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ForrTel: Offshore Resources Hit The Infrastructure: What Should You Do Robert McNeill Senior Analyst Forrester Research December 1, 2004. Call in at 10:55 a.m. Eastern Time
ForrTel:
Offshore Resources Hit The
Infrastructure: What Should You Do Robert McNeill
Senior Analyst
Forrester Research
December 1, 2004. Call in at 10:55 a.m. Eastern Time
Global sourcing is on the rise
Deloitte Research survey of 27 of the world’s 100 largest financial services institutions
Top financial institutions moving rapidly to global sourcing models
Labor arbitrage increases outsourcing's value prop dramatically
Using offshore
No offshore
0% 50% 100%
2005
200330%
70%
75%
25%
Infrastructure outsourcing trends in 2005
Increase in the number of selective infrastructure processes being outsourced
Common drivers include:
» Saving money (cost is the principal driver for outsourcing)
» Increased competition in the RFP process (increased number of players in an RFP mix)
» Reduced risk exposure as compared with “mega deal”
Companies are having to defend extremely commoditized processes on a yearly basis (help desk, desktop management)
But most customers have no idea on how much things cost
What are the two most important criteria for companies when selecting an outsourcer?
Base: 78 firms that will outsource in 2004
53%
49%
41%
35%
23%
18%
15%
13%
8%
5%
5%
4%
Price
Knowledge of my business/industry
Domain knowledge
Ability to offer end-to-end services
Previous working relationship with my firm
Corporate/financial stability
References
Cultural fit
CMM or similar certificationAccess to low-cost
offshore capabilities
Ability to take over employees
Scale/numbers of data centers
Why outsourcing agreements fail
Full IT outsourcingSuccess 38% Failure 35%
Mixed 27%
Selective outsourcing
Success 77% Failure 20%
Mixed 3%
0 10 20 30 40 50%
Customer service adversely affected
Cost to outsource higher than expected
Outsourcer does not understand core business
Outsourcer non-responsive
Relationship has not evolved
Lack of management control
Technology changeover more difficult
Outsourcer has missed changeover dates
Led to a loss of skilled labor
Source: Lacity/Wilcox and Giga Information Group
Reasons for outsourcing failure
Infrastructure outsourcing trends in 2005 80% of infrastructure outsourcing contracts are commodity, 100% have
benchmarking clauses
Pricing though has come down 15% to 20% in the past two years
Market will respond to price pressures by using automation, offshore resources, and vendor consolidation to reduce cost
» There will be an increase certainly in the prime — subcontract type contract. Big players will take prime and increasingly subcontract for cost reasons, essentially taking responsibility for service assurance and vendor management
» Limited labor arbitrage opportunities through offshore delivery
» Remote management technologies and network improvements allow reduction in delivery cost
» Service provider are responding to price pressures by reducing the services included in a standard bundle, thereby lowering price (e.g., limiting the number of MACs in a managed desktop schema) and selling project services
Offshore infrastructure outsourcing trends 2005
Offshore managed operations will increase, especially for level-one help desk, remote infrastructure monitoring, applications packaging/ testing, database mgt., and on-site low cost services
» Indian vendors continue to expand this business in the UK and the US
» Partnering will be used as strategy (e.g., Tata and IBM)
» Process/methodology will be big push from these players. ITIL becomes more visible from a marketing and positioning perspective.
» Partnerships are immature, and this will hamper success but only in the short term
Offshore infrastructure outsourcing Offshore outsourcers are selling down from application management
relationships
Propensity to be seen in commodity deals (Freemarkets especially)
Tier one global outsourcers (e.g., IBM, EDS, CSC) try to reduce costs through standards, mature processes, systems management technologies, state-of-the-art reference architectures, and economies of skill in the labor pool
Indian vendors reduce infrastructure costs through labor arbitrage and are just developing state-of-the-art processes. The combination can be powerful.
Pushing ITIL — check where resources are trained — HP and Getronics are the two largest ITIL consultants in the world
Ask how many consultants are certified at the foundation and master level?
“What IT functions do you send offshore?”
Market will see white-hot growth next year (300% to 400%)
79%
54%
36%
28%
26%
21%
16%
Custom application development
Software maintenance
Packaged app implementation
Architecture consulting
IT operations
Remote administration
Help desk
A word about infrastructure outsourcing
What can you support remotely?
» Monitoring, DBA, desktop/server management, help desk, SW distribution
Where are the cost savings? Labor!
» Applications: Bulk of cost is related to labor
» Infrastructure: labor costs, other expenses (hardware, software, etc.), capital depreciation
» So, cost savings are typically greater on applications side
On-site requirements reduce savings
Indian vendors are pushing offshore labor instead of automation
Low-ball prices significantly — there is no history that they can make money on deals
Try to divorce subcontractor from integrated SLA
The “offshore-ability” of infra components
Operations function “Offshore-ability” of service/function type
Facilities management
Clearly the majority of tasks associated with data center administration require a local presence, and the primary offshore market today – India – is still a relatively high-risk market for such services
Production support Production support (job scheduling, JCL support, file management, etc.) is not easily sent offshore, as it assumes a good knowledge of applications, not just generic technologies. Even tier-one outsourcers can only support this by hiring experienced staff from the client.
Server and storage administration
Remote server and storage administration is technically viable and the tasks are fairly common (standard) across organizations, making offshore support possible. However, since some administration tasks require physical access, many organizations are reluctant to split responsibilities.
Technical support Technical support is well-suited for remote support, offshore or otherwise. It requires high skill levels, but standard product areas (Windows, Unix, z/OS, Oracle, etc.) are supportable
Performance monitoring and
capacity planning
Well-suited to offshore support, as these tasks, while very important, are not typically real time. Organizations outsourcing in this area should assume they will have to retain responsibility for forward-looking business growth aspects of capacity planning.
Database administration
Very similar characteristics to technical support above – mostly well-suited to remote/offshore support, but crisis management/recoveries can be more difficult
Network operations By definition, a remote support function and well-suited to outsourcing
Help desk While technically well-suited to remote/offshore outsourcing for commodity technology and OTS applications, THIS IS A DIFFICULT PROPOSITION
Elements of infrastructure outsourcing do not require end user participation
Limited end user or IT customer involvement required
Projects often fail or are less successful than planned because users (IT’s customers) cannot accommodate the rigidity of the offshore outsourcing relationships (requirements statements of work, specifications)
Infrastructure outsourcing requires less interaction between the customer and the outsourcers. Thus, the relationship can be transparent.
Cultural misunderstandings are less problematic
Help desk and desktop services
As North American companies are more comfortable with offshore outsourcing, a broader range of services are considered
The market for outsourced offshore technical help desk services remains immature, but it is poised for significant growth
Do not want asset installation and disposal activities
Push level-one activities
English language predominantly
Try to sell help desk DR and business continuity services
Not assigning any on-site account management to its outsourcing deals, but rather account managers/sales executives manage multiple accounts
Challenges to offshoring technical help desks
Voice, accent, and behavior
Knowledge transfer
Culture
Transition
Staffing and attrition
Customer satisfaction
Expectations management
Productivity
Telecommunications and call switching
Global resourcing strategies minimize risk
Work is randomly split between geographies in case of an outage in one of the geographies
Work is split and shifted to work through time zones (“follow-the-sun support”)
Work is split between geographies based on its level of complexity or peak-hour requirements
Work is split based on customer demographics, such as purchased level of service or perceived value
Consider your needs Many companies moving to offshore/ nearshore model with less
preparation than required Indian vendors challenged by scaling requirements US IT services vendors continue their ramp in India and other low-
cost geographies Attrition is a problem in India
Selection Criteria Beyond Cost» Vertical knowledge
» Customer Satisfaction
» Experience in pricing and profiting from complex deals
» Access to financing
» Take over people and assets
» Access to technology - SW and HW partnerships
Vendor selection — infrastructure outsourcing
Service provider type Vendors
VARs CompuCom, Sarcom,
Computacenter (Compunet)
Desktop outsourcers Dell, CompuCom, Getronics, HP, Unisys,
Banctec, Lufthansa Systems
Infrastructure outsourcers IBM GS, EDS, SBS, Unisys, CSC,
T Systems, Cap Gemini, iStructure
Offshore outsourcers Wipro, TCS, HCL, Infosys, Satyam,
Cognizant, TCS
Niche managed desktop service
providers
CenterBeam, Everdream
Where could you employ offshore providers?
XP deployment (Microsoft is building partnerships with Infosys and HCL)
Level-one help desk initiatives
Network monitoring and management
Remote server monitoring and management
Database management
IT staff augmentation
Wipro
1) Total revenues from infrastructure outsourcing – $237.59 million FY 03-04 (year ending March 31, 2004) 2) Revenues from infrastructure outsourcing from India, APAC, & ME – $178.19 million FY 03-04 (year ending March 31, 2004) 3) Revenues from infrastructure outsourcing from rest of world – $59.4 million FY 03-04 (year ending March 31, 2004)
Client description Services delivered
Outsourcer/utilities company
24x7 remote operations support for IT infrastructure spread across 118 locations in Europe
Technology software vendor
IT GBOC (Global Backup Operations) managed worldwide backups across 12,000-plus servers with more than 16,000 backup jobs covering approximately 57TB of backup every day. This group also manages MAC (move, add, and change) and restore request for the users.
Telecommunications vendor
Remote management to ensure availability from 99.9% to 99.999% of the infrastructure on a 24x7x365 basis, spread across six locations in the US
Wipro — top three infrastructure clients
HCL — top three infrastructure clients
HCL End of year $53 million+ est.
Client description Services delivered
Fortune 300 technology provider
Help desk level one/two, managing monitoring network/circuit, devices
Fortune 500 semiconductor manufacturer
Help desk, remote support, desk side support in US (re-badged US employees)
Fortune 300 engines manufacturer
Help desk, remote management, database management and monitoring
Satyam — top three infrastructure clients
Satyam $50 million est.
Client description
Services delivered
Global conglomerate
Level-two/three help desk, desktop support, server management (distributed and midrange platforms), e-business infrastructure support, middleware support, network management, database administration, security management (IDS, ISS, etc.), single sign-on management, application packaging, application monitoring & management, SMS administration, production support, BMC PATROL support, Citrix farm management
Financial management organization
Midrange server support, distributed environment support, database administration, middleware support, network support, remedy support, SMS administration; desktop integration and testing – packaging, integration testing, rollout and support; production support for a direct market portal – application deployment and supporting development, test and QA environments, MQ series support
Automotive Application hosting and management, level one/two/three help desk, desktop support, server management (distributed and midrange platforms), e-business infrastructure support, middleware support, network management, database administration, production support
Infosys — top three infrastructure clients
Infosys Revenues (management + deployment):
FY 2004 — April 2003 — March 2004 — MUSD 31.7 (full year)
FY 2005 — April 2004 — Sept. 2004 — MUSD 31.4 (half year)
Client description Services delivered
Leading Japanese electronics
manufacturer
Data center management, system administration, database
administration, network management, storage administration,
application monitoring
Health care service provider Unix administration, Windows administration, database
administration, storage, technical help desk
A global leader in the
automotive industry
Defined and deployed a program to migrate 23,000 users and
200 servers from Netware/NT to Windows 2003 and Active
Directory
Cognizant — top three infrastructure clients
Cognizant $15 million est.
Client description Services delivered
Retailer Managing and monitoring assets end to end 24x7 remotely. Help desk, server monitoring and management, desktop services, network management, and business application support.
Shipping company Managing and monitoring 24x7 — 2,100 assets remotely, including 1,500 desktops. Others include servers, storage, WAN, LAN, applications, databases in 70 locations globally in five worldwide regions (Europe, Scandinavia, America, Asia, and Oceania).
Global financial services
Support three trading floors across three continents. Level one and two support for business-critical application infrastructure in the Investment Management division. Batch-job and feed management, messaging hub management, server management support, and release management.
Do not be an absentee landlord: Outsourcing does not mean abdicating responsibility
Preparation investment critical
Full-time program management resources required
Re-engineer your skill sets to accommodate the outsourcing relationship
Manage expectations
You’re never going to master the offshore game unless you realize that mastering it means relentless adjustment and continuous learning!
Hire staff with outsourcing experience
Recommendations
Recommendations (cont’d.)
Candidate IT services include small activities that would go under the radar of big providers
Understand the implications of using reverse auctions like Freemarkets. Experienced vendors are choosing not to play here.
You are going to have to baseline your costs. Offshore providers have limited experience in selling larger deals.
Implement tiered and escalating penalties
Build customer satisfaction SLAs
Vendors — Be Aware — There is a lot of RFP “column fodder” going around
How Forrester can help
Review sourcing strategy
Assist with the RFP process
Assist in vendor comparison and selection
Understand the best pricing structures and services bundles to push with outsourcers
Contracting
Email me at [email protected]
Robert McNeill
www.forrester.com
Thank you
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