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Issue of June 2006 

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Infrastructure Strategies '06

Outsourcing non-core areas

Companies are outsourcing, but they are sceptical when it comes to outsourcing areas other than desktop and network management. Megha Banduni examines the rationale of this strategy

Although outsourcing is happening, it's taking place at a rather basic level. Most companies have already initiated outsourcing activity or are planning to do so in the near term due to obvious benefits such as getting the focus back on the core business, cost control and speedy delivery. Though India is the back office of the world, for Indian companies the concept of outsourcing complete processes is yet to materialise.

According to the IS survey, most companies are planning to invest in desktop (71 percent), network (70 percent) and application development (55 percent). If we compare the investments with last year, 55 percent of the 119 respondents said their extent of desktop outsourcing has increased while 35 percent said it has remained the same. In networking, 53 percent of respondents have outsourced to a greater extent.

  • Before deciding what areas to outsource, one should evaluate the criticality of that particular application/process, the benefits that can be derived after outsourcing, and the budget.
  • Outsourcing of your IT applications can enable you to focus on core business activities while at the same time ensuring that you have skilled and qualified professionals to manage your IT infrastructure.
  • Before deciding on a third-party, one should consider factors such as cost, service support, technical competence, and the reputation of the vendor.
  • Keep in mind that whatever application/process is outsourced, you must have strategic control; everything should not be left to the vendor/partner.
  • The decision-making power should be given as per the need of the organisation. But the business heads as well as top management should be involved when taking the decision to outsource.

Reasons for outsourcing

The IS survey shows that among the factors driving outsourcing, the desire to reduce cost (57 percent) is a primary factor followed by the need to focus on core competencies (49 percent) and the desire to speed-up delivery (46 percent). Some of the other reasons are access to new technologies, resource constraints and reduction in IT staff.

With growing competition and fast-changing technology dynamics, companies prefer to outsource IT functions to stay ahead of the technology curve. In this way they can benefit from the latest technologies without spending time procuring, maintaining and upgrading them. The other advantages are that outsourcing enables them to focus on their core business activity, as well as ensure that they have skilled and qualified professionals to manage their infrastructure.

CIO View

P A Kalyansundar,
General Manager, IT
Bank of India

On outsourcing

Bank of India, with over 2,600 branches across the nation, and a network of 21 branches at key financial centres across ten countries, strongly felt the need to outsource its core banking operation to HP. IT-enabled transformation based around core banking and data warehousing, and competitive pressure from private sector banks and multinationals compelled us to outsource our core banking process.

Only the technology part is outsourced at our bank, whereas operations and control remain in our hands. We wanted to concentrate on our core competencies without bothering about technology. Thus, the bank evaluated the option of choosing an IT partner to manage all its infrastructure and application requirements, including an IT transformation around core banking.

Our primary requirement was to have a flexible, scalable and innovative technology infrastructure that would provide us the business agility to respond to changing market dynamics. We also wanted to substantially improve existing customer service levels, and acquire enhanced ability to attract new customers.

On the process

An organisation should be very clear about its objectives, crucial areas, and what areas should be outsourced and why. We followed the global tendering process and decided to choose the company that was most responsive to us.

Outsourcing has resulted in the CBS roll-out taking place in 550 branches in a record time of 475 days. HP our partner has provided us with consulting and integration, customer support and managed services, business intelligence, business continuity and availability, disaster recovery, network management and systems management solutions.

Our outsourcing partner also manages the servers, desktops, network devices, Web servers, mainframe MIPS, storage and servers that run the CBS. As part of the overall project, HP will implement and manage a data warehousing and document imaging solution, and provide integrated channel management including tele-banking, Internet banking and ATM.

The contract also envisions building and managing a data centre, disaster recovery site, help-desk and call centre. HP will manage the IT infrastructure and networks across 750 branches of the bank, supply and maintain technology products including servers, desktops and peripherals across the branches, and provide asset refresh and obsolescence protection for IT assets.

CIO View

Aditya Menon
CIO, Yes Bank

On outsourcing being restricted to network and desktops

Indian companies have automated their operations very recently. They are still coming to terms with the huge deployment of systems and IT teams, and hence outsourcing is still restricted to very basic requirements of hardware.

It is only when they realise their core competencies that they will look at outsourcing the way Yes Bank or SBI does.

In our case, the main reason for outsourcing was the need to have systems up and running in the shortest time-span. For instance, our core banking solution from i-flex was up in three months. This was possible only because we outsourced our IT requirements.

On cost as a major criterion

Cost is not an important element. However, if the company is concerned about economies of scale then they should go in for an in-house team rather than outsourcing.

Cutting down cost was a concern for us too, but more than that we were looking at the competitive advantage that an outsourcing partner allows us. For instance, if I need to go in for certification of ITIL or any other compliance-related issue, my IT team would need a maturity level of at least two to three years. But if I have outsourced my partner would have the maturity of process and I need not look into it.

Nevertheless, the most important criterion for selecting an outsourcing partner or vendor is the cultural fit. We do not consider them as vendors but as our partners, and it is very important that they have the same ethos as we have. The partner needs to understand our business requirements as well as he understands his.

On people involved in decision-making

I personally feel that the CEO and CFO need to be involved in such a decision. It also depends on what drives the organisation to outsource. If it is cost then the CFO needs to be involved; if technology and processes are the criteria then the CIO needs to take the lead. However, if the decision is based more on strategic advantages and to add value, then the CEO needs to take an active role. At Yes Bank it was the pro-active role taken by our CEO in outsourcing.

I have seen many global outsourcing deals going wrong, and one of the crucial reasons is the feeling of loss of control among the banks. You just have to be in strategic control of the entire workings. Though a company might outsource all its functionalities, it needs to be the one in control, and not the vendor/partner.

Within Limits

Most companies plan outsourcing of their desktops only, followed by network and application development

According to the survey, there has been an upsurge in planned outsourcing activity for desktops. Indeed, most companies plan outsourcing of their desktops only, followed by network and application development—and they still don’t want to outsource critical IT functions.

71 percent are planning to go in for desktop outsourcing in the current fiscal, while 70 percent are planning to outsource their network. The services sector is the highest investor in outsourcing, whether at desktop, network or application level. All the respondents from the services sector are planning to outsource their network, 80 percent their desktops, and an equal percentage application development.

Outsourcing among Indian enterprises is yet to move away from the traditional hardware-related issues. There are few companies which are going in for process outsourcing.

Survey Findings
Desktop, Network and Application Development are the three major areas where large enterprises are planning to outsource in the current fiscal.

The desire to reduce cost, focus on core competencies, and speed up delivery emerge as the main factors driving the outsourcing strategy of large enterprises.

Technical competence, service & support, and price are the three most important evaluation parameters for selecting an outsourcing vendor.

The right fit

Choosing the correct vendor for outsourcing is critical. The survey shows that factors affecting the choice essentially revolve around technical competence (79 percent), service & support (73 percent) and price (67 percent).

Though price is a key factor while making the outsourcing decision, companies are willing to overlook it when comes to performance and support from the third-party.

Generally, the relation between a company and third-party is that of client and vendor, but when it comes to outsourcing companies feel that the relationship between the two should be like partners

Some of the important elements for deciding on a vendor are the vendor’s understanding of the company’s strategy and needs, past experience with the vendor, the vendor’s reputation and specialisation, global coverage, and a consultant’s recommendation.

Generally, the relation between a company and third-party is that of client and vendor, but when it comes to outsourcing companies feel that the relationship between the two should be like partners.

Technical competence seems to be very important for chemical/pharma (89 percent) companies while deciding on the vendor, followed by service and support (70 percent). Similarly, price seems to rule among the manufacturing (84 percent) and services verticals, and support is important for manufacturing (89 percent).

The decision-makers

The decision-making power regarding outsourcing remains with the CIO (61 percent) followed by the CEO (41 percent) and CFO (30 percent). Ideally, the CIO and CEO should work together on deciding an outsourcing vendor because it is not just an IT decision but a business decision as well.

Decision-making also depends on what drives the organisation to outsource—cost, technology or something else. Based on the purpose the authority is sanctioned to the concerned person. Among the Government/PSU (73 percent) lot, the CEO takes the outsourcing decisions, whereas among the BFSI (68 percent) the CIO is relied on more.

Having tasted the benefits of IT outsourcing, the government sector is expected to get into it further. BFSI and FMCG are the verticals that are planning to outsource heavily.

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