IT Outsourcing - Options

IT matters! Most conglomerates are tech savvy and use IT (Information Technology) to gain a competitive advantage. Most companies are spending a substantial amount of their revenue on building IT capabilities. Big Indian IT companies termed as SWITCH (Satyam, Wipro, Infosys, TCS, Cognizant, HCL) are the “cost efficient experts” in low cost countries. These companies excelled in delivering state of the art IT solutions at low cost. However, there have been numerous changes in this industry over last few years and the business environment has become challenging. Some of the changes are:

1. Indian IT biggies looking to move up the value chain.
2. Global IT consulting companies like Accenture now  offer end-to-end solutions by operating in India.
3. There is a high demand of IT professionals while the supply of labour is low. This has increased the wages dramatically and the labour arbitrage is slowly diminishing.
4. Low availability of skilled labour has caused companies to compromise on quality.
5. High competition has led to pressures on billing rates and the margins are decreasing even further.
6. Companies unable to manage high growth leading to quality and security related issues.

Within buyers of IT services, there is an ongoing debate on whether to outsource or instead go the captive centre route. While outsourcing is cheaper and usually a necessary step to retain a competitive edge, there is no discretion in team selection and no visibility into the Software Development Life Cycle processes. Captive units on the other hand negate most of these disadvantages but most companies fear making the high investment commitment required to set up a captive unit in a new country. A case in point is Apple’s development centre in India, which was closed a month after it opened.

The captive unit business model will become a big threat to SWITCH companies. Most of the critical work will get assigned to the captive units and vendors will be used to compensate for spikes in business or for delivering the less critical and lower margin tasks. To compete in this changing environment, SWITCH companies should take the lead in establishing a new business model.

To accomplish its IT business, there are various options that any company can use. There are obvious advantages and disadvantages of each option. While accomplishing IT work in own premises might be most beneficial, it might not be the most optimum option. With the emergence of knowledge centers like India, which provide the similar or better services at a much lower cost, outsourcing and offshoring are becoming extremely important in any CIO’s agenda. Following are the options that a company can use to accomplish its IT business.

1. In-house IT department
   1. Onshore Captive Unit
   2. Offshore Captive Unit
2. Third Party Out-sourcing
   1. Near-Sourcing – location is near to incumbent’s location.
   2. Far-sourcing – location is far (e.g. American company outsourcing to India).

Within the offshoring strategy there are various options in which the IT business can be structured and accomplished. There are essentially six different offshore models. The two models at the extreme are:

1. Captive Center – Completely owned by the company for its own use.
2. Supplier Direct – Completely owned by a third party offshore supplier.

There are also a few more models which are lesser known but slowly and surely gaining importance. These are:

1. Dedicated Center
2. Joint Venture
3. Third Party Transparent
4. Build-Operate-Transfer

Captive Center: Under this model the company sets up its own offshore captive center. It starts from ground up, sometimes, in a totally new country where it has no earlier presence or outsourcing relationship.

Supplier Direct: In this model, the work is outsourced to a third party who provides both low cost advantage and special skills, while allowing the company itself to focus on its core business.

Dedicated Center: A dedicated center is a further extension to Supplier Direct model. This is also operated by an offshore supplier, but the staff, equipment and facilities are all exclusively dedicated to the company. This model has some shared processes, shared risk and shared ownership.

Joint Venture: In this model generally a company partners with an offshore supplier in a joint venture relationship and they share the revenue. A joint venture can also be between two or more global companies, with or without local partners, to build an offshore center with multiple owners. This way they share the cost and risk.

Third Party Transparent: In this model a third party builds and maintains the offshore presence.

Build-Operate-Transfer: In this model, a third party builds the captive center ground up, and transfers it to the company once it is operational. The time for which the third party maintains it can vary.

SWITCH companies currently operate in the Supplier Direct Model. This model became popular because of labor arbitrage available in India. With it huge pool of English speaking skilled population available at low wage rates, this model was highly successful. Most companies used Supplier Direct model to outsource their IT services work while some use hybrid models like having both a captive center and outsourcing some work to third party IT vendors.

In the long term, any company needs to invest in what it considers the core. If some work is clearly not the core and hence not of long term value it should be outsourced if it makes economic sense. On the other hand, if the work is strategic for the longer term then the continuity of the work and the people (after all, it is a knowledge economy) is required and investments have to be made. With this reasoning, some companies operate their own captive centers and outsource the low value work to third party vendors in low cost countries.

With no distinction between any two third-party IT services vendors, cost became the only distinguishing criteria. As competition heated up, there was a huge pressure on prices and the billing rates reduced dramatically. At the same time, some of the IT consulting companies like IBM and Accenture also expanded to low cost countries to make use of labor arbitrage and provide end to end services to their clients. This forced the IT biggies to rethink their strategy as the current strategy was clearly not sustainable. The Indian companies aligned their businesses along verticals and put a strong emphasis on building domain knowledge so that they could move up the value chain.

The IT businesses have expanded at a dramatic pace and some companies have not got enough time to adapt themselves to their explosive growth. The demand for labor has gone up multifold, while the supply has been more or less constant. This has affected the quality of labor and therefore the quality of work delivered. There have been a few instances of security breaches in handling sensitive data. Most companies now believe that their India strategy is very important and a lot of time is spent of formulating this strategy. IT biggies are facing a new competition from increased number of captive units being started. As more captive units come up, these companies would start losing their clients and moving up the value chain strategy would remain incomplete. There is also an additional risk of big captive centers like GE building capacity and competency to service other clients from their captive centers.

In this highly dynamic market, a new wave of IT evolution has to gain momentum. IT vendors need to rethink their strategy to survive and excel in the future. This scenario presents SWITCH companies with both an opportunity and a threat. I believe that to compete in this changing environment, the business need for these companies is to adapt quickly to this new wave and position themselves to take maximum advantage of this opportunity. In Thomas Friedman words the situation can be summarized by the lines, “Do it before it gets done to you. The change itself is inevitable”.

 

Funny Video

This is not to suggest anything...it's plain funny...

Solstice

We had the 5th Solstice this weekend. Solstice is the annual ISB Alumni Reunion. It was a good chance for the current students to meet with alums given there is no overlap of two batches this being a one year course. It was also a good chance for alums to meet their own batch mates. This weekend was full of masti, partying and networking - last and most important alum gyan sessions.

On the party front, the new events lounge was inaugurated. We also had a concert by Indian Ocean. To be frank, I had not heard of this band earlier, but I liked the music yesterday. I think I am going to follow this band in the future. Some of the songs were really cool.

Met with a few alums and got a lot of gyan. I think it will help. It came right in time for placements. I could get the resume reviewed, get tips on prep and how to approach companies. Overall, a fun filled experience this weekend. However, now I need to catch up with my schedule and prepare for the exams coming up in 6 days

Leaving you with a picture of Indian Ocean.

Interesting Link on Global Consumption and Wastage

Story of Stuff

Marketing Notes - Should you reduce prices to counter competition?

Let's take a scenario where you join a new firm and are asked to manage a brand. The brand is not doing well right now and you need to prove that you made an impact. You obviously have a limited marketing budget. After a lot of introspection you come out with two choices:

1. Spend budget on advertising

2. Spend budget on price promotion.

What would you choose?

You evaluate the two options and here is the analysis:

1. Price promotion because it will introduce trial.

2. Price promotion because it will attract switchers.

3. Price promotion because it is offensive strategy while advertising is a defensive strategy.

4. Price promotion because big impact expected immediately while advertising will be a long term investment.

5. Advertising because it will influence perception.

6. Advertising because it will create loyalists.

7. Advertising because it increases perception of quality.

8. Advertising because it will build brand image.

Now you also know that in the short run even you don't advertise for a month your sales might not be affected much. e.g. say if coca-cola stopped advertising today, would you stop drinking coke?

I am sure you will go the price promotion route. This is what most managers will do. It seems sensible. However, there is a pitfall in this strategy. It leads you to a vicious cycle.

As you drop prices, you are at par with the other low price products. There are more low price products that high price products. So, the consideration set for the consumers increases. Given a larger consideration set, the consumer becomes more sensitive to price as there is very little differentiation. The product becomes a commodity and you end up with lower margins. Lower margins mean, less cash available for advertising or adding product differentiation by virtue of R&D. So, how do you sell more product - Reduce Prices. And you are back to where you started with. The path of no return!

Here comes another bubble

A hilarious video I found...

Marketing Notes - Slow Death of the Brand

Disclaimer: The end of the story is very grim. This real story can cause you to get a feeling of déjà vu.

This story starts in a happy world. Our Brand, called "Hit", is a high quality, high price brand in a growing market with over 30% market share. There is another competitor, with slightly inferior product and about the same market share, and the rest 40% divided between some 100 small competitors, with inferior products. Our brand was enjoying good premiums and everyone in the firm was happy.

Good time do not last forever, and enter a new competitor. The person feels there is a vacuum in the market and there is a place for a Low Price Brand. He positions his product in a low but acceptable quality and low price. This brand gains 1% market share. Hit is still enjoying life and doesn't care about a newbie. Time passed and the new brand keeps gaining the market share continuously. People start seeing the value for a low price brand the brand reaches a 10% market share. Now Mr.Hit take notice and after hours of meeting come out with a killer strategy. They can not reduce price because the brand premium will go away. So, to compete with the new product, they launch a new product called Mr. Fighter, a flanker brand. This is a neat strategy. The brand image or Mr. Hit will not be hit and the firm will be able to capture additional market share from the competitor.

Mr. Fighter does a good job and takes share from other 100 competitors and some from Mr. Hit and some from the new competitor. Now the competitor has to make the next move. Competitor already had lowest prices, wafer thin margins, so he obviously can not cut prices further. So, it decides to go to the retailers and gives them the proposition to go private label. Retailers will be happy to do that. They can squeeze the manufacturer further. Now, the ball is back to Mr.Hit's court.

Mr. Hit, now thinks that they can either let competition take the market share, because the retailer owns the shelf space, or go private label themselves. Now, Mr.Hit is both manufacturing private label and also providing trade incentives to the retailer for shelf space for the flagship brand. The margins goes down. So, Mr.Hit outsources the manufacturing and designing and is left with only the brand name.

Retailers are happy by squeezing both the hit brand and competitor. The private label products are gaining popularity because people are slowly realizing that its the same product after all and at a lower cost. In the whole value chain, retailer has the highest margins. Now, our dear Mr.Hit has also lost the design capability. The ODMs (Original Design Manufacturers) on the other hand give a proposal to retailers to manufacture multiple brands for them. They don't have their own brand to begin with and their main capability is manufacturing and operations.

So, now the retailer has high margins and also a good, better, best strategy to have various brands at all levels, i.e. entry level low quality - low price product, middle level medium quality - medium price product and also a premium brand positioned next to Mr.Hit's brand commanding high price for the high quality. With brand being the only thing left and no margins to innovate, the demise of Mr.Hit is evident. It's only a matter of how long can it take the losses, while the retailer makes merry!

That's the end of Mr.Hit! Now, the question arises that while this story is so distressing yet so true, what could have Mr.Hit done differently to stop this eminent death? While there are no straight answers to this question, one thing is clear - Mr.Hit can be saved only by differentiation and by being ahead of competition ALWAYS! It has to constantly innovate if it has to remain alive. It has to create a pull from the customers forcing the retailers to provide shelf space to this product.

IT Outsourcing

This is the continuation of my previous post about IT. To get the IT work done, a company has following choices:

1. Do it internally, or

2. Outsource it.

If the company plans to get done everything internally, then it can either:

1. Do it in a captive unit at its main location

2. Open a new captive centre in a low cost country like India.

If the company plans to get done everything externally, then it can either:

1. Go for near-sourcing (e.g. Capgemini for a company in Europe)

2. Go for far-sourcing (e.g. Infosys for a company in US)

There are advantages and disadvantages of all formats.

Indian companies operate under outsource and off-shore space. They provide the dual benefit of low cost and quality work. You would then think why would not every company go for outsourcing and offshoring? Well, it is because there are a few disadvantages too. e.g. there is a lack of control in case of outsourcing to a third party vendor. A company has no visibility into project schedules, quality of people, safety of sensitive data and risk of key employees leaving and company having no control on retaining them. The business secrets may also get lost as vendor employees move from one client to another.

To connect this thought with the one presented in the previous post, companies could spend the staying in the race or to some extent winning the race budgets in outsourcing and offshoring. The third party companies have already developed expertise in such work and there is not much strategy involved, so the risk is lesser. The innovation part of budget can be spent in-house.

Information Technology

I have been reading a lot of articles on IT off-late. Here is a summary of those articles. None of the stuff here in my research. It is all the knowledge that I borrowed by reading different articles.

In any company IT has three distinct uses:

1. Reduce operating costs by automation, reducing manpower requirement or increasing efficiency (called as "Lets you stay in the race" by some specialists). You have to do it because others have done it, and if you don't you will lose.

2. Give a strategic advantage over competition by doing something first. Also called as "Lets you win the race" by specialists. This is similar to first point, except you always pre-empt the competition and get advantage over them by capturing market share or increasing margins by improving efficiency.

3. The third and most important use of IT is to come out with innovative products, reduce time to market for those products and create such an activity system such that the competition can not find a unique factor for your success.

Most companies today spend in point 1, while some in point 2 and rare companies in point 3. The classic examples of companies spending in point 3 are Dell, WalMart etc.

An important point to note here is that companies can not choose to spend just in 1, 2 or 3. To be successful, they need to spend in all 3 categories. The experts say that companies should create a portfolio of IT spending and should manage it just like a financial portfolio. In this case, the companies should distribute their budget across the three categories, just as you would in stocks and bonds in a financial portfolio. You need some budget to maintain your usual systems like email, messaging etc, some budget to pre-empt competition and stay ahead in a game and some into innovation.

While the portfolio model sounds very simple and logical, the problem comes in the implementation part. Imagine a large conglomerate with different companies. The obvious way to maximize operational efficiency will be to have a centralized IT department, like a shared service. The problem with this model is that distance it creates between the business units and the IT staff. It also tries to commoditize IT. The workaround is to have innovation staff work closely with the business units.

On the innovation front, there are various ways in which CIOs can get new innovative ideas.

1) Work closely with venture capital firms and invest in companies where you see potential for use of technology in future.

2) Work closely with researchers, academia to get to know about the latest and cutting edge technology.

3) Form a innovation cell within the company and encourage Research and Development.

4) Pilot new technology is a small business unit and then extend it to the entire company if there is huge potential.

To consult or not!

The biggest question I have in my mind these days is whether to opt "consulting" as a career or not. Following points are in favour of choosing consulting:

1. You get to work with the top level executives.

2. You get to learn a wide variety of domains and business problems.

3. Challenging work.

4. It's a glamorous job.

5. Involves travelling world wide.

6. High chance of getting a successful career post consulting.

7. Good money.

Following points are against choosing consulting:

1. Travelling often and away from family is not something I want.

2. Very demanding job, long work hours.

3. Requires lots of networking.

4. No leverage on prior experience. Start afresh.

A tough choice to make. However, if I don't choose consulting, then the options that I have are:

1. Go back to IT

a) Delivery

b) Business development

2. Marketing Roles.

3. General Management

Again, marketing, though interesting, I am not sure if I will be a good fit. General Management sounds interesting, but factory setting doesn't. IT delivery is a very non glamorous job, while business development is no good than consulting in terms of negatives, while lacks the positives. So, consulting doesn't seem a bad choice after all. However, the travelling part still is something I have to think thoroughly and that is a decision that I will need to take collectively with my family. So, consulting, to be or not to be...

The same feeling again

Every time I attend a cultural show, especially conducted by colleagues, I get this feeling of worthlessness. The people are so talented, that they no only excel in studies, but also in activities like dance, song, dramatics etc. I initially used to think that there is a negative correlation between extracurricular activities and the basic activity like grades in college. However, that is totally wrong. I have repeatedly seen that people who excel in study also excel in extra-curricular activities. They would volunteer for any events that are taking place, perform and network effectively. This is the hallmark of a complete person. As always I have decided that I will pursue some hobby religiously now. Only time will tell if I will just be writing the same thing on the blog even after the next event that I attend.

Best day since joining

Our (D-14) group mate Vipul won a business plan competition and we all went to Barbeque Nation to celebrate. This was one of the best days since I joined ISB. We had lots of fun, mostly at the cost of Moiz. I have laughed this much for months now. Nice break from the otherwise hectic and stressful schedule. We were the last one's to leave the restaurant. If we had not left for another 10 minutes, we probably would have been thrown out! We pulled each others legs and finally everyone remembered the most memorable moment at ISB. Wow, for the first time I am thinking I am gonna miss this life. Just 120 days to go for graduation!

Job scene is looking good. Met my mentor today and he mentioned that jobs are not a problem. There is enough demand for good managers and leaders in the market today. McKinsey has posted its job postings today, and I am sure more than half of ISB will apply. It is the dream company of so many people. It's amazing how some company drives so much excitement at such a broad level.

Pictures from the outing:

I ate so much today and after a relaxing evening, I think I am gonna crash now. I will need to get back to work tomorrow morning, as the to-do list is unending right now, and I better get started. There is so much to do. To list a few things:

1. Revise core terms.
2. Case Prep for consulting interviews.
3. Read up on IT industry for tech interviews.
4. Assignments.
5. Backlog of Term 6.
6. Finish the book that I am reading right now, Information Rules by Shapiro.

I better get back to work! Was this relaxing evening a dream? It's over already :(

Best day since joining

Our (D-14) group mate Vipul won a business plan competition and we all went to Barbeque Nation to celebrate. This was one of the best days since I joined ISB. We had lots of fun, mostly at the cost of Moiz. I have laughed this much for months now. Nice break from the otherwise hectic and stressful schedule. We were the last one's to leave the restaurant. If we had not left for another 10 minutes, we probably would have been thrown out! We pulled each others legs and finally everyone remembered the most memorable moment at ISB. Wow, for the first time I am thinking I am gonna miss this life. Just 120 days to go for graduation!

Job scene is looking good. Met my mentor today and he mentioned that jobs are not a problem. There is enough demand for good managers and leaders in the market today. McKinsey has posted its job postings today, and I am sure more than half of ISB will apply. It is the dream company of so many people. It's amazing how some company drives so much excitement at such a broad level.

I ate so much today and after a relaxing evening, I think I am gonna crash now. I will need to get back to work tomorrow morning, as the to-do list is unending right now, and I better get started. There is so much to do. To list a few things:

1. Revise core terms.
2. Case Prep for consulting interviews.
3. Read up on IT industry for tech interviews.
4. Assignments.
5. Backlog of Term 6.
6. Finish the book that I am reading right now, Information Rules by Shapiro.

I better get back to work! Was this relaxing evening a dream? It's over already :(

Should a customer be fired?

There was a very nice debate in our Customer and Market Performance Management class whether a customer should be fired or not. In this case the customer was very demanding and was bleeding the client. On top of that, because the internal processes were not right, the client offered discount to the customer. The case conclusion was fire the customer. It seems in realty also the customer was fired. However, I do not subscribe to this view. In my view, you should explain the customer that we had our internal process wrong and we need to change the way we bill you. If after that the customer wants to walk away, let him. But give him a chance to continue the relationship and be a strategic partner. What say?

How to Manage Multiple Tasks?

I am still wondering that MBA has not taught us anything on how to manage multiple tasks and priorities at the same time. Although MBA does expose you to prioritising your tasks, but that is not as a teaching but as a side effect. I think this should be the first course in term 1 that should be taught in MBA. How can one manage multiple tasks and set priorities. Just a thought!

Did I really pay so much to get this life?

We all keep discussing if we really took this decision to pay 17 lakhs and ask for this torturous life? Amazing! It's 3 AM and the assignment is still on. Then there is morning 8 AM class to attend. Quiz in 10:15 Class and then another assignment tomorrow. In between, 5 PM class also needs to be attended. Phew!