Business vs Technical Proposition for IT Outsourcing

Most offshore-based IT outsourcing companies still look at selling to prospects on the basis of the superiority of their technical proposition. They go at lengths to come out with technical data, analysis, process models etc. All this to prove that they have a better story than competition which is now not necessarily another offshored-based IT outsourcing company. ( It mostly used to be then but now as they look at playing in the turfs of the big boys, this is not always true). So they go to all lengths to woo the CIO and his team and convince them how they are superior technically.

What they miss out is to woo the CFO and sell on the basis of the larger compelling case - the business case. The big boys of the game (IBM, EDS, CSC etc.) have been playing golf and wooing the CFO along with the CIO. The truth is that most often having a strong technical solution (not necessarily the best but even if it is one of the better ones) is a qualifier than being a clincher.

Isn't it so true - "The business of business is business" and so till there is an appealing business case, the CIO may not have the last say.

Reminds me of the sales mantra which I learnt early in my career : Sell to the M-A-N in the account:

M: Money (the person who controls finance)

A: Authority (the person who has the authority to decide/influence the sales)

N: Need (the person in the prospect organization)

The CIO mostly is the "N" while the CFO is the "M". Both or some others will have the "A".

As India based(offshore-based) IT outsourcing companies look at playing larger deals, they need to recognize this and not miss the CFO who may be the reason for those deals that unknowingly swung off while they had best technical solution.

Opex Only IT

With cloud, SaaS catching up, IT's capex is bound to shrink. With the utility metered model, and with enterprises buying data center services rather than data center, IT expenditure will move to very high Opex and a very low with not nil Capex.

This is what would get CFOs interested into this phenomenon. It will make it easy for businesses to be more flexible and agile. It would be easy to predict expenses and pay higher when you need more (say quarter ends and holiday sale etc.) and not pay for excess capacity when you don't need it. The cloud provider will be able to even out usage spurts across customers and give that advantage.

The only enterprises which will be having high capex will be cloud providers who will finally be the only one buying infrastructure to build and maintain capacities.

IT Enterprise 2.0

I mentioned the following in my previous post :

"In its ultimate and extreme form which may take many years to materialize hardware will finally be bought and managed by large service providers. Most enterprises will then have a link to the cloud. Think of it like the electricity supply to consumers and businesses. Now we don't need to have generators to produce our electricity but rather depend on a central agency which generates electricity. Replace electricity with computing and storage and you see how these service providers will build and sell computing services. Thus the complexity is pushed to the periphery or the user is distanced from the core."

Data Centers will move to the periphery or away from the enterprises to service providers. As that happens all that goes into the data centers (computing infra, storage infra, systems administration, system management et al). So what will IT Managers do? What would be in the realm of the CIO and the IT Managers once the cloud becomes staple (and stable)?

The focus will then shift on those that are relevant to the enterprise users and not handled by the cloud. All that relates to cloud's performance will be factored in the QoS SLA of the cloud. Here are things that IT departments will then be working on:

• Focus on applications, their relevance, efficiency and architecture
• Performance of infrastructure that links to the cloud. The network elements linking to the cloud will ultimately decide the quality of service that would be realized
• Focus on end user experience of applications. This is something which seems to be long missing out its rightful share.
• Enterprise management will be reduced to managing performance of network elements which in all likelyhood will be outsourced to the network provider. Centerstage will be Business Service Management where the ultimate impact and performance at the business performance level will manage. The market for bulky enterprise management tools will suddenly shrink to the cloud providers who will be servicing hundreds and thousands of customers

The Cloud

There is probably more being written about the cloud than it is probably known about. At a high level it feeds the need for some buzz which sounds logical and true but try explaining it to a CFO and you see why it is still in the err.. air!

Different people seem to have a different view but it is surely one buzz that is difficult to ignore. How it finally plays out is difficult to predict but investments by the majors around surely show that many are betting their dollars on this. And sometimes even if a technology is not the best, if there is so much of hype and dollars it may actually evolve to be something which would worthwhile. If biggies put in their best resources and biggest dollars into this, it could surely turn out better than anything else which may be equally or more promising but does not have this sponsorship.

It means some of these to some:

• A virtualized environment run at a very large scale available on-demand
• Throwing out the traditional data center out of the window for a completely outsourced model unless you are talking "private clouds" for large enterprises
• A move towards a utility model - "pay as you use" model
• On-demand provisioning closely linked to the current immediate term dream of virtualized environments

How it will impact technology and business models is to be seen, but here are things that may happen:

• Greater focus on impact of network for computing that ever before. The quality link to the cloud would define the quality of service from the cloud.
• Emergence of totally new era of providers who are probably not even considered in this space. Google, Amazon who are current first generation implementors of this technology may lead the show directly or indirectly.
• Compute technology may move to more simpler blocks than those complicated ones being worked on today. The building blocks of the cloud would be simple commotized pieces.
• Technology to improve compute, its availability, its crunching power would move from hardware to software. The differntiators would be in the software and not the hardware as it is today.
• Storage would move to the next level as compute is commotized and all the date crunched will need to be stored in various forms.
• In its ultimate and extreme form which may take many years to materialize hardware will finally be bought and managed by large service providers. Most enterprises will then have a link to the cloud. Think of it like the electricity supply to consumers and businesses. Now we don't need to have generators to produce our electricity but rather depend on a central agency which generates electricity. Replace electricity with computing and storage and you see how these service providers will build and sell computing services. Thus the complexity is pushed to the periphery or the user is distanced from the core.
• Applications (the reason why we need data centers and computing power) will reside in the cloud and be increasingly componentized. The IP will rest with companies who could deliver required functionality by integrating various applications. Bespoke will probably continue but would also be hosted on the cloud.

Staffing Trends For Offshore Based Infrastructue Management Services

There has been recent news reports that some of the offshore based IT Infrastructure Service Providers are now hiring B. Sc. graduates instead of engineers to be part of the delivery teams. In India B.Sc. programs are three year programs, considered commonly to be the option for interested students in science who could not qualify for an engineering program. Hence it is often considered to be a source of the non-cream layer of students, which is not necessarily true.

However due to this common perception it is true that the average starting salary for B. Sc. graduates is much lower than that of engineering graduates ( so a lower wage group). Also B.Sc. graduates have not had a chance to typically work in Tier 1 companies who used to hire engineering graduates. Hence when they get a job in one of these Tier 1 IT Infrastructure Services companies, they are more likely to stay on and not be part of the high employee turnover statistics which is ruled by the engineering candidates. There is also a belief somewhere that B.Sc. graduates as employees are relatively less ambitious and so willing to be more flexible in accepting various roles.

So when wage bills are shooting and even then employees are hopping around, it is a no brainer that some of these companies are tempted to hire B. Sc. graduates. It only helps that they are more flexible to do take up roles and even do the odd hour shifts as they see as a way to continue in a Tier 1 company.

However if it is a different question if these hirings will impact the quality of service and customer perception. It may not be really untrue unless due care is taken in training and ensuring the right fitment.

Asset Takeover - Why Doesn't It Fly With Offshore Based IT Infrastructure Service Providers

There are many differences in approach and delivery model of the traditional IT Infrastructure outsourcing firms (like IBM, CSC, EDS etc.) and the relatively newer kids on the block - the offshore based IT Infrastructure Service providers. While that can be a topic for a full book, one of the key differentiators is that most (and probably all) offshore based IT Infrastructure Service Providers do not get into taking over assets of customers' IT environment. These typically are the servers, desktops etc. The traditional biggies in fact have had this as a core streak in their proposition. How they handled it can be differentiated into two parts - those who were hardware vendors and also had a hardware agenda and those who were pure play services companies. Whatever be the way it was dealt it was always a financial engineering subject. It gave a flash on the topline but the bottomline took a hit.

The offshored based IT Infrastructure Service Providers have traditionally evolved as application service providers and never had assets in their deals. The inclusion of such deals causes a lot of concerns, some of which include:

• Impact on the bottomline which would make it into single digits which they are not used to and do not consider core to their growth strategy
• Lack of a hardware business does not get the extra dollars to offset this "hit" with revenues in some other businesses
• Lack of critical mass and economies of scale (across multiple customers) which the biggies have
• No related business model like hosting services or data centers with leased servers where the residual equipment can be gainfully deployed
• Need for enhanced stickiness as such deals then require a much longer and deeper relationship which the relatively new offshore based IT Infrastructure Service companies have not seen (since they are still new and have not spent as much time in the marketplace)

Now these are the most common but relevant reasons aggregated across various companies. Specifics may vary with companies.

Analysts talking of the emergence of new non-asset linked services and its benefits (which cannot be denied) to the client are only making the market place an exciting place with different players having their own value prop stories.

Captive Offshore Centers

Let me start with a story:

Traders from far off exotic lands used to get precious gems to a certain village. These were much sought after and sold at a price to the locals. Few smart folks from the village, who liked these gems, wanted to know more about this trade and the trader. So, they found where he comes from and where he gets his precious trade. They figured out that it was futile to pay for these gems those prices when they could get it cheaper if they undertook the same journey from the far off land and brought the stuff to their village.

So they befriended the trader, went with him to his country and found the places to pick those gems. They surely could buy a lot more for the same price that they paid to the trader in their village. However after the initial euphoria of the new find subsided, they found that undertaking this journey to get the gems was taking a toll. They were not able to spend enough time in their village and so their own business was suffering due to the lack of attention. Secondly over a period of time, with some maths they found that the cost of getting the precious finds home was actually more than taking it from the trader! They had initially overlooked the local expenses and costs - the cost of stay in an unknown place, the cost of hiring labor to extract (with a comparatively smaller scale than those of people like their trader friend), cost of security, cost of travel etc. So, while the gems themselves were cheap there, the lack of volumes, lack of knowledge of local conditions, lack of core competency in that space was causing their overall costs to go up.

Finally the smart folks gave up their newfound venture and settled for buying the gems from the trader who visited their village. They could get it at better price than they would have eventually played to get themselves and they were also able to focus on their business.


The story is similar when it comes to offshore captives set up by many enterprises who find it more lucrative to set up an offshore center than to pay a provider to get offshore delivered services. So, while they want to get the benefits of labor arbitrage, they want it do it all themselves.

Over the years, the industry has seen many such captives being closed or sold off. The companies ultimately found that running offshore based delivery centers were best left to be run by companies which understand this business better. They were bogged down by high attrition, escalating cost of labor, lack of opportunities to offer to their employees as compared to service providers and other local conditions.

They still get the gems ( the cost efficiency and improved profits) while they focus on their core business and let the professional service providers run ofshore services for them.

It is no different than the classic "make or buy" decision - only that in this case most companies have realized that "buy" is the way to go. There may be exceptions where a "make" may make sense but then that's what they are -- exceptions!