Outsourcing
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).