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!