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.

Why Didn't Recession Boost Offshore Services Revenues?

The common speculation that outsourcing and specifically offshoring of IT services would rise dramatically in the recession remained just that -- speculation! In fact in the last two quarters, barring some exceptions, the offshored based IT services companies also saw their revenues from new deals fade just like other industries were hit with recession. This is surely merits a study to understand why this is happening. It looks obvious that an industry thriving on reducing operating cost would only benefit in a situation where bulk of their customers (in US and Europe) move to an environment of severe crunch.

What could be the reason? While an empericial study led by interviews on both sides (customers and service providers) can share some data backed insights, following are some guesstimates based on my interaction with people in the industry:

- Outsourcing and offfshoring activities generally require time to execute through a well defined procurement process if it has to be done at a large scale ( to derive larger value of benefit). Hence this was not considered as an exercise to reduce operating cost since the horizon of initiating, getting a new provider and finally breaking even would be over 24 months --- a time horizon much farther away than the urgency demanded.
- This increase in revenue would have come most from companies who had shied from offshoring in the past and would gain most by unlocking this latent chained value in their operations. However these same companies also shied from offshoring now, which would have resulted in further unemployment in their country. This was not a desirable PR move given the focus on increased unemployment due to recession.
- Many of the companies did outsource but not to offshore based service providers. They outsourced to local American or European IT services companies who offered labor arbitrage close to what the offshored based players offered by having India based centers to deliver work. So, while the offshore based players may have resulted in a marginal better value, enterprieses took a stance to outsource to in-country companies which helped without any negative PR of jobs going to companies from other other countries. Of course, at the back-end these US/Europe based companies leveraged labor in other countries.

Impact of Recession on Offshore Based IT Services Companies

I wrote some time back on "Wall Street Meltdown & Offshore IT Players". In the past months the meltdown has crossed over to the oft quoted Main Street and now is on Hosur Road, Whitefield and OMR in India.

The global recession which was being discussed in whispers and "what ifs" is now full blown in terms of acceptance. However the extent of its impact is yet to be known. With the domino effect it has been having this time across various industries ( I was reading last week that in the previous quarter Volvo reported new orders for just under 150 new trucks globally, against a number close to 15000 in the same quarter last year). Unlike the last one, this recession is not limited to or greater in impact to the technology companies alone. In this one it seems that the technology companies will feel the heat as opportunities from various industries they connect with, get impacted. So, the impact is more widespread, it has shaken the fundamentals of economy and business in many countries and has now crept to impact everyone with the government bailouts, mortgages and job losses.

So, what does it mean in terms of its impact to the offshore based IT companies in particular. Here is my take:

1. The worst is yet to come. What we are seeing now are steadier revenues from business signed few quarters back. Since a large part of the engagements are relatively longer in terms of contract, the real effect of the slowdown will show when the deals that were to be signed now and in future will result in loss of work in the coming few quarters. Some of the short term project work has of course taken a hit and the impact is clear with the layoffs being seein now even in the Tier 1 offshore based IT services companies.
2. The impact, once in its full by mid of next year, will be the worst that the industry has seen. The positive fall out is that it will make these companies re-think on their "hire more people for more revenue paradigm". All are now sitting on a big employee base with labor cost (salaries) being their largest part of their operating cost which is bound to reduced.Another development that will soon set in is that some new offshoring contracts will get signed in the next 2-3 quarters. These will be related to outsourcing/offshoring those work which the client operations teams could hold off due to fear of losing their own jobs, losing control to an offshore team, due to risks in security which could be now be re-assessed with a higher risk taking ability in the interest to keep the work going. Next quarter we should see traction from mid-sized companies which would want to decide very fast for IT services in general. It is also possible that in case the enterprises have an incumbent, they have already called them and asked for a flat 10%-15% discount due to the business climate. Increasingly this is not unusual and an RFI/RFP issue only adds to the thread in case some large onshore based vendors are not willing to budge.
3. By next year, almost all would have asked employees to take a pay cut. The focus would also be to create products, upgrade competency and even pursue mid-sized deals (either smaller contracts with large companies but more likely, larger end to end contracts with smaller companies).
4. Not restricting to offshore vendors, but in general too, this recession will really move up the bars for risk/reward system in contracts. Companies will find innovative ways to structure contracts with contained risks for service providers partially but a big thrust on sharing their fate with the payout with service providers. In absence of much action elsewhere, offshore based vendors are more likely to jump for such deals since their cost base are still relativevly smaller than the larger onshore based companies.
5. Offshore based providers, again not restricting to them, but they in a big way will start scaling up their sales efforts in non-US markets. Moving sales staff from US to South America, Europe, South Africa and APAC will be a big focus.
6. When it ends, it will bring the offshore providers back with the labor arbitrage that they were fast losing. It may not put in them in the position they were at the beginning of the century but the frenzy would give way to some more sensible selective pay hikes and not those blanket ones. The attrition (staff turnover) due to volunteered resignations has dramatically reduced though larger number of employees are leaving as they are being asked to.