December 2013 Archives

Indian IT industry at cross roads but what will 2014 bring? Predictions from Infosys.

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I blogged yesterday about how IT outsourcing has moved from being about cutting costs to more about adding business value. The Indian suppliers, who came to the table offering 40% cost cuts, are a good barometer of how outsourcing is changing. They have moved from being body shops to business experts in certain sectors.

Here it from the horses mouth in this guest blog from Chandrashekar Kakal, head of global delivery at Infosys.

IT has come this far, what next for 2014?

By Chandrashekar Kakal

"The question is whether the IT sector will become a creator of business value or remain in the back office.

The Indian information technology and business process management industry is at a crossroads today. It has grown from about $100 million in 1992 to about $108 billion in 2012. It employs about three million people directly, of whom about 30 per cent are women, and contributing 8 per cent of the GDP and 23-25 per cent of exports.

Undoubtedly, it is the centrepiece of modern India's success story. But given the recent global macroeconomic upheavals and rise of new challenges, the burning question is: What next?

Up the value chain

The Indian IT industry has come a long way from supplying staff to managed projects, and from managed solutions to delivering business outcomes. Along the way, moving from the time and material based pricing model to delivering a project with defined deliverables in a fixed price model was in itself a level up the value chain.

The ability to take on IT-led transformation programmes, along with consulting, was enough to jolt the traditional global services firms.

Delivering business solutions and not just IT projects to defined specifications was a transformation for the industry. Having crossed the $100 billion mark, the industry today is at an inflection point, and ready to deliver business value and not just IT skills. While the direct employment generation of the IT and IT enabled industry is well known and quantifiable, the employment generated in the 'IT enabling' industries such as food catering, transportation, housing, domestic help and accessories, while only an estimate, is less discernible. The influential, invisible hand of the Indian IT industry in almost every major business of global corporations needs to be articulated adequately.

Value delivery

Value delivery to clients happens either by helping them enhance revenues or by reducing the cost of operations, including IT operations.

For a long time, the Indian IT and business process industry has delivered tremendous value by supporting cost optimisation and will continue to do so.   What is being added to this now is a mind-set that creates genuine business value.

The grand challenge for the industry today is to transform its image to that of a value creator by working equally on both the cost and value creation challenges.  This will happen, not by mere branding exercises, but by building talent; building domain, process and functional knowledge in addition to technology execution excellence. The associated pricing models will also need to change based on proposed value rather than input cost.

Showcase delivery

Building and leveraging intellectual property (IP) through products, tools and platforms to better deliver traditional IT services is an integral part of this journey. Another integral imperative is to build awareness among the client base by showcasing the examples of value delivered.

This will help elevate the positioning of the Indian players as a creators of true business value and spur member companies to respond suitably."

Are IT service providers more competent than customers?

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It could easily be interpreted that IT outsourcing is all about cutting costs. If at the outset outsourcing something cost more than doing it in-house it would be a non-starter. Some outsourcing does end up costing more than in-house and this is usually a reason for a contract to be cancelled.

But have IT service providers now matured and become experts in certain sectors? I recently spoke to Nasscom chairman KK and he told me that Indian companies have built up expertise with customers and are now better at doing certain processes than the customers. He said they have become experts in different field over the years.

In this guest blog David Mackay, senior director of Diversified Business, Europe at IT consultancy Virtusa's, gives us his take on the real advantages of IT outsourcing today.

The real benefits of IT Outsourcing and how to achieve them

By David Mackay,

"IT Outsourcing and especially offshoring was originally conceived as way to save cost through the labour arbitrage offered by low cost economies such as India. Fast forward to today, those low cost geographies have seen costs increase, while at the same time ITO suppliers have built up real capability and expertise. The calibre and maturity of staff working for ITOs has increased, while the extensive experiences those ITOs have, coupled with their evolution of highly sophisticated delivery management processes has resulted in organisations that are more competent than many of their customers. So as either a new entrant into the IT Outsourcing space, or as business that already uses IT Outsourcing, what are the key benefits available?

As noted above, ITOs have built up extremely strong competencies through their experience of multiple client engagements, programmes and projects. So within ITOs there are experts who really understand domain and technology. Customers should be leveraging that expertise, using the ITO as a way to focus a wide range of capability to address the task at hand. Rather than the business trying to design the solution and have the ITO build it, smart customers are articulating the business requirements and expecting the ITO to come up with the right solution.  This access to expertise especially around solution design is a key benefit of ITO, and being able to leverage it is essential to derive maximum value from the ITO arrangement.

CEOs are being asked by their boards to innovate, and to look both internally and externally to generate and harness innovation. Business should look to their ITO supplier as a key source of innovation. For the reasons above, ITOs have the ability to apply latest thinking from emerging industry trends. While many customers may expect to see innovation, many ITO suppliers will not provide it by default. It is incumbent on the customer to set their expectations clearly with regard to supplier innovation, at the outset of the engagement. Suppliers often create innovation through the work they do for clients, but don't expose it. Often really innovative steps are taken by junior team members working miles away from the client, and without any client facing time. While many ITOs have systems internally to harvest innovation, customers must establish the framework, opportunity and incentives for ITOs to promulgate innovation.

But probably the key benefit of ITO is around the achievement or acceleration of desired business outcomes. While suppliers have the expertise to deliver technically sound solutions, those solutions will address the requirements outlined to them, which have often passed through intermediaries, so that what the business really wants isn't what the ITO is asked to build. The easiest way to access this benefit is to structure the entire relationship between ITO supplier and customer through a contract that is outcome based. While many people talk about this, it is hard to do. The reason being that in order to achieve a business outcome, that outcome must be structured in such a way that it is measureable, so that the ITO has a clear target/metric to achieve. Being able to define these metrics appropriately requires some skill, and is predicated on the various stakeholders within the business having a common vision of those outcomes."

Who said IT service providers don't innovate? TCS is grabbing start-ups before they even start-up.

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I met up with TCS's global head of digital enterprise, Satya Ramaswamy, last week.
We spoke at length about what large enterprises are doing in the digital world and I will write up the interview in January.

But I thought I would blog about something that he said about TCS's strategy of innovating in the digital space.

Being based in Silicon Valley in California Satya is in contact with lots of people with tech ideas on a daily basis. He told me that TCS in Silicon Valley recruits these people even before they have started working on their ideas and gives them the platform and resources to turn the idea into a business.

This sounds great because it means the people with the ideas get the backing, and the business know-how, they need and TCS picks up new technology that will be more expensive further down the line when it is a start-up company.

But is there a risk that this might prevent the ideas developing independently and actually quash innovation?

I suppose when all is said and done the entrepreneur wants money and advice, which TCS has.

Let me know your thought because I am planning to write an analysis about this in January.

The state of IT outsourcing in 2013 and beyond

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It's that time of year again. A time to reflect and predict. I am always looking for guest blog posts for this blog so if you have any predictions for IT outsourcing next year, send them to me at kflinders@techtarget.com.
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Here is a guest blog from ISG's head in Northern Europe, John Keppel. He writes this overview of the 2013 outsourcing market and contract activity, and shared his predictions for 2014.

IT outsourcing Review of 2013 and 2014 Outlook

By John Keppel, partner and president, ISG North Europe

"Following a fairly solid 2012 performance, the European outsourcing market spent much of 2013 in a state of flux. The first half of the year experienced relatively low levels of activity, but as confidence began to rise, more deals were awarded, resulting in an outstanding performance in the most recent third quarter.
 
Sourcing trends
One of the most interesting trends of this year has been the rise in small outsourcing deals, which are having an increasingly substantial effect on the market.
These smaller deals consistently accounted for more than half of the total ACV signed in each quarter through 2013. To illustrate, in the third quarter, deals in our lower band accounted for €2.6 billion of the $4.6 billion total ACV awarded.
 
The 323 deals in the under €40 million category awarded in the third quarter marked an increase in volume of one-third year-on-year.

Big deals still matter though, with the third quarter seeing 10 mega-relationships awarded globally. Since 2010, only three other quarters have exceeded that 10 mega-relationship mark. As a business we have noticed more and more mega-relationships are due to restructurings, and of the 10 we saw this quarter, nine were restructuring. That represents a high we've never seen before. Fifteen of the 23 mega-relationships awarded so far this year, a full 65%, are restructurings, compared to about 40% to 45% in prior years.
 
ITO
The third quarter of 2013 saw a marked increase in the number of IT Outsourcing (ITO) contracts awarded in EMEA, reaching a record breaking 125 counts - the highest figure ever recorded by the Index and almost double the number awarded in the second quarter.
 
As a result, ACV also increased significantly - the €2.3 billion awarded was the second highest ITO ACV to be recorded in a quarter, and was up 177% over the relatively weak quarter that preceded it.
 
BPO
Business Process Outsourcing (BPO) activity remained robust in 2013, although the absence of larger deals took its toll on overall ACV. However, contract counts continued to rise in EMEA throughout the year, reaching an impressive 51 contracts in the third quarter - the highest figure ever recorded.
 
Whereas ITO has been the mainstay of organisations looking to cut costs in a challenging business climate, EMEA companies are now looking beyond it to BPO value propositions, which can deliver a more profound business change. In 2014 we expect much of the same, with BPO activity likely to continue to rise.
 
Public Sector
The Public Sector has recognised that best-of-breed providers offer specialist knowledge that can derive real value from outsourced services, value that wasn't possible with the single-provider mega-deals of the past. We're seeing real innovation in the Public Sector, and this vitality makes the public sector an exciting space to be involved in.
 
The U.K. has led the way in using outsourcing as one response to austerity measures. Yet while overall activity remains low, many European public sector organisations are starting to explore the use of outsourcing in their wider sourcing strategies and activity in some markets is slowly picking up.
 
With these programs continuing to be implemented across EMEA, the evaluation of innovative sourcing methods to achieve cost optimisation and reduce waste is likely to increase. Governments are increasingly turning to outsourcing because, despite pressure to control spending, they can't simply put infrastructure investments aside. Public sector outsourcing can help satisfy taxpayer demands for efficient, localised modern services without increasing costly bureaucracy, and this looks set to continue.
 
The forward view
Looking ahead, we expect our fourth quarter results to reveal that 2013 will finish strongly but will perhaps fall short in the region of 12- 15% compared to the full year 2012, due to the protracted global weakness of the first half remaining a drag on annual contracting values.
 
Turning to 2014, we see strong public and private sector activity in the pipeline, and with the majority of organisations having an increased focus on efficiency, strong governance and value for money in their outsourced functions, we expect the trends of multi-sourcing and the SIAM (Service Integration and Management) model to accelerate in the coming months."