Is Rogue Sourcing here to stay?

Consultants have created a plethora of adjectives to differentiate themselves from outsourcers: smart sourcing, right sourcing, strategic sourcing and the like.  Now rogue sourcing?  Before the reader frowns, I will freely confess that I created it.  Please view me as a career CIO who coined this term and not as a consultant.

To provide a bit of a background,  IT is facing the daunting task of delivering more for less. The result is that users (like marketing, finance, operations) are seldom getting their projects done by the internal IT department.  Naturally they resort to outsourcers.  A very harsh phrase to use, but rogue sourcing refers to IT sourcing by non-IT departments.  Of the many challenges with rogue sourcing, the three that kindle their way to the top are: management overhead, higher costs, and lack of a review and credentialing process potentially leading to poor delivery quality.

The way to eliminate rougue sourcing is not to outlaw it, but accept it as a weakness in the IT department in how it is managing user requests.  IT governance helps facilitate decision making across all users. This prevents IT from independently making and later being held solely responsible for poor decisions.  The guiding principle is to deliver value to the business without injecting onerous controls that stifle productivity.   To achieve it, the IT Governance framework should provide complete transparency on IT activities and make it simple for users to make, monitor and prioritize IT requests.  In order to achieve transparency, IT management will need to establish controls and processes to deliver quality technology solutions on time and within allocated budgets.

Outsourcing can actually enable effective IT Governance as it provides a scalable resource base to work in conjunction with internal IT resources.  IT can transform itself as a nimble service based organization taking advantage of outsourcing.  This will signficantly reduce rogue sourcing.

Is offshoring affecting US competitiveness?

With all the offshoring taking place, one concern is that US is losing its competitive edge.  A recent analysis in Information Week seems to suggest otherwise.  US is actually ranked number 1, and two big offshore providers India is ranked 34 and China 38.

If this study is to be believed, then off-shoring has no impact on competitiveness.  One can even argue the opposite.  US is focussed on innovation and taking advantage of global resources to produce what makes US competitive.

Is Infosys a body-shop?

A “body shop”, analogous to a garage where the bodies of automotive vehicles are repaired, in IT refers to a company that recruits resources to work for other firms building their technology.  A very popular Indian writer Chetan Bhagat’s tweeted calling Infosys a “body shopping company”.  His tweet “it is ironic when someone who runs a body shopping company and calls it hi-tech, makes sweeping comments on the quality of IIT students,” created a turbulent discussion with a majority agreeing with Chetan.

I disagree with Chetan.  In the Indian outsourcing industry, Tata’s established that Indians can program at customer premises by bringing technically trained resources to work under the clients direction.  Infosys proved that the same work can be done off-shore using a very structured process with a combination of client and Infosys management.  Before Infosys, offshore programming work was not deemed to meet the quality requirements that satisfied client requirements.  Infosys, in particular Narayan Murthy, must be congratulated on helping not only establish credibility for Infosys, but every Indian IT services company who gained from the success Infosys achieved.  To brand Infosys as a body-shop is harsh.  The acceleration of outsourcing to India over the past two decades can be attributed in a large measure to Infosys.

IT Outsourcing Statistics 2010/2011

My good friend Frank Scavo does us all a great service by showing us facts and trends in the field in IT.  His report on IT Outsourcing is available.  It answers questions like: a) How many IT organizations are outsourcing particular functions and how much work are they actually outsourcing?,  b) Is the trend up or down?, c) What percentage of the typical IT budget goes to outside service providers, and, d) How do costs and service levels for outside service providers compare to doing the same work in-house?

Invaluable questions, and more important, evidence based guidelines.  It covers:

• Application development
• Application hosting
• Application maintenance
• Data center operations
• Database administration
• Desktop support
• Disaster recovery services
• Help desk services
• IT security
• Network operations
• Web/e-commerce systems

For a full report, visit http://www.computereconomics.com/page.cfm?name=Outsourcing

The cost of this report: $595 a true bargain.

Voluntary Outsourcing Versus Involuntary Outsourcing

Voluntary Outsourcing refers to events where outsourcing is managed as a discretionary activity.  Most outsourcing in the past was voluntary.  Enterprises addressed both technical and social aspects of outsourcing, and outsourcing was typically undertaken to 1) to drive costs lower, and/or 2) to focus on “core” activities, and/or 3) to gain resource flexibility.

Of late, outsourcing has become a necessity, almost involuntary.  Lack of technical resources or expertise is forcing organizations to outsource.  The gains by outsourcers (even in this stagnant economy), indicates the growth of involuntary outsourcing.   The critical research question is whether the effects of involuntary sourcing is no different than voluntary sourcing, or there is a significant difference.  If there is a significant difference, it is important to identify them.  My hunch is that involuntary sourcing may lead to less than optimal decisions which will adversely impact the value IT can bring to the business.

The Good News Just Got Better!

USourceIT has helped many IT companies get access to customers at extremely nominal costs of 10% per transaction. Now we are going to completely eliminate all fees.  This means our customers will gain full access to our provider database and seek out service providers directly!  Naturally, some of the customers may want us to be an intermediary handling contracting, payment, and escrow services for a nominal fee of 5%, however, we are leaving that option to the buyers.  Effective October 1, 2011 all new transactions will use this no-fees model.  The new model eliminates transaction costs.

An important aspect of this change is to open the service provider network.   Only general capabilities will be shared: Financial and other confidential information will not be shared.   Using a open and friction free B2B model (no transaction costs), customers and service providers will save money and time.  Tools will be provided at no cost for service providers to assess their chances of success, and customers will be provided tools, again at no cost, to evaluate bids.

I am excited to make these changes to help foster your growth.  Your feedback and suggestions are most welcome.

Offshore CTO?

At first the idea of off-shoring the CTO function looked a bit difficult to comprehend.  To put it in context, IT Organizations hire a Chief Information Officer (CIO) for ensuring that the organizations information technology investments are aligned with its strategic business objectives. For most Fortune 2000 companies, the CIO has become the the architect of building and managing technology assets that meet the business requirements. Many CIOs come from a business background and lack the hands-on-skills in architecting solutions.   To help alleviate this gap, often a Chief Technology Officer (CTO) was hired to support the CIO.  While the CIO was the big boss in most organizations, technology-centric firms gave more credence to the CTO.  Large firms can afford the luxury of having both the CIO and CTO.  Small to Mid-Sized Businesses (SMBs) rarely have the luxury of affording two executives.    Many CIOs lack the technical skills to build contemporary IT efficiently.  Conversely, many CTOs lack the business skills to build a technology portfolio that best matches the organization’s needs.

The idea of of an off-shore CTO working under the direction of a CIO to help architect and deliver a technology platform does appear to make sense, particularly in light of the fact that many technology solutions are in fact developed off-shore.  A few guidelines for successfully off-shoring the CTO services:

1. The business drivers must be articulated on-shore by a CIO or equivalent;
2. The off-shore CTO must be co-located with the implementation team;
3. The off-shore CTO must provide PMO functions to ensure successful outcomes;
4. The CTO must be fluent in the enterprise architecture; and;
5. If the development team is outsourced, the CTO function must not be from the same outsourced entity.  This will help ensure that the CTO’s loyalty is to the enterprise and not to the outsourced entity.

Off-shoring a CTO is not necessarily undertaken to reduce costs, rather it is to help minimize the gaps between the desired outcome and the delivered technology platform. The capability of the CTO determines the success of the engagement.  Fortunately, with the large number of engagements that have involved on-shore and off-shore projects, it will not be difficult to locate competent CTOs.  Many qualified CTOs in Europe/US may themselves avail of off-shore engagements further boosting the pool of available CTO resources.

Remote Infrastructure Management: Best for Cutting OP EX Costs

On occasion we invite guests to write our blogs.  Vishal, head of Byte Technosys has taken his firm to a new level simply by providing the best of breed RIM service.  The blog below is from Vishal Vasu, Director at Byte Technosys, India.

Remote Infrastructure Management (RIM) services will be the next growth engine for the offshore service industry as reported by leading consulting agencies and media. In fact, the global RIM industry has grown at more than 80 per cent CAGR from US$2 billion in 2006 to US$6 billion to US$7 billion in 2008 where India has been a significant beneficiary. A common question that would come to our mind is – with the industry hit by recession in 2009 and with the dark clouds of recession still looming on the horizon of 2010, what potential does the RIM service market hold in the future?

RIM makes more sense not just in terms cutting costs during recessions but more as a business strategy. Today enterprises leverage the power of IT to streamline their key business processes and gain a competitive advantage. Even with the investments already made, the key issues relating to application performance, scalability, security, management and effective utilization are mostly unresolved. Apart from helping to reduce the overall IT Infrastructure Management costs, a well structured and managed RIM relationship can bring significant benefits.

Flexibility of Service
Customers hiring service providers have an advantage here as they can align the business needs with the services provided by the Service Provider. Services can be flexed to meet peak times and loads, mission-critical and non-mission critical or a combination of both. This type of flexible pricing model and service delivery helps in apportioning the infrastructure management costs.

Domain Expertise
In this highly volatile IT industry it is hard to keep up with the latest technology trends and it is almost impossible to have on pay roll a staff that can match the ever demanding and changing face of IT technology across all segments. A RIM service provider can add value here as they have diverse IT staffs which are at a client’s disposal, working 24×7. Moreover, these specialists are constantly updated with the latest technology trends via internal training programs, technical training programs from vendors, etc.

This basically helps companies to gain a competitive advantage as it helps to reduce the time to market. Companies can take the bold steps of adopting and switching to new technologies to gain a competitive advantage. Serious service providers in the RIM industry would normally have alliances in place with leading technology suppliers and as a result clients can also enjoy a single window of service from them with an assurance that the team working on their projects would be capable of handling the technology and related needs.

Visibility and Control
Companies retain full control of its strategic components such as physical IT assets, technology refresh, policy and architecture which provides visibility into the availability, performance and utilization of each component. Many of the established RIM suppliers have embraced the ITIL framework which lends itself to RIM very effectively. Putting the collected data in to this type of best practices framework provides lot of insight and visibility. This visibility further enables companies to take control of the situation, make informed decisions on future investments in IT and improve current service levels.

Reduced Costs
Remote Infrastructure Management not only assists in reducing the manpower cost of managing the infrastructure, but also brings down the costs related to future infrastructure investments. It has been reported and endorsed by agencies like McKinsey and NASSCOM that outsourcing the infrastructure management services can save dramatically reduce the labour related costs by 30% to 40%. On the other hand, companies can also reduce costs associated with future infrastructure investments using expertise of the service provider by way of infrastructure optimization, standardization using industry best practises and consolidation using virtualization technologies.

Proactive Services
Most of the time RIM services engagements are driven and governed by SLA’s (Service Level Agreements). Service providers, in order to maintain the SLA, invest in to software and technology that enable them to gain an insight on failing components in the IT infrastructure, usage patterns, thresholds, etc. These tools enable a service provider to provide 24×7 proactive monitoring and management via a Remote NOC (Network Operations Centre). This helps to resolve issues in a faster and structured manner.

So, in today’s fast paced and ever changing IT world, RIMs makes more business sense and CIOs have to step back and ask themselves what they’re trying to accomplish with infrastructure outsourcing. Cost savings, optimization, transformation or efficiency? CIO’s decisions on outsourcing infrastructure management are going to be driven by more than just cost savings and as a result it is also going to create a challenge for the service providers to tweak their service models to show more benefits and not only cost savings.

The True Cost of Hosted E-Mail Solutions

Most businesses take e-mail as a given. However, the true costs of managing e-mail accounts are seldom assessed. As an illustration of the costs, assume a Small to Mid-Sized Business (SMB) with 1000 e-mail boxes for non-IT users, four servers to service the accounts and Microsoft Exchange Platform. Further assume that the IT group gets about 3000 requests on the average annually.  Requests include account set up, password reset, backup, & restore, synchronizing the e-mails with PDAs such as iPhone and Blackberry, and other support.   To properly support the users, two skill sets are required:  helpdesk support and exchange administration.  If the SMB maintains the expertise in-house, hosting costs, staff, virus and spam filtering and Exchange license costs are in the neighborhood of $300,000 to $400,000. It effectively amounts to $350 per user per year.  There are essentially two options:

Option 1:  Outsourcing to a hosted e-mail solution and maintain the helpdesk in-house.

Option 2:  Outsource to a hosted solution and outsource the helpdesk.

Option 1 Analysis:  Typical costs of hosted e-mail solutions range from $10 to $20 per mail-box per month.  If you add a minimum of two support personnel, the costs are not significantly different from in-house costs.  However, the service levels are significantly better.

Option 2 Analysis:  The challenge here is that outsourcing helpdesk for low volume of requests actually results in higher costs.  The primary reason is that most firms providing outsourced helpdesk charge between $25 to $60 per ticket or $30 per user per month.

For this reason, most SMBs have just managed e-mail in-house.  There is an alternative solution.  It takes advantage of the Global blended model more typical of applications outsourcing.  The solution is not to use hosted e-mail, but use hosted servers and use RIM (Remote Infrastructure Management) to manage the servers and off-shore helpdesk.   Although one individual typically is required on-site, the overall costs are significantly lower.  Many off-shore companies now offer a per ticket charge.   These costs are usually in the neighborhood of $4 to $10 per ticket.  Remote infrastructure management is typically $100 per server per month.   This implies that SMBs can reduce their costs by over 40% annually.   The best part is that the service levels are significantly higher than traditional e-mail hosting solutions.  Most Fortune-1000 companies have taken advantage of these benefits.  The growth of focused niche Service Providers will pave the way for SMBs to take advantage of the blended global sourcing models.   The challenge is to find the right Service Provider.  Brokers who connect SMBs to Pre-credentialed Service Providers accelerate the search and contracting process.

Notes:

Industry analysts have identified Self-Service as an area of high return on investment derived from reduced cost per incident, enhanced agent utilization rates and customer satisfaction improvements.

Case in point the average fully-burdened cost per incident:

• Walk Up            $29.30
• Phone               $27.60
• Email                $21.67
• Fax                   $18.90
• Chat/IM             $17.90
• Self-Service       $13.50

* Help Desk Institute, Practices and Salary Survey

Research indicates that agent efficiency in a typical call center is 75% – not an acceptable level in tight economic times.

Labor Arbitrage Models Will Fail

I wrote a blog in the BPO network with the same title – but as I pondered it applies to the off-shore development market as well.  In the BPO blog I staretd with “BPO initially started with the need to focus on core services, but economic benefits were quickly realized as BPO providers gained economies of scale and scope. The prevalence of BPO quickly became one of labor arbitrage. Although many BPO providers are focusing on value and moving away from just cost advantages, a majority of them still rely on the labor differential. In my view, this approach will fail. Not just for the rising labor costs, but the way people are getting help is also changing.”

Upon reflection this is equally true for off-shore development.  Global providers have not only moved away from the one or two country source models to multi-country (IBM and Tata are great examples), but they have also moved up the food chain.  One project I helped in determining the best sourcing strategy was decided not on cost alone, but deep expertise in the CPG (Consumer Products Group) industry.

The key here is that service providers should be looking at the business model, their target markets and build systems and processes that can be readily adapted to different verticals. To achieve this, they must develop innovation groups and fund them internally. R & D is not just for product companies, services companies must have R & D groups completely distinct from operations and projects to help the firms stay competitive.