IT Outsourcing Contracts

IT outsourced services represent an intent on the classic "make vs buy" decision. Organizations choose to "buy" a service than doing it in-house. Of course there are variations where organizations may also choose to keep some services in-house (which happens most often) but largely that's the intent. 

In doing so, organizations have few control levers than the contract as they embark on such a partnership. The contract seems to be the only sane way to keep control on the provider for the next five or seven years (or whatever is the duration of the contract). However organizations often miss out few key things:

1. It is not possible or feasible to document each and every aspect of expectation and scope in a contract as several areas may emerge as services mature or as the service provider's  (or providers') operations are understood

2. Needs of business will change and evolve over the period of the contract due to business climate changes, market changes and several factors which cannot just be foreseen so far ahead as the duration of the contract. These just don't include the scope but also the SLAs, engagement model, delivery model etc.

The more successful relations have seen a start based on the framework provided by the contract but then the relationship should mature based on mutual trust and understanding. In the later years the contract may just be an over arching framework to be referred in case of deep disagreements but largely the teams working together need to understand each other and make things work than getting the lawyers to do the same.

Landed Staff vs Local Staff

One of the big differences in the delivery and staffing model of offshored based providers against traditional onshore based providers is the use of landed staff. Aside of the whole issue around immigration and its impact on economy which has been widely discussed, these present an interesting contrast in operating model --- the landed resources are almost certainly working from client premises and are more connected to IT teams by sheer physical proximity. The local in-country staff may not always be in-premise all the time which impacts their connect.

Also, since the landed staff is in the country only for that work, and are more culturally tuned to the offshore based teams, they often have a not so busy social life which along with the work culture they are mostly tuned to, end up working more in terms of sheer hours.

There are several other interesting aspects that I have seen at closed range as I have worked in both models and will discuss those in some future posts.

CSAT Programs for Outsourced IT Services

Enterprises and service providers alike have not been able to find a consistent way to really tap into the the user perception of IT services that are outsourced to external providers. There are only a handful of them who have a well oiled framework to regular mine feedback from users of outsourced IT services, siphoning it back to the delivery teams and tracking the progress against the areas of improvement. Even there, the process is at best reactive. 

There are several variants of doing this but a lack of a consistent framework stands out --- and is so surprising that no one has really been making moves across the industry in this space, moreso with the growing trend of moving work to several countries outside the base country, multi-sourcing and other emerging trends which adds several moving parts to what was earlier a simple support model with in-house and mostly local IT support.

In most IT shops where CSAT programs run, these are mostly around service desk where a % of users whose tickets are closed are served with a 5-8 question survey to gather feedback on that experience. However there is need to include resolver groups in this or separately and also to track trends of root causes and teams scoring lower scores consistently. However this is mostly the B2C kind of CSAT if you may. The other is the qualitative feedback on a provider's ability to deliver the intended goals, service improvement and support for business which are more of the B2B kind of CSAT. These are more crucial to gather what the customer leadership team thinks of the provider and are most often modulated due to the "in-band" nature of information gathering. The teams which collect such information are part of the account relationship team and have a conflict of interest in collecting such feedback on performance which reflects their own. Also, it is not easy to standardize such B2B CSAT feedback as each client has its own unique set of requirements.

An ideal CSAT program covers both B2C and B2B CSAT feedback and analyzes these and finds trends to assess how the services are trending. A great area to improve and grow for both enterprises and service providers alike.

This news article has pegged UK as the second largest IT outsourcing market after the US:

The government has put a huge FOR SALE sign over the country’s public assets and services. According to the sharedserviceslink.com website, the bulletin board for “leaders in finance shared services”, the United Kingdom is the world’s largest out-sourcing market after the United States. The number of contracts in the UK has increased sharply by 47 per cent to 148 contracts a year since 2010. The annual contract value for this country jumped 16 per cent in 2012 to $3.75 billion! All this before the major sale drive about to take placein the NHS.

The International Services Group (ISG) states that the UK accounted for 80 per cent of all contracting out across Europe, the Middle East and Africa, making our government alone among the major European economies in using out-sourcing  as a key element in its response to austerity. Richard Vize, ofOutsourcer Eye, says that the application of cuts is dominated by “short-term thinking”. The effects of all this activity on quality or cost is unclear and there is no reliable information on the impact of cuts or out-sourcing – though these effects are visible, for example, in local government, the NHS and government agencies such as the Inland Revenue.

While EMEA was always considered the second largest ground, UK taking that cake on the back of a strong government driven initiative speaks of the growing importance of the country in the global marketplace. While the scale and growth rate are still lower than that of US, this demonstrates the prominence of the region not just in the European context but overall in the global IT market context.

Captives : The Middle Path

The value proposition of an offshore based captive is very compelling for large global corporations. Those that have gone through few cycles of offshore services contract, smelt the value in streaks in their experience but also most often faced the business disconnect as IT moved away from an inhouse function to a service provider. While there are cost efficiences to leverage, most enterprises do not expect and are not prepared for the commoditized service model that service providers unleash. Fact is that part of the cost efficiency and its related lower management overhead is derived from these models but IT teams and business often find this to be the most understated situation in the before and after discussions they had during the sales cycle.

It is like moving from a gourmet (and in-house at that) restaurant with all the bells and whistles of a fine dining  place to a fast moving pizza delivery location which at best may have few chairs thrown in just in case patrons are too hungry to take the pizza home. The delivery model for the pizza place which is running a large scale operations at a competitive price with low real-estate footprint and staff does not have the well dressed manager who greets you at the door of a fine dining place. From there, you see that most stuff in the pizza place is standardized and fixed. They may be able to help you with some of your special request but cannot do a made-to-order dish that you can relish at the gourmet place. You often leave the pizza place unsatisfied on these counts if you are not prepared for this change from your gourmet habits. So, that's coarsely what is at play.

Now, the captives step in like couple of those pizza joints which also have a manager who greets you at the door and while they use the same kitchen and staff, the relationship with the client is more refined and customized and factors in your special request (to the extent the kitchen can accommodate). There would silverware for those who look for it and he could take time to explain how the cheese is made and stuff. 

So, in summary, the captives on paper do have a compelling proposition. The devil lies in the detail of execution. Running an offshore set-up requires more than just running an internal IT department. And if the set-up is in the neighborhood of service providers, resource management and retention is just one of the key challenges. Some companies have found the secret (pizza) sauce and are doing well while others are trying to refine the model and few others have already exited selling their set up to IT service providers ( who else?!) as part of a lock, stock barrel deal.

Cultural Sensitization

Anyone who has been involved in offshore based outsourcing for some time, in any way, will surely have interesting stories of how lack of cultural awareness led to serious and some times just hilarious incidents. Fact of the matter is that while the common denominator that drives work to remote locations is the fact that at least in technology services, these are finally technical stuff which can be delivered by anyone technical, these closely linked to cultural aspects too.

What is not often factored in, is that these technical services are needed and provided through human interface and these provide the cultural tone to services, through the consumer or provider of these services. If there is no adequate sensitization on both or at least one side of the equation, it can often lead to misinterpretation, service deficiency or frustration. Most companies which provide offshore based services have understood this now, many the hard way, but there is still a big gap to cover and most measures are not comprehensive and do not tend to address the root cause.

Now, it is also true that it is not easy to change the cultural affiliations of people so easily and so, ultimately it comes to making people appreciate the cultural gap and having them be aware of the major socio-cultural aspects through learned behavior in an effort to match what comes naturally and effortlessly to the other party as it is part of human social and behavioral manifestation.

Bottom-line : it is very important to ensure that both enterprises and service providers appreciate this aspect and jointly work to address this in a way so that it at least neutralizes the obvious rough edges fairly consistently and is baked into the fabric of service delivery enablement. 

Making IT Work With Offshored Services

Came across this article IT Offshoring Still Works, If You're Careful which talks about what some of the companies have matured to do, in handling the offshored IT services through various service providers. 

While there is no magic potion (!), fact is that enterprises need to be cognizant of the fact that this is different from the way outsourcing worked earlier and need to make some changes in the way they structure the contract and engage with the service providers's teams. There is surely tremendous value still, provided a proactive approach is jointly taken by both sides. 

Quality Concerns with Offshore Outsourcing

Came across this article in CIO.com on the drivers of offshore based outsourcing and also what some of the respondents had to say after their experience. Clearly, service quality is an area which stands out across application services offshoring  (24%) and IT infrastructure offshoring (29%).

What this also means is that aside of the fact that a quarter to a third of the customers not satisfied with the quality of services, they probably did not put in enough measures, governance and enablers to bring this as a area for continuous performance measurement with their service providers. Clearly the service provider would be motivated to address areas that are part of their performance and since this is not being done largely, the gaps in performance are reported by so many.

Now, I am not suggesting that this is easy or that there would not have been issues, but that both sides (customer and service provider) need to acknowledge and accept this as an area of client value and put measures to track, report and action on.

This is also one of the key areas which industry needs to get into as more and more work moves outside the country from where work is being outsourced. What worked (in terms of governance and measurement) with in-shore outsourcing couple of decades back will not necessarily work with offshored outsourcing. A strong understanding of these would help enterprises engage with their service providers to ensure that the latter are driven on these areas of concerns that many have.

Trends : Hands-off Outsourcing to Hands-on Outsourcing

Few years back companies in their earlier efforts to outsource with all its benefits of being able to focus on their core business most often outsourced services (IT services in general and specifically IT infrastructure services too) to a single vendor so that there was almost no IT staff required in their enterprise. The service providers brought in expertise --- operational and otherwise to work with business.

Over time several enterprises have evolved to realize that it may not just be a great idea to leave everything to a service provider (or even couple of them) and not gett their hands dirty. There are several challenges, many which come to fore over time due to need for continuity or improvements over a period which can best be championed and driven from within the enterprise to provide the best and most relevant content.

Many mid to large enterprises are now kind of going back to having IT staff, much leaner and with core responsibilities of making things happen working with service provider(s). This is bringing in a fresh change to business where IT department is able to step up and have more skin in the game and take responsibility not just for getting things done but also for doing the things that need to be get done.

This is possibly a natural evolution and comes as the proverbial middle path which offers best of both worlds --- there would increased IT staff wage bills but it comes with greater benefits of an improved business aligned IT services plan. Of course the thing many are struggling with is to get businesses to accept the improvement and provide inputs to put a tangible $$ value which can be used to further justify the change in approach by the CIO.

Knowing The Business Technology Services Supports

One of the common themes that most managers leading IT service teams struggle with (once they figure out that it is important) is the best way to get the technical teams to understand the business that is supported by the technology that they support.

In the depths of technical operations the technical folks get too technical to be the better and best. They are into commands and scripts and cross technology domain, but what takes a toll is the understanding of the business that they support. In several situations, this appreciation will add tremendous relevance to their actions or even create new ones if they can understand the business they support.

One of the  basic ways is to take them through the business environment -- like taking them to a retail store or a bank branch so that they can see the customers of that business enterprise, and how technology helps (and can struggle) when business faces it's customers. There are several other ways too but whichever way one chooses, there is no denying that this has tremendous impact on the way the teams then see their work.

The other struggle is to keep such awareness current and not to have it take a back seat in the technical and operational trenches. Successful managers have been able to do this through various means successfully (else, guess what, they would probably not be successful managers!).

The IT Services Cloud : Emerging Trends

NetworkWorld recently carried Gartner's Prediction for 2012. The summary has predictions, many of which revolve around the buzz that we have been hearing around cloud services, social networking (here in the enterprise context), IT security, smart devices, energy crisis etc. 

One that caught my eye, and is against the current known trend at large, is around movement of Asia produced finished goods and assemblies (consumed in US) to Americas (not US per this prediction). While this is not widely discussed, movement of manufacturing and even services bases around the world is not unknown. What has worked well is not necessarily set to work well in future too. In fact if we extend this to IT services : it is not very unlikely that center of gravity of where these services will be delivered, will also move in the coming years. In fact it may move to not have a center of gravity at all and be more diffused than previously known. Several new contenders from Europe (more of East Europe) and those from Far East are already creating shifts in the currently emerged models which moved out of US in the previous decade. These are challenging the current sweet spots in India and other regions for IT services.

What will countries, currently making hay while the Sun shines, do in that scenario? There are naysayers galore which is evident with continued investment in building greater and bigger delivery infrastructure. Like any bubble, these will continue till the trend reversal seems imminent. That will unleash (if this theory which I personally feel is not too far fetched) a string of manifestations which would not be new. Looking at what happened when a disruptive model moved many of these outside US will provide some insights on those impacts.

For now, the view from the trenches does not show this trend at all, probably because the view from trenches is never good to know where things are heading overall. In India, companies continue to grow and many are rightly in a constant effort to find those differentiators and build exit barriers. 

In the longer run, companies should focus on building capabilities and resource models which are not geo-specific and should be easily adaptable across cultures and geographies. What then  will emerge are leaders in IT services who can front-end with enterprises and get the work done. Where the work happens may not be really relevant. It would then commoditize the services model and turn it into a "IT services cloud", invisible and transparent to the enterprise. The core focus would then be around understanding business imperatives, domain focus and orchestration of service delivery which the clients would value. Where work gets done would then be irrelevant, who gets it done and the process maturity would be key then.

Scale Matters A Lot!

Recently talking to a friend who is working on a business case for setting up an IT Infrastructure services practice, fact that scale matters a lot come up strongly across various scenarios we discussed. Since several delivery models require 24x7 operations, across various technology (or sub-technology flavors), often times the staffing done is to meet these requirements of having a resource available at all times but the resource may not be fully utilized. However as the scale of operations increase, the per equipment FTE number decreases dramatically and the cost per ticket (as one metric) reduces substantially.

And since this is a services business ( read people's business), a larger scale of operations helps in better employee retention with the employer being able to provide better prospects for job rotation, career progression and varies exposure as the scale of operations increases.

This is one reason which keeps a high entry barrier for this business. While there are several players in the market, many are waiting in the wings to reach that critical threshold which would help them be more competitive and offer a compelling cost case to their prospects.

Hardware Refresh and Software Upgrade

If there is one thing that distinguishes IT infrastructure services from the general IT services pool in terms of structuring the deal and the impact on (accounting) books, it is the way IT infrastructure space impacts capex decisions of CIOs. While "running the operations" draw opex budget for software services and infrastructure services, the need to refresh hardware (network gear, desktop, servers and other related gear) and upgrade software (to keep pace with OEM support or hardware compatibility) brings in the capex element which makes most long term deals interesting.

When outsourcing for infrastructure services, value being sought is not just in improving service quality, operating efficiency, running cost optimization but also to reduce and smoothen the traditional clunky outflow on account of such refresh and upgrade requirements which are mostly inevitable and a necessity in large enterprises running mission critical environments.

As different service providers come with up different models for addressing these customer imperatives, there are different approaches each provider takes. Some have their in-house financial companies which finance/lease hardware ( these service providers also want to keep such activities on a different accounting book and not let it pull down its operating margins and numbers). There are some others who do not have such options and take this as a "core value prop" pitching it as an advantage of not having any bias to any technology OEM. However with time, since the business of business is business, CIOs may like pure-play show but finally it is where the dollars are saved that they mostly end up going with as finally that's how they get their bonus worked out!

If the enterprise does not own the existing equipment, this becomes a big factor in large deals as they then do not find it attractive to add equipment to their books in the current situation. If they have the equipment on their books, already this gives them a great opportunity to build a business case to use the opportunity to outsource or change their service provider and sell their assets to the new provider.

Revenue and People Count

Look at the quarterly or annual revenue reports of offshore based IT services companies and almost all report revenues and employee count hand in hand. The unsaid association is that more the number of employees, greater the revenue. So, you read projections each year of each company targeting to hire in the upwards of 20,000 or even 30,000 or 40,000 employees each year!!!!

An interesting study would be the comparison of revenue per employee of these firms with that of their competitors who are primarily pure services non-offshore headquartered or services companies with OEM business as well. And if we want to spread the spectrum and skew the numbers further, we can include the same for software product majors. Will make for an interesting weekend study which I will do one of these days. But the relationship drawn makes one wonder where this will stop. For a $6b-$8b revenue if the employee base needs to be upwards of 150,000 employees, what happens when the firm is say $20b if there is always a linear relationship which has happened till now and firms don't seem to be talking of more value based revenue. What worked well in the past will not necessarily work in the future. As the employee base grows, focus on managing the gigantic resource pool and its aspirations will be crucial.

Increasing Remote Operations in Offshore Operations

What has probably existed for few years in the US based operations of OEM majors who are also service providers, is now catching up at offshore locations of these and other offshore players. Increasingly administrators are working from home - thanks to the improved network services which are also cheaper along with the reducing costs of a laptop and a mobile phone, not to mention the pervasiveness of chat and video conferencing.

Till 2-3 years back, such were just privileges which some of the senior folks in the offshore operations could enjoy as not everyone yet has a laptop in most offshore operations' teams which work on customer projects. Secondly, the efficiency of home networks (cost and quality) has improved several times. My home broadband has more than 99.99% uptime for the last few years I have been using it in India.

Another advantage of the home worker is the saving in office space along with reduced commute time (and cost) for the worker which motivates them to work well from home. Of course they need to ensure that they have a decent "home office" with no interruptions which is something that many struggle with as most homes are not big enough to have a study.

Other issue that many report is the inconsistent power supply in some of the cities/areas. However these days the power outages are mostly couple of hours in a stretch (as a maximum limit) which is better than the situation few years back and an air card with a laptop ensures that the worker is active even when there is no electricity for few hours at home.

So it is a win-win for the employer and employee but what about the customer? While many companies may not explicitly disclose to their clients the number of work from home workers on the account, most often the quality of service is at par with the workers working from a regular office. And most who work from home still come to the regular office once or twice a week to meet up with their supervisor and some of the face to face team meetings.

Another important "constituent" set are female employees who find it very useful to work from home in a predominantly patriarch society of most offshore countries where the woman of the house is still responsible for cooking and cleaning though it is gradually changing. Many are also able to afford domestic help with the new salaries they enjoy.

So it does  sound like a win-win-win for employer, employee and the client. Talking to some such workers - most enjoy the flexibility to handle home and work but yes they do miss the water cooler moments which technology still can't help with!

HP's Acquisition of 3Com

News that HP has acquired 3Com is news and probably went unnoticed largely. Juxtaposing it with the acquisition of EDS last year, clearly HP has a strategy where these pieces fall into place. While HP cemented its services game plan to meet the challenge from IBM with the EDS acquisition, with the acquisition of 3Com, it is meeting the challenge from Cisco.

Will be interesting to see how the integration of these companies will play out to bring value to HP's revenue and profitability.

"Yes Sir" and No "No Sir"

I was having a lunch conversation with a colleague who has moved from the IT department of an enterprise to an offshore based service provider's organization. He was sharing his frustration on the lack of assertiveness on the part of most team members in the offshore service provider's team (and in that company in general). Since he had moved from an internal IT organization to a service provider, these were frustrating for him when he was in calls with the client where his colleagues mutely accepted whatever the client asked for --- be it additional scope of work, very aggressive timeline commitments or unrealistic service expectations. They just didn't push back!!!

This is in fact a recurring sentiment I have heard from many on both sides of the table -- those who offshore work to IT service providers and those who provide such services working for offshore based IT service providers. This is in fact a very rampant behavior trait which neither party wants to discuss because one is taking advantage of it and the other is being taken advantage of. Worst, most often the team members don't even realize that there is an option to push back. I am not suggesting that the trait should be a "push back all the time and every where" attitude but there are ways to respectfully and collaboratively correct a client's expectation if they are unrealistic or may have issues which they may not be aware of. Most folks in several offshore based companies just do not acknowledge this and this seems to run through the echelons of power in such companies. I have heard of some companies where the relationship manager says " How can I say NO when the customer is asking for it? He is the after all the CUSTOMER!" for situations where what the customer is asking is just not do-able or practical. What is not understood is that in the process incorrect expectations are set and face-off is deferred to a later time when anyway the expectations will not be met or lead to consequences which are not desirable.

Now, the interesting part --- though most customers who offshore take advantage of this cultural trait ( we will delve more on how much of it cultural and how much of it is anything else), in private they acknowledge that they want partners who can challenge them and say NO when the right answer is NO. They do not want to get a submissive YES for everything because then the service provider team is not bringing value in validating what they think. If, whatever the customer think prevails, there is no check or balance to bring in perspective from similar experiences with other customers. Not just that, many even say that they actually would respect an offshore provider more if they see the teams more balanced and responsive and say NO when that is the right answer.

What is the reason for this seemingly foolhardy behavior?:

1. There is a bit of a cultural aspect to this given that such conversations happen across cultures. While at one end are customers from the western world ( mostly Americas and Europe ... and I don't want to get into which ones from these two are more aggressive!) who are more aggressive in general, at the other end is a typical Indian or some times even attributed as an Asian trait of not confronting the client directly in business situations.
2. Another reason and more plausible is also that it just is not there in the DNA of such offshore based IT services companies because they essentially grew through T&M (Time & Material) contracts contributing almost 96% of all their revenues in the last 20-25 years. In a T&M contract, the resources from the service provider works as part of the staff of a manager who is from the customer's side. So, they are essentially executing tasks assigned to them. There is little chance to be asked for opinion in that sense and whatever opportunities exist are not leveraged due to the cultural trait discussed earlier. So, over the years, the organizations have grown on a staple of T&M engagements where their staff has followed what was assigned to them not having much of a chance (or inclination) to speak up to do things differently.
3. Another reason for I have seen is the "Customer is always right" syndrome which is conveniently used as it means whatever the customers asks or says is to be followed and takes away the "burden" of finding what is better or right if that is not known.
4. Another reason, which is again highly debate-able and needs to be understood in the right context has to do with the evolution of most of the offshore based IT service providers. In the early years of their formation, the staff they mostly used were from their base countries. However the IT maturity in these base countries was not to the level of what existed in most of the western world where the customers were located. Hence, while the staff started working, they were mostly on a learning curve for some of the technologies as these were new to them. Hence, in those early years, they also lacked the confidence of knowing that they could have a point to make since they knew that the client teams had worked in these systems for a longer time in the past than them and hence they found it more convenient to follow what was being told due to lack of confidence.
5. Finally, many organizations just do not understand still of what the customer is looking for. They think that by agreeing to what the customer is asking or suggesting, they are making the customer happy and ensuring continued business.
   

However this today is not limited to traditional offshore headquartered IT services companies. Since many of the employees in the offshore units of onshore headquartered IT services companies have been hired from the offshore headquartered companies, they carry these personal traits too with them in their new organization. This has further contributed to their own challenges in meeting expectations at times in their new organization or at times led to further rifting of the great divide that exists in such companies between their offshore units and their base home units set up onshore in the Americas or Europe. That rift is probably a topic for another post though!

But before I conclude this post, I should say that these are typical traits heard from many people on both sides of the story. This however does not mean that all offshore based IT service providers or all the team members of a particular service provider demonstrate this trait. There are many who are highly appreciated and their clients will tell you how they brought value by brining in perspective that were really brilliant. However, for those who found these traits, the above is an analysis on why it possibly happens given that such a behavior does not help either party in the long run.

Tiered Infrastructure Architecture

Thanks to the recession, CIOs are busy but not to support the growing demands of business, but instead identifying how and where to save costs and bring sustained value. When the going is good, it seems to pay better to throw more hardware, software and labor at any business requirement because business is growing and someone will pay for it. Studying delta savings and incremental benefits are more of overheads, where the cost of managing them seems to outweigh the benefits accrued. Not any more in these times!

One of the things I have consistently observed is the lack of a consistent approach to a tiered infrastructure architecture. IT infrastructure is mostly set up as chunks of monolithic or patchy systems with no stratification or gradation of the infrastructure or the service quality provided on top of it. While many banking and other enterprises do have "A Class" infrastructure or service for "A Class" business applications, the rest of the applications and their underlying infrastructure is most often a mix of systems acquired over time. It is often not possible to say that we have three kinds of storage infrastructure --- A, B and C which caters to different kinds of storage requirements in terms of these metrics 1. ..... 2. .... and .. 10. ...

An efficient environment should have an enterprise divide its IT infrastructure into two or three grades. Each component (hardware, software, labor) should fall into one of these buckets. It may not be possible to have an air tight environment with no overlap but having at least 80% discipline from the current 10% (or none) will result in cost efficiencies and better manageability. It will also ensure IT is more responsive and participative in growth --- next time a project estimate is made for (say..) setting up a new back office, the project cost would be more reflective of how critical that operation is to business. IT team would first ask how critical that environment is, operational requirements, redundancy requirements etc. for all aspects of IT environment to plan for an optimal set-up instead of an one-quality-fits-all approach where that "one quality" is often an expensive service requirement.

Emerging New Players in Outsourcing Space

In the last two weeks two major acquisitions were announced in the Outsourcing services space --- Dell acquired Perot systems for $3.9b and Xerox then acquired ACS for $6.4b. These come within a year or so of HP's acquisition of EDS for $13.9b in May 2008.

While each company has its reasons to buy the acquired companies, these deals have few things in common:

• The acquiring companies are primarily hardware manufacturers and the companies acquired were services companies. Xerox or Dell did not have any services business contributing any significant amount to the revenue pie
• Both these recent deals came during the time of recession (or at least the fag end of it if we believe that is the beginning of the end of the recession). In these times if Dell and Xerox spent time, energy and money to acquire these companies, it must surely be a major event in their history. This is surely not one of those Cisco acquiring yet another technology company ( by the way they acquired Tandberg yesterday for $2.96b) where the fitment is obvious. The acquisitions by Dell and Xerox are much more aspirational than others as they aim to start a whole new service line of revenue for their companies. In fact Xerox's acquisition of ACS is even more aspirational than Dell's where the latter at least was in a related business.

Talking of aspirational acquisitions, Oracle's acquisition of Sun for $7.4b which was sure stunner for most industry pundits.

And not so back in the past, IBM had sold its hardware business (ThinkPad) to Lenovo, exiting from a product manufacturing revenue stream -- which helped it focus on services business and improve profitability in a significant way.

These deals are surely going to have some bearing in the future outsourcing services market. Dell is keen to shake off its PC-business image, whereas Xerox realizes that somewhere the printing and copying industry would head to be a sunset industry as over time people have been printing less, copying less on the whole. This will help each company jumpstart into the services space and meet the kind of companies they aspire to compete with.

Interestingly both Perot and ACS have a fair offshore presence in India. With the acquisition, both Dell and Xerox would also get access to these facilities and delivery models. It would be challenging to integrate these acquired companies and find the right kind of management team which can oversee a different business from their traditional manufacturing business.

Pricing Models and Choice of IT Service Providers

Among the various pricing models in vogue with the offshore based IT services providers, the key ones are time and material (T&M) and fixed price (FP) models. While there may not be complete data ( or at least I have not seen), on which ones rule the most --- my personal take is that T&M contracts should be accounting for almost 80% of the contracts if not more. The rest are mostly fixed price. There are some others like device based unit pricing, outcome related pricing which may be there in pockets but mostly T&M rules the chart.

This also shows the nature of engagement --- the customer owns the risk in such contracts -- and probably s/he don't mind it as the nature of work outsourced is chopped and packetized to ensure it follows the technologies, processes and skill requirements that already exist. However as corporations move to a managed services environment, if you can rely on your provider, then to help them realize the full potential of their innovativeness and cost-efficiency, one needs to look at pricing models like fixed price, utility based, transaction based or, outcome based. However, the difference across these models (apart from how you assess the charges and the risk ownership) is also the degree of control you, as the outsourcing enterprise, would wield. So, not only does it require a mature, stable and innovative partner with a track record, but it also needs the outsourcing enterprise to agree to let go control, to varying degrees to completely benefit from outsourcing.

It is not uncommon to see most CIOs embark on a roadmap starting with T&M model, with a stated objective to move to other more deeper models gradually, but somewhere down the road that does not happen -- often fuelled by the outsourcing enterprises' staff's need to retain control or due to the lack of leading-the-curve trait shown by the chosen provider. And then, between the choice of going for a new partner in the hope that it will be different or to continue with the current one but with a lower degree of involvement ( and no transition and a whole lot of other stuff to face) organizations often choose to continue with the chosen provider.

So, it is also important to choose a service provider carefully in the first place before you let them in. It is much more difficult than shifting to a new desktop manufacturer ( which in itself is not easy either!) when it comes to changing service providers for IT services.