BUSINESS CASE FOR IT OUTSOURCING & LINUX APPLICATION

BUSINESS CASE FOR IT OUTSOURCING &LINUX APPLICATION MGMT 396- Autumn 2003 S. Kohli Kaustuv Mukherjee 25th November 2003

Contents • Introduction • Process/Best Practices • Current Scenario / Future Trend

Business Issues • What are the critical buying criteria in the offshore market? • What is the potential of the North America market for growth? • How do different industry segments use offshore? • What applications are most ripe to outsource offshore? • What countries are providing offshore services • What Linux Application are Business Ready? • Advanced Linux technology

Key Drivers for Offshoring • Time differences advantages • 24 x 7 x 365 work cycles • Cost benefits • Quality Processes – CMM and ISO • Talent/Skill Pool • Capacity Issues resolved • Higher value chain

12.1% CAGR North American IT Services Market

U.S. Offshore IT Services Spending 26.4% CAGR Source: International Data Corporation, 2001

Challenges facing CIO’s today… Business pressures Talent constraints faced by IT department • More cost effective use of IT dollars. Demand for IT spend continues to outpace the increase in budget forcing CIOs to postpone/rationalize spend • Compressed time-to-market. Application development cycles have reduced from 12-24 months in early 1990s to 3-6 months in early 2000 • Higher quality and performance standards. Use of enterprise applications in more mission critical areas, e.g., eCRM has reduced the tolerance of errors/faults • Intense war for technical talent. • Increasingly difficult to win against ISVs, service providers and new economy players • Overall shortage of technical talent increasing to 8-9 million worldwide by 2004 • Rapid escalation in professional services fees. • Average US based consultant costs twice as much as a full-burdened IT employee Key challenges • CIOs cannot rely solely on internal organizations to develop and maintain enterprise IT systems • Traditional “outsourcing” service providers are not cost-effective Source: McKinsey analysis;IDC, Giga; client interviews

… can be addressed by outsourcing to vendors • 30-40% lower costs than traditional IT service providers • Likely to sustain lower costs for the next 5 years More cost effective use of IT dollars • Tested and robust business model with manageable risks • Well established and competitive vendor base Challenges faced by the CIO • Up to 40% shorter development cycles • Shorter learning curves • 24/7 production runs • Ramp-up capacity faster • Shorter rework cycles Compressed time-to-market Higher quality and performance standards • More established methodologies and processes for meeting higher performance standards Source: McKinsey analysis, Satyam, Infosys, Wipro, Morgan Stanley Dean Witter

Country Comparison Skills surplus countries Regional hubs User countries High Talent sophistication • Number • Cost • Skills US India UK Germany China France Indonesia Ireland Philippines Singapore Low Low High Vendor sophistication • Number • Quality

Contents • Introduction • Process/Best Practices • Current Scenario/Future Trend

Approach/Model • Near Shore Process • Offshore Process • Optimum mix between onsite, off-site, and off-shore • Use of dedicated development centers around the world • “24 X 7” delivery model Evolvescape’s RightSourcing Model Satellite Based Communication Client / Off-site Location Near Shore Project • Analysis and planning • High level design • User interface design • Project coordination • Onsite testing • Implementation Post implementation support • Rapid reaction support Offshore Project • Project management • Detailed design • Coding • Testing • Documentation Offshore Development Centers(Key elements of cost savings approach) Post implementation support • Bug fixes • Warranty support • Maintenance

Customers need to address key outsourcing process issues Outsourcing Strategy Outsourcing Execution • How do we maximize benefit from outsourcing to vendors? • What kind of relationship should we establish with vendors? • How do we select vendors for specific projects? • How do we manage the transition to offshore development? • Which projects are suitable for offshore development? • How do we manage the transition of individual projects? • What kind of organization and governance is required to manage vendor performance? • How do the vendors customize its processes to customer requirements?

Best practices in outsourcing processes Outsourcing to vendors should be much more than offshoring and staff augmentation Adopt a partnership based approach to IT outsourcing and move towards a competency based vendor selection Follow a staged approach for transition to an offshore partner with a careful selection of projects Best Practices Prepare detailed transition plans for each project, especially maintenance projects Establish strong governance and management oversight to manage relationship and performance Ensure that outsourcing processes are tailored to business requirements

Outsourcing to vendors is more than offshoring and staff augmentation “Traditional” Mindset “Winning” Mindset • Use vendors for project components • Outsource complete projects • Maximize offshore component • Use offshore, offsite and onsite presence judiciously • Use staff augmentation approach for onsite presence • Maintain onsite presence for managing and delivering solutions • Focus on software outsourcing only • Extend IT organization virtually (includes software development, network management, call centers, infrastructure projects, decision support systems, etc.)

Think partnership not transaction “Transaction” approach “Partnership” approach • No long term commitment • Medium/Long term commitment • RFP issued for every project • Competency based vendor selection • Vendors not expected to invest • Vendors expected to invest in infrastructure, knowledge transfer, etc. • Vendors follow customer orders with limited value add • Vendors expected to leverage their knowledge base and contribute to overall strategy and planning issues • Vendors not involved in technology strategy and planning • Vendors expected to be actively involved in technology planning • Insufficient focus on risk mitigation • Proactive measures for mitigating risks While a partnership approach is recommended, in certain situations a transaction approach may be more appropriate. For example: • Initial engagements to test the capabilities of a vendor • Projects involving confidential and proprietary knowledge, etc.

Partnership model has benefits • Enables vendors to offer lower pricing because they have better visibility into revenue streams • Reduces the vendor total cost of doing business which can be passed to customer. Cost • Learning curve benefits help in improving quality • Allows vendors to prepare resource plan in advance and staff projects with appropriate resources • Helps achieve best practice transfer by vendors • Learning curve benefits help in faster time to market • Releases important customer resources for more value added work • Reduces time spent in the RFP process Quality Time to market

A staged approach helps transition to offshore partner Complete outsourcing Key Success Factors in a Transition Increase scope and scale Test the partnership • Involve the end user closely in the transition • Discuss in existing IT governance forum • Involve end user in oversight • Management of the CMM level gap between offshore partner and user organization is critical • Presentation screen re-writes • Database cleansing • Back-end systems maintenance • 24x7 QA* • E-business front end • Re-architect back-end • Implement middleware • Server consolidation Typical projects Increasing management complexity and mission criticality * Quality Assurance

Careful selection of projects required Large projects are generally more successful... … and also those requiring low customer interaction Actual Savings Project Size >50% of low interaction projects deliver greater than 40% savings <$10 million 21% $10-$100 million 27% Best Practice • More emphasis on projects requiring low level of user interaction • Less emphasis on choosing small projects • Generally favors projects with less schedule pressure but higher business priority

A simple framework for planning transition and selecting projects • Business Stability • Quality of scoping • Changing market (e.g., Internet applications) • Release version - higher versions are more stable • System Complexity • Number of interfaces to other systems, some of which are also under development High Requiring vendor with high management abilities Not recommended to offshore Management Complexity May require longer transition and higher onshore presence, medium saving potential of 30 - 40% Requiring vendors with high interaction handling capabilities and tools Medium Suitable; high saving potential of 40 - 60% Low Low Medium High Interaction Requirements There will be exceptions to the above framework in certain situations. Examples of projects typically not outsourced • Applications related to core business processes • Pioneering technology work • External interactions • Customer input on interface design • Third party input (e.g., JV partner) • Internal interactions • Missing or bad documentation forcing interactions with other developers • Complex business knowledge requirement forcing interactions with business partner

CASE STUDY … technology provider successfully followed a phased approach Started attending partner conferences Year : 2000No. of people : 125 • Contribution to new releases (development) Marked up SLAs Year : 1999No. of people : 90 Scaled down SLAs to give time to vendor • High priority and high complexity • Full testing of products Year : 1998No. of people : 60 Jointly bidding for implementing solutions • Medium priority and medium complexity maintenance (including analysis and design) Year : mid 1997No. of people : 30 • Medium priority and medium complexity maintenance • Regression testing Started presenting at partner conferences Year : 1997No. of people : 6-8 • Development project to test vendor capability • Low priority and low complexity maintenance of a small component Moving up the value chain with increasing customer confidence in vendor capabilities

A detailed transition plan is required for each individual project Steps for offshoring project – Application Maintenance example Project Planning Knowledge Acquisition Onshore/Offshore Transition Offshore Execution Offshore Simulation Offshore Training/Pilot Further details on Outsourcing Processes available in the ‘Outsourcing Processes’ section of the ODC Boot Camp binder

Strong governance and managementoversight is critical Key Levers Best Practices • Partnership board consisting of senior management from both sides is the final decision making authority • Every quarter, partnership board reviews the level of outsourcing and the performance scorecard • Every year, partnership board conducts joint strategic technology planning sessions Partnership Board • Day-to-day project management is performed by dedicated relationship managers from each side • Relationship managers facilitate smooth project execution, define processes and act as trouble shooters Relationship Management • Performance tracking should be automated • Performance scorecard (SLA’s) for off-shore vendor • Commitment tracker for US partner • Clear definitions of success and failure • Predefined processes for increased and decreased collaboration • Exit clauses that define responsibility and timelines for knowledge transfer, documentation and intellectual property rights Performance Management

Risks associated with outsourcing to vendors manageable Perceived risks Why we believe risks can be managed • High attrition rates due to large demand • Leading vendors are investing heavily in training, compensation and partnerships with universities to train more students Talent • Complex projects have many failure points • CMM level 4 and level 5 certification • Active governance policies with interactions at all levels Project • Differences in work culture • Leading IT vendors proactively manage culture gaps Cultural • Electricity and telecom not reliable • Different IPR laws • Government actively promoting uninterrupted power supply and telecom to technology companies • Established legal system Infrastructure • Geopolitical events can destabilize trade e.g. with India • US and Indian governments agreed to de-link the IT trade from politics Political/Country

Linux Business Application • 66 % of the Internet Server market • $2 Billion investment by IBM & HP • Office Automation to Space Travel (NASA) • Runs in Multiple Hardware Architecture PC, Mainframes, phones & embedded systems • Security and Availability

In summary. . . • Move towards competency based vendor selection • To obtain the largest benefit from offshoring: • Adopt a partnership based approach • Not rely heavily on staff augmentation • Move the vendor up the value chain in a phased manner • Successful execution of outsourcing strategy requires • Careful selection of project • Detailed transition plan for each project • Strong governance and management oversight

Contents • Introduction • Process/Best Practices • Current Scenario/Future Trend

Historical Market MaturityPre-2001 • Traditional key drivers to the market: • Inability to retain IT staff internally • Lack of internal skills to support key strategic initiatives • Ability to scale staff • Therefore, offshore deals were focused on: • Staff augmentation • Speed to completion • Shorter-term non-strategic relationships • Little due diligence • Offshore Provider sales structures were: • Delivery-oriented • Mid-level technical focus • In-bound client vs. company generated demand • Repeat/referral (word of mouth) business

Current Market Conditions • Current market drivers include: • Return on Investment • Cost containment • More extensive due diligence/strategic partnering • Industry references • Third-party evaluations • Domain/application experience/expertise • Market Leverage • Shifting to the next phase of market maturity!

New Market Realities • To be effective, offshore providers must retool their sales and marketing in the following areas: • Business requirements must be addressed in tandem with technical requirements • Value propositions that differentiate your company will be required • “Share of client” will become a meaningful success metric • Domain, application, and industry knowledge will become increasingly important • Emphasis on sales process and methodology • Emphasis on client creation • Sales and marketing not driven by delivery

World business leaders bullish on India "A truly global company will be one that uses the intellect and resources of every corner of the world. And, India is a developed country as far as intellectual capital is concerned. The opening of the research center marks a new level of commitment by GE in India.” Jack Welch August 2000 "Three years ago during my first visit to India, the country was emerging as an IT super power. Today the country is handling the most sophisticated projects in the world. Going ahead, we would be investing over 50 million dollars on the development activities of the center.” Bill Gates September 2000

QuestionsThank You !

BUSINESS CASE FOR IT OUTSOURCING & LINUX APPLICATION