Outsourcing - A Strategic Decision?
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
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
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
- 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 recom-mends the following:
- Understand different business perspectives and how they affect sourcing
- 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.
Soutiman Das Gupta can be reached at email@example.com