are Application Development/Management, Helpdesk, and WAN & Servers management.
  • Indian companies feel more comfortable managing their core processes, rather than let an outside party do it for them. Therefore few companies are looking at outsourcing their Business Processes.
  • Outsourcing 'Help Desk' management is of high priority for FMCG/Consumer Durables (64 percent) and Telecom/IT/ITES verticals (58 percent).
  • In most cases it's the CIO who makes the final decisions on IT outsourcing.
  • The top three criteria for selecting an outsourcing partner are 'Technical competence' (82 percent), 'Service & support' (79 percent), and 'Price' (64 percent). It is interesting to note that price is a distant third despite India being a price-sensitive market.
NM Suggests
  • Companies that want to save costs on IT setup or maintenance should clearly look at outsourcing. But as companies scale up their IT infrastructure, it might make sense to develop certain technical skills in-house and manage at least the core IT infrastructure.
  • When outsourcing development/management of infrastructure/applications, go with an established outsourcing service provider who has a high reputation and who is likely to be around for some time.
  • Service-centric companies should outsource their help desk, so that they can concentrate on their core competence (For example, banks, telcos).
  • Larger companies should look at outsourcing business processes—like billing or customer service, since this will significantly bring down operating costs.
  • Cost should not be the only criterion in choosing an outsourcing partner. Consider parameters like competitiveness, service and support, technical expertise, reputation, and track record before choosing
    a company.
  • Insist on service level agreements (SLA) when you outsource.
AFL reaps outsourcing benefit

AFL an integrated logistics provider with divisions spread across the country is connected by a huge terrestrial network linking 85-90 locations. AFL switched to centralized applications from a distributed computing environment on a reliable network made up of leased lines, optical fiber, dial-up lines, and ISDN.

AFL worked with various solutions providers while building and upgrading its network to support centralized applications. *Vinod Kamat, Group Manager, Technical Services, AFL Private Ltd. said, "The choice of network solutions provider is generally based on the product one selects and the relations the channel partner (local product vendor) has with the OEMs."

Choice to outsource
After setting up its network, AFL had the choice of managing the network infrastructure in-house or outsourcing it. If it chose to manage in-house, the company would need additional personnel, would have to train them, and send them to the regional sites/hub locations.

The company decided to partially outsource the network management and support activity in order to get an experienced and skilled team on board.

"The criteria for choosing the outsource partner was a service provider who best knows the product (technology) and has adequate presence across the country. AFL chose Convergent Communications based on their technical knowledge of the systems at AFL and their strong relations with the OEM, Motorola."

The support
Convergent Communications is directly supporting 14+4 sites (14 dedicated engineers with full support and four offer-shared supports).

An experienced and technically skilled in-house team supports a few other locations.

Kamat opines, "Outsourcing in this manner offers certain benefits. For one it offers flexibility: at some locations the service provider (Convergent) gives AFL full support, while at others it offers partial support. Also one can add or withdraw locations, and hence deploy support staff at very short notices. Then there is the cost advantage too. The company does not have to incur expenditure on in-house network professionals' recruitment, training, incidental expenses etc."

*Vinod Kamat is no longer with AFL Pvt. Ltd.

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