Transformational Off Shoring Why And How
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Transformational Offshoring: Why and How? Prashant Halari
Patni White Paper
COPYRIGHT Copyright © Patni Computer Systems Ltd. All Rights Reserved. September 2005 Restricted Rights This document may not, in whole or in part, be copied photocopied, reproduced, translated, or reduced to any electronic medium or machine readable form without prior consent, in writing, from Patni Computer Systems Ltd. Information in this document is subject to change without notice and does not represent a commitment on the part of Patni. This document is provided "as is" without warranty of any kind including without limitation, any warranty of merchantability or fitness for a particular purpose. Further, Patni does not warrant, guarantee, or make any representations regarding the use, or the results of the use, of the written material in terms of correctness, accuracy, reliability, or otherwise. All other brand and product names are trademarks of their respective companies.
Patni Computer Systems Limited India Akruti, MIDC Cross Road No.21 Andheri (E), Mumbai 400 093 Tel: +91 22 5693 0205 Fax: +91 22 5693 0211
North America One Broadway Cambridge MA 02142 Tel: +1 617-914-8000 Fax: +1 617-914-8200
UK & Europe Japan Vistacentre, 50 Salisbury Road 4F, Yamaguchikensetsu No.1 Bldg, 2-14-8, Hounslow, Middlesex, UK. TW4 6JQ Akasaka, Minato-ku, Tokyo 107-0052, Japan Tel: +44 20 8538 0120 Tel: +81-3-5549-2200 Fax: +44 20 8538 0276 Fax: +81-3-5549-2261
Table of Contents
Introduction ...............................................................................................................................................1 Transformational Offshoring: Why and How?.............................................................................................2 Key Benefits of Offshoring .........................................................................................................................2 Need for Transformation............................................................................................................................3 Offshore Engagment Process and Various Engagement Models .....................................................................5 Captive Unit ....................................................................................................................................... 6 Build-Operate-Transfer....................................................................................................................... 7 Offshore Development Center ............................................................................................................ 8 Joint Ventures .................................................................................................................................... 9 Selecting an Appropriate Engagement Model and Potential Offshorizables ..............................................10 Conclusion ..............................................................................................................................................11 About the Author .....................................................................................................................................12 About Patni..............................................................................................................................................12
Copyright Patni Computer Systems Ltd., 2005. All rights reserved.
INTRODUCTION Over the years, organizations have adopted offshore options like Selective Offshoring and/or an Offshore Development Center (ODC) with a focus on single/multi-vendor approach. Todate, the predominant drivers for offshorization have been cost, quality, easier access to technical talent, faster ramp-up and accelerated delivery. However, any offshore strategy formulated around achieving these benefits has been adding little or nothing when it comes to ensuring the alignment of IT with business. This is one of the key challenges faced by CIOs today. Forrester estimates that 80% of IT budgets go into maintaining existing applications leaving only 20% for new projects. Economic and regulatory frameworks over the last few years have resulted in several challenges for organizations. Such dynamic considerations have made it imperative for them to assess the financial viability of their IT portfolio for effectively addressing the change in business scenario as well as optimizing ROI on existing applications. With most organizations’ applications being supported offshore, Business-IT alignment becomes an important part of their offshore strategy. In addition, selection of an appropriate offshore engagement model also becomes a key issue as organizations traverse on the Transformational Offshoring Path. Traditionally, ODC has been widely accepted as an offshore engagement model. Though ODCs have been successful earlier, now organizations and offshore vendors need to critically evaluate other engagement models (BOT/JV/Captive) as a part of their evaluation process. Transformational Offshoring will involve significant change management at both the organization and offshore vendor level. The offshore vendor should have the necessary capability to understand an organization’s business process and methodologies to implement the Transformation strategy from offshore in an effective manner. Transformational Offshoring requires a certain level of maturity in an organization’s business processes. If an organization’s business processes are fragmented and not clearly defined, it will be difficult to transition them to offshore and expect the transformation over a period of time. Transformational Offshoring requires the definition of adequate metrics to measure the performance of application portfolio and overall offshore strategy. Effective Transformational Offshoring strategy is driven by:
§ §
Selection of an appropriate Offshore Engagement Model Identification of transformational application candidates in the early stage of offshore planning process
§
Identification of metrics (including ROI, Application-value) to be monitored throughout the relationship
§ §
Addressing change management Developing an appropriate transition and transformation roadmap.
This Paper discusses some of the biggest challenges faced by organizations in aligning their applications to the business. The role of an offshore strategy in transforming those applications so as to align them with their business while they are offshore is a central theme of this Paper. The Paper also focuses on the methodology involved in defining Transformational Offshoring strategy with a list of parameters that needs to be evaluated
Copyright Patni Computer Systems Ltd., 2005. All rights reserved.
1
to arrive at an appropriate Offshorization and Transformation recommendation, for each application in their IT portfolio.
TRANSFORMATIONAL OFFSHORING : W HY AND HOW ? Ever since the dawn of the new millennium, one industry that has witnessed realignment and paradigm shifts is the global IT industry. What we are now witnessing is a much larger phenomenon of the industry settling down to a new equilibrium. From a long-term perspective, the Indian IT industry stands to gain. From a demand viewpoint, the size of the offshoring pie is increasing - larger deals are flowing offshore, and more global players have come to India to evaluate and finalize outsourcing relationships. We have seen many examples of such companies in the past years, including IBM, PeopleSoft, Accenture, among others.
KEY BENEFITS OF OFFSHORING So far the key drivers for the majority of offshore engagements have been the desire to reduce costs and improve the service quality. Using offshore locations with a lower cost base is clearly an attractive option in the search for cost reductions.
Figure 1: Benefits Offered by Offshoring
Copyright Patni Computer Systems Ltd., 2005. All rights reserved
2
As shown in Figure 1, the following are the predominant benefits of using offshore services:
§
Cost savings
§
High quality standards
§
Flexible capacity
§ §
Accelerated delivery
§
Handling of competitive pressure.
Easier access to high-end technical talent
However, customers and vendors are also increasingly advocating the benefits of improved processes and service quality as equally important reasons in the choice of an offshore location. More flexible work practices and the exploitation of different time zones can, for example, create 24-hour processes which were previously limited to certain parts of the day. Access to highly qualified and motivated staff in some locations also assists in the improvement of service quality. "They come for the price, but stay for the quality" is the mantra, which many offshore providers currently like to use.
NEED FOR TRANSFORMATION While the offshore benefits are being accepted across organizations there are certain concerns related to the aligning of the IT portfolio with the current business processes. Also, considering the fact that the applications are being supported from offshore, clients feel that there is very little or no control left over their applications. This also raises the concern as to how the applications can be aligned with the business remotely. If we look at a typical application portfolio, at one end of the spectrum there are modern applications that leverage and capitalize on the potential of the Internet, while at the other end there are traditional, close-ended, legacy business systems. In the midst of this technological diversity comes a surprising fact that more than 70% of corporate data still resides on legacy systems. The challenge that technology and business leaders have to address is the successful management and re-deployment of legacy systems to meet tomorrow’s business needs while they are offshore. In this scenario, organizations need to understand the impact of Legacy Applications to answer following application rationalization questions:
§
What legacy applications do I have?
§
How many of them are being supported from Offshore? How are they performing?
§
Which applications support my most critical business processes?
§
How do these applications support critical business processes?
§
Who are the end-users?
§
Which applications have poor data, high maintenance requirements, and high support costs?
§
What is the total cost of ownership?
§
How do applications impact the customers?
§
What redundancies exist across the application portfolio?
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3
The following are the key drivers for Application Transformation:
Figure 2: Key Drivers for Application Transformation Organizations thinking of moving away from legacy systems adopt a solution that meets strategic business needs – while simultaneously evaluating the financial viability of the espoused strategy. There are various options available to the organization when metamorphosing from legacy systems to more contemporary platforms. The four key options along with offshore leverage during each stage of application life can be summarized in the following graph:
Figure 3: Offshore Leverage during Application Life Stages As shown in the above graph, the offshore leverage during the life of an application ranges between 30% and 80%. However, a plain vanilla application offshoring strategy introduces Copyright Patni Computer Systems Ltd., 2005. All rights reserved
4
breaks in the overall strategy as application moves from one stage to other. Also this becomes as low as 0% during a stage when application is moving in the transformation or a modernization stage. This largely happens due to loss of application behavior knowledge in the previous stage and inability to assess the appropriate modernization or transformation alternative in the absence of crucial application data (like number of change requests received, application abends in the past, complexity of source code, and application knowledge).
OFFSHORE ENGAGEMENT PROCESS AND VARIOUS ENGAGEMENT MODELS A typical Offshore engagement process can be diagrammatically represented as below. As shown in this diagram it goes through three key phases:
§
Decision phase
§
Transition phase
§
Monitoring and managing phase.
Figure 4: Key Phases of an Offshore Engagement As depicted in this process, transformation planning is one of the key stages, which helps in aligning the application with current business needs. Also this alignment happens while the application has been transitioned at offshore. Transformational planning stage in turn identifies new projects (e.g. Reengineering or migration of existing application or consolidation of existing applications) that can be executed from offshore.
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There are a number of different ways of structuring an offshore arrangement for achieving the offshore benefits and IT transformation objectives. The four main ways are:
§
Captive Unit
§
Build-Operate-Transfer (BOT)
§
Joint Venture
§
Dedicated offshore development center.
CAPTIVE UNIT In the captive center model, the business sets up its own subsidiary offshore so that all assets and staff are owned by the client business. The client then sets up its own operations through hiring local staff and leveraging expatriate staff. This model has the advantage of the client retaining ownership and operational control. Captive centers will best serve clients that want to migrate core business processes offshore or technology companies that want to establish IT development, support and maintenance in a multishore structure. In general, the captive unit offers the following benefits to clients:
§
Control: Captive is an obvious choice if the company has a need to have total control over the quality, timeliness, process, security, data privacy etc. of the process in question. With a captive unit, companies will have the advantage of offshore operations without the management challenges of working with a thirdparty.
§
Risk: Captive is a strong choice if the company needs to aggressively manage and retain control over their risk profile. Many firms that are regulated tend to manage their offshore business processes in captive centers, especially for critical business areas.
§
New Markets: With business going global, and countries becoming virtual boundaries, there is an immense opportunity to leverage old investments in new markets, utilizing local expertise and talent.
§
Talent: Skilled managerial resources can be leveraged and redeployed to the various offshore locations. Business knowledge and experience with the processes adds value to the second level managers who are usually recruited from within the local marketplace where the site exists.
However there are certain issues that need to be addressed while operating the captive centers. Broadly these issues are:
§
Higher Start-up Costs: Typical investments in infrastructure, hardware, software and facility service provisioning require high initial setup costs. These costs are usually significantly higher in building a captive center when compared to outsourcing to a third party who can spread their costs and risks over a wider client base. Also, while the client has to bear all the cost as it occurs in a captive scenario, in a third party situation, the supplier can spread it over the terms of the agreement. Thus, a client will need to have a larger amount of capital available in order to invest in building a captive center.
§
Organizational Issues: From the organizational point of view, offshore captives will challenge the staffing, style, and formal and informal information systems of organizations that implement them. Specifically, human resource departments will
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need to become more adept at managing disparate work forces and cultural differences in communication and problem solving. The management will need to develop policies and practices to incorporate a more flexible approach to labor allocation. The management structure will need to support relationships with offshore operations and assure that objectives, contracts, delivery models, and measurement are aligned.
§
Process: Human interactions as well as IT systems and applications will need to enable the dynamic allocation of workflow and support quality assurance. Organizations will need to gain a level of comfort in relinquishing control over previously proprietary applications and processes while implementing capabilities that allow offshore processes to be measured and improved over time. Finally, the disciplines of program and process management must address the advantages and challenges presented when part or all of a project "moves offshore," and managers must develop and disseminate best practices for achieving project success as well as cost savings.
§
Infrastructure and Technology: Offshoring is greatly enabled by technology, tools and the availability of communications bandwidth. However, the same are also primary challenges. Replication of on-shore infrastructure is not the answer – and there is a great need to understand the needs and constraints and implement an optimized solution. Technology and bandwidth costs are a major part of the total cost of offshoring. Latency in data transmission impacts performance and should be one of the guiding principles for engineering the bandwidth and selection of technology and tools.
§
Attrition Management: Organizations which offshore through a captive unit often lack the ability to align the compensation structures with the overall industry averages because of inadequate benchmarking and a lack of understanding of the dynamics of the offshore workforce and resource management.
§
Transition Management: Transition planning and management is critical for the success of a captive. This often requires expatriates to spend significant time at the offshore location. The transition management also includes processes such as portfolio assessment, training & knowledge transfer, recruitment & staffing, benefits calculations.
BUILD-OPERATE-TRANSFER Build Operate Transfer" or "BOT" arrangements are increasingly used in establishing offshore centers, particularly in India. The client and supplier set up an arrangement, through which the supplier is contracted to establish the operation, such as the acquisition of facilities and staff, and then to provide the services for a defined period. At a point where the center and services are properly established, management and ownership is transferred to the client. Vendor who offers the solution usually makes the investments for a BOT project. The commonly used instances where BOT is used are:
§
Work that is being offshored by an organization is core in nature and therefore while in the initial stages the work is done in a set-up situation by a vendor, thereafter it is pulled back by the organization into its own fold.
§
The organization wishes to commence business in a country where it does not have any base at all. The organization would look at getting a local company to
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7
de-risk its venture into the new country. The organization would tie up with a local service provider to set up the project, run it for some time till the project stabilizes, and then take it over from the vendor who has set up the project. Typically a BOT offers the following benefits to the client:
§
Infrastructure: In the BOT model, the incubator starts the relationship with the incubated in the ODC mode, earmarking exclusive infrastructure resources such as bandwidth, networks, systems and office space. It enters into a contract with the incubated client for a pre-defined period with clearly labeled Service Level Agreements.
§
Resource Pool: The BOT model provides seed resources across levels for all the key functions in the technical and support arenas for jump-starting operations, for instance, Project Managers, Project Leaders and Team Members along with personnel from Quality, Corporate Communications, Human Resources, Finance, Administration and System Support are provided by the incubator to the incubated. It also undertakes project execution and management, and ensures that the deliverables are on time and of the highest quality.
In short, the BOT model provides an opportunity to capture market share rapidly or address a crying need in a short period of time, the advantage of not getting distracted while setting up a new venture and being able to continue to focus on the organization’s core competency, possibility of accessing best in class skill-sets, conservation of capital expenditure, cost effective outsourcing during the initial period of build out and operating, and reduced operating risk and knowledge retention when related to sensitive processes. The main challenge in the BOT model is to do with transfer of employees from vendor to customer's entity in the transfer stage, the transfer price and fair return to the vendor for the efforts in the Build and Operate stages.
OFFSHORE DEVELOPMENT CENTER An Offshore Development Center (ODC) is a dedicated development center, located outside the client’s premises, solely engaged in developing, testing and deploying software solutions and applications, most often in a country outside the client’s country. The purpose behind an ODC is to take advantages of the technological know-how, cost advantages or the reduced time-to-market. The initial phase of setting up an ODC requires accomplishing the infrastructure set up for the development facility, which would include setting up of the physical infrastructure such as office equipment and development environment, besides the assignment of professionals with relevant skill sets to the ODC based on the requirements of the client. The next phase is very critical to the long-term functioning of the ODC. This phase deals with setting up of a functional process, which will be implemented and improved upon through out the life of the ODC. A detailed discussion is held with the client to decide on the process to set up the communication protocol, operational efficiency/reporting structure, specific roles and responsibilities assigned to specific personnel, project delivery methodology, and the escalation procedures. The process of setting-up an ODC in India has matured and Indian vendors as well as clients have been advocating for ODC as a
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means to leverage offshore destination. As a part of the process, the following issues are also being addressed in a structured way:
§
Protection of IP
§
Exit policy
§
Security and backup policies
§ §
Ramp up and ramp down
§
Attrition issues
§
Cultural Integration
§
Transition/skill orientation
§
Change management system.
Risk management plan
JOINT V ENTURES A Joint Venture is a model wherein a client and offshore supplier may set up a joint venture vehicle, which will predominantly service the client's business. The offshore supplier brings the local expertise and service skills while the client brings its knowledge of its existing business function and maintains greater management control. Both the client and the JV partner share the risk and the revenues resulting from the operations. In general JV offers following benefits to the client:
§
Easy transition of assets and staff and high service continuity during the deal and transition phase.
§
The client has an influence over the resources, organization and strategies of the Joint Venture and also has an option for buying the company so established.
§
Possibility of selling service and solutions in the open market and hence high revenue creation.
However, due to the complexity of the engagement and the level of commitment required from the client side as well the JV Partner, the following challenges are faced:
§
The negotiations at times can become sticky since both client and vendor control the joint venture.
§
Knowledge transfer from vendor to joint venture partner is limited.
§
Consolidation and economies of scale are limited. Cost reductions are seriously limited.
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SELECTING AN APPROPRIATE ENGAGEMENT MODEL AND POTENTIAL OFFSHORIZABLES The selection of an appropriate Engagement model and devising an effective transformation strategy is the key to a successful relationship. Broadly, organizations and vendors should evaluate the following parameters to come-up with an appropriate transformational offshoring roadmap and potential offshore candidates:
§
Turn around time required: Low turn around time requires high sense of ownership. The timely delivery can have long-term business implications.
§
Requirement clarity and stability: High requirement clarity reduces dependency on own resources. It also helps in ease of transformational offshoring.
§
Level of user interaction required: High user interaction requires faster and robust access to information. Cultural diversity is inversely proportional to the level of interaction required.
§
Application complexity: Highly complex applications require long-term planning, skilled resources and high costs.
§
Degree to which application is aligned with current and future business needs: High alignment of applications with business processes require low technological and cultural gap.
§
Nature and number of resources: Availability of adequate resources with right skill-sets reduces the dependency. It also helps in executing short-term projects.
§
ROI: Cost of initiating and managing the relationship in a given Offshore engagement model and benefits delivered (in the form of cost arbitrage, better quality application leading to lower maintenance cost, better aligned application and productivity benefits) will be key to a final decision to offshore in a particular engagement model.
As shown in the following diagram, selection of an offshore engagement model would depend on two key parameters: Level of control required and Size of operations.
Figure 5: Level of Control and Size of Operations of Offshore Engagement Copyright Patni Computer Systems Ltd., 2005. All rights reserved
10
In addition, there are other parameters like: knowledge about geography, required process maturity, strategic needs and long-term business focus, economical feasibility that will drive the decision to select a particular offshore engagement model.
CONCLUSION A study by Mckinsey Global Institute shows that the potential cost savings from a typical offshoring engagement will be in the range of 45 to 55%. Offshoring with a focus on transformation will add another 15 to 22% in the total cost savings. Setting key objectives for an offshorization strategy and performing a detailed analysis of business and IT practices, IT portfolio and need for business/IT alignment will help in identifying an effective offshore engagement model and potential list of offshore candidates. Based on these key objectives, organizations should assign weights to each evaluation parameter and identify the fitment of a particular offshore engagement model in their scenario. This will result into a best-fit offshore engagement model and potential offshore candidates, based on which a detailed cost-benefit analysis should be performed and a final decision should be taken. Subsequent to this, the client and offshore vendor can focus on application and knowledge transition and ongoing management of relationship with the help of a structured Vendor Management Team (VMT) or Offshore Program Management Office (PMO). Organizations deciding to go offshore should also plan for change management in the internal IT department and the way IT and business (end-users) interact with each other.
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ABOUT THE AUTHOR Prashant Halari is a Technical Architect working for Patni Computer Systems Limited, India with key focus on Application Offshorization, Application Modernization and Application Portfolio Management. He has a core research background from IIM, Ahmedabad, with key focus on “Implementing IT Strategy in an Organization”. He has been instrumental in developing Assessment Methodologies to map business requirements/limitations to appropriate BI and EI frameworks. He has also developed an ROI model to compute returns for investment made in technology implementations like EI and BI. At Patni, he leads the Offshore Advisory Center and is involved in developing guidelines for setting up a transformational offshoring engagement model. He has also developed a ROI framework, which helps clients in estimating the returns on an Offshorization initiative. Prashant even co-authored a book titled Migrating to .NET: A Pragmatic Path to Visual Basic .NET, Visual C++ .NET, and ASP.NET for Prentice Hall PTR, USA. (ISBN-0-13100962-1).
ABOUT PATNI Patni Computer Systems Limited (BSE: PATNI COMPUT, NSE: PATNI) is a global IT Services provider servicing Global 2000 clients through its industry practices in Insurance, Financial Services, Manufacturing, Telecom, Retail, Media & Entertainment, Energy & Utilities, and Logistics & Transportation; and through its technology practices. With an employee strength of over 10,000; multiple offshore development facilities across eight cities; and 24 international offices across the Americas, Europe and Asia-Pacific; Patni has registered revenues of US$ 326.6 million for the year 2004. Patni's technology focus spans enterprise applications, embedded technologies, e-business, business intelligence & data warehousing, and RFID. Our service offerings include: application development, application management, business process outsourcing, infrastructure management, product engineering, verification & validation, process consulting, engineering services, and IT governance. Committed to quality, Patni adds value to its client's businesses through well-established and structured methodologies, tools and techniques. Patni is an ISO 9001:2000 certified and SEI-CMMI Level 5 organization, assessed enterprise wide at P-CMM Level 3. In keeping with its focus on continuous process improvements, Patni adopts Six Sigma practices as an integral part of its quality and process frameworks.
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Patni White Paper
COPYRIGHT Copyright © Patni Computer Systems Ltd. All Rights Reserved. September 2005 Restricted Rights This document may not, in whole or in part, be copied photocopied, reproduced, translated, or reduced to any electronic medium or machine readable form without prior consent, in writing, from Patni Computer Systems Ltd. Information in this document is subject to change without notice and does not represent a commitment on the part of Patni. This document is provided "as is" without warranty of any kind including without limitation, any warranty of merchantability or fitness for a particular purpose. Further, Patni does not warrant, guarantee, or make any representations regarding the use, or the results of the use, of the written material in terms of correctness, accuracy, reliability, or otherwise. All other brand and product names are trademarks of their respective companies.
Patni Computer Systems Limited India Akruti, MIDC Cross Road No.21 Andheri (E), Mumbai 400 093 Tel: +91 22 5693 0205 Fax: +91 22 5693 0211
North America One Broadway Cambridge MA 02142 Tel: +1 617-914-8000 Fax: +1 617-914-8200
UK & Europe Japan Vistacentre, 50 Salisbury Road 4F, Yamaguchikensetsu No.1 Bldg, 2-14-8, Hounslow, Middlesex, UK. TW4 6JQ Akasaka, Minato-ku, Tokyo 107-0052, Japan Tel: +44 20 8538 0120 Tel: +81-3-5549-2200 Fax: +44 20 8538 0276 Fax: +81-3-5549-2261
Table of Contents
Introduction ...............................................................................................................................................1 Transformational Offshoring: Why and How?.............................................................................................2 Key Benefits of Offshoring .........................................................................................................................2 Need for Transformation............................................................................................................................3 Offshore Engagment Process and Various Engagement Models .....................................................................5 Captive Unit ....................................................................................................................................... 6 Build-Operate-Transfer....................................................................................................................... 7 Offshore Development Center ............................................................................................................ 8 Joint Ventures .................................................................................................................................... 9 Selecting an Appropriate Engagement Model and Potential Offshorizables ..............................................10 Conclusion ..............................................................................................................................................11 About the Author .....................................................................................................................................12 About Patni..............................................................................................................................................12
Copyright Patni Computer Systems Ltd., 2005. All rights reserved.
INTRODUCTION Over the years, organizations have adopted offshore options like Selective Offshoring and/or an Offshore Development Center (ODC) with a focus on single/multi-vendor approach. Todate, the predominant drivers for offshorization have been cost, quality, easier access to technical talent, faster ramp-up and accelerated delivery. However, any offshore strategy formulated around achieving these benefits has been adding little or nothing when it comes to ensuring the alignment of IT with business. This is one of the key challenges faced by CIOs today. Forrester estimates that 80% of IT budgets go into maintaining existing applications leaving only 20% for new projects. Economic and regulatory frameworks over the last few years have resulted in several challenges for organizations. Such dynamic considerations have made it imperative for them to assess the financial viability of their IT portfolio for effectively addressing the change in business scenario as well as optimizing ROI on existing applications. With most organizations’ applications being supported offshore, Business-IT alignment becomes an important part of their offshore strategy. In addition, selection of an appropriate offshore engagement model also becomes a key issue as organizations traverse on the Transformational Offshoring Path. Traditionally, ODC has been widely accepted as an offshore engagement model. Though ODCs have been successful earlier, now organizations and offshore vendors need to critically evaluate other engagement models (BOT/JV/Captive) as a part of their evaluation process. Transformational Offshoring will involve significant change management at both the organization and offshore vendor level. The offshore vendor should have the necessary capability to understand an organization’s business process and methodologies to implement the Transformation strategy from offshore in an effective manner. Transformational Offshoring requires a certain level of maturity in an organization’s business processes. If an organization’s business processes are fragmented and not clearly defined, it will be difficult to transition them to offshore and expect the transformation over a period of time. Transformational Offshoring requires the definition of adequate metrics to measure the performance of application portfolio and overall offshore strategy. Effective Transformational Offshoring strategy is driven by:
§ §
Selection of an appropriate Offshore Engagement Model Identification of transformational application candidates in the early stage of offshore planning process
§
Identification of metrics (including ROI, Application-value) to be monitored throughout the relationship
§ §
Addressing change management Developing an appropriate transition and transformation roadmap.
This Paper discusses some of the biggest challenges faced by organizations in aligning their applications to the business. The role of an offshore strategy in transforming those applications so as to align them with their business while they are offshore is a central theme of this Paper. The Paper also focuses on the methodology involved in defining Transformational Offshoring strategy with a list of parameters that needs to be evaluated
Copyright Patni Computer Systems Ltd., 2005. All rights reserved.
1
to arrive at an appropriate Offshorization and Transformation recommendation, for each application in their IT portfolio.
TRANSFORMATIONAL OFFSHORING : W HY AND HOW ? Ever since the dawn of the new millennium, one industry that has witnessed realignment and paradigm shifts is the global IT industry. What we are now witnessing is a much larger phenomenon of the industry settling down to a new equilibrium. From a long-term perspective, the Indian IT industry stands to gain. From a demand viewpoint, the size of the offshoring pie is increasing - larger deals are flowing offshore, and more global players have come to India to evaluate and finalize outsourcing relationships. We have seen many examples of such companies in the past years, including IBM, PeopleSoft, Accenture, among others.
KEY BENEFITS OF OFFSHORING So far the key drivers for the majority of offshore engagements have been the desire to reduce costs and improve the service quality. Using offshore locations with a lower cost base is clearly an attractive option in the search for cost reductions.
Figure 1: Benefits Offered by Offshoring
Copyright Patni Computer Systems Ltd., 2005. All rights reserved
2
As shown in Figure 1, the following are the predominant benefits of using offshore services:
§
Cost savings
§
High quality standards
§
Flexible capacity
§ §
Accelerated delivery
§
Handling of competitive pressure.
Easier access to high-end technical talent
However, customers and vendors are also increasingly advocating the benefits of improved processes and service quality as equally important reasons in the choice of an offshore location. More flexible work practices and the exploitation of different time zones can, for example, create 24-hour processes which were previously limited to certain parts of the day. Access to highly qualified and motivated staff in some locations also assists in the improvement of service quality. "They come for the price, but stay for the quality" is the mantra, which many offshore providers currently like to use.
NEED FOR TRANSFORMATION While the offshore benefits are being accepted across organizations there are certain concerns related to the aligning of the IT portfolio with the current business processes. Also, considering the fact that the applications are being supported from offshore, clients feel that there is very little or no control left over their applications. This also raises the concern as to how the applications can be aligned with the business remotely. If we look at a typical application portfolio, at one end of the spectrum there are modern applications that leverage and capitalize on the potential of the Internet, while at the other end there are traditional, close-ended, legacy business systems. In the midst of this technological diversity comes a surprising fact that more than 70% of corporate data still resides on legacy systems. The challenge that technology and business leaders have to address is the successful management and re-deployment of legacy systems to meet tomorrow’s business needs while they are offshore. In this scenario, organizations need to understand the impact of Legacy Applications to answer following application rationalization questions:
§
What legacy applications do I have?
§
How many of them are being supported from Offshore? How are they performing?
§
Which applications support my most critical business processes?
§
How do these applications support critical business processes?
§
Who are the end-users?
§
Which applications have poor data, high maintenance requirements, and high support costs?
§
What is the total cost of ownership?
§
How do applications impact the customers?
§
What redundancies exist across the application portfolio?
Copyright Patni Computer Systems Ltd., 2005. All rights reserved
3
The following are the key drivers for Application Transformation:
Figure 2: Key Drivers for Application Transformation Organizations thinking of moving away from legacy systems adopt a solution that meets strategic business needs – while simultaneously evaluating the financial viability of the espoused strategy. There are various options available to the organization when metamorphosing from legacy systems to more contemporary platforms. The four key options along with offshore leverage during each stage of application life can be summarized in the following graph:
Figure 3: Offshore Leverage during Application Life Stages As shown in the above graph, the offshore leverage during the life of an application ranges between 30% and 80%. However, a plain vanilla application offshoring strategy introduces Copyright Patni Computer Systems Ltd., 2005. All rights reserved
4
breaks in the overall strategy as application moves from one stage to other. Also this becomes as low as 0% during a stage when application is moving in the transformation or a modernization stage. This largely happens due to loss of application behavior knowledge in the previous stage and inability to assess the appropriate modernization or transformation alternative in the absence of crucial application data (like number of change requests received, application abends in the past, complexity of source code, and application knowledge).
OFFSHORE ENGAGEMENT PROCESS AND VARIOUS ENGAGEMENT MODELS A typical Offshore engagement process can be diagrammatically represented as below. As shown in this diagram it goes through three key phases:
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Decision phase
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Transition phase
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Monitoring and managing phase.
Figure 4: Key Phases of an Offshore Engagement As depicted in this process, transformation planning is one of the key stages, which helps in aligning the application with current business needs. Also this alignment happens while the application has been transitioned at offshore. Transformational planning stage in turn identifies new projects (e.g. Reengineering or migration of existing application or consolidation of existing applications) that can be executed from offshore.
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There are a number of different ways of structuring an offshore arrangement for achieving the offshore benefits and IT transformation objectives. The four main ways are:
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Captive Unit
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Build-Operate-Transfer (BOT)
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Joint Venture
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Dedicated offshore development center.
CAPTIVE UNIT In the captive center model, the business sets up its own subsidiary offshore so that all assets and staff are owned by the client business. The client then sets up its own operations through hiring local staff and leveraging expatriate staff. This model has the advantage of the client retaining ownership and operational control. Captive centers will best serve clients that want to migrate core business processes offshore or technology companies that want to establish IT development, support and maintenance in a multishore structure. In general, the captive unit offers the following benefits to clients:
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Control: Captive is an obvious choice if the company has a need to have total control over the quality, timeliness, process, security, data privacy etc. of the process in question. With a captive unit, companies will have the advantage of offshore operations without the management challenges of working with a thirdparty.
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Risk: Captive is a strong choice if the company needs to aggressively manage and retain control over their risk profile. Many firms that are regulated tend to manage their offshore business processes in captive centers, especially for critical business areas.
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New Markets: With business going global, and countries becoming virtual boundaries, there is an immense opportunity to leverage old investments in new markets, utilizing local expertise and talent.
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Talent: Skilled managerial resources can be leveraged and redeployed to the various offshore locations. Business knowledge and experience with the processes adds value to the second level managers who are usually recruited from within the local marketplace where the site exists.
However there are certain issues that need to be addressed while operating the captive centers. Broadly these issues are:
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Higher Start-up Costs: Typical investments in infrastructure, hardware, software and facility service provisioning require high initial setup costs. These costs are usually significantly higher in building a captive center when compared to outsourcing to a third party who can spread their costs and risks over a wider client base. Also, while the client has to bear all the cost as it occurs in a captive scenario, in a third party situation, the supplier can spread it over the terms of the agreement. Thus, a client will need to have a larger amount of capital available in order to invest in building a captive center.
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Organizational Issues: From the organizational point of view, offshore captives will challenge the staffing, style, and formal and informal information systems of organizations that implement them. Specifically, human resource departments will
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need to become more adept at managing disparate work forces and cultural differences in communication and problem solving. The management will need to develop policies and practices to incorporate a more flexible approach to labor allocation. The management structure will need to support relationships with offshore operations and assure that objectives, contracts, delivery models, and measurement are aligned.
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Process: Human interactions as well as IT systems and applications will need to enable the dynamic allocation of workflow and support quality assurance. Organizations will need to gain a level of comfort in relinquishing control over previously proprietary applications and processes while implementing capabilities that allow offshore processes to be measured and improved over time. Finally, the disciplines of program and process management must address the advantages and challenges presented when part or all of a project "moves offshore," and managers must develop and disseminate best practices for achieving project success as well as cost savings.
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Infrastructure and Technology: Offshoring is greatly enabled by technology, tools and the availability of communications bandwidth. However, the same are also primary challenges. Replication of on-shore infrastructure is not the answer – and there is a great need to understand the needs and constraints and implement an optimized solution. Technology and bandwidth costs are a major part of the total cost of offshoring. Latency in data transmission impacts performance and should be one of the guiding principles for engineering the bandwidth and selection of technology and tools.
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Attrition Management: Organizations which offshore through a captive unit often lack the ability to align the compensation structures with the overall industry averages because of inadequate benchmarking and a lack of understanding of the dynamics of the offshore workforce and resource management.
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Transition Management: Transition planning and management is critical for the success of a captive. This often requires expatriates to spend significant time at the offshore location. The transition management also includes processes such as portfolio assessment, training & knowledge transfer, recruitment & staffing, benefits calculations.
BUILD-OPERATE-TRANSFER Build Operate Transfer" or "BOT" arrangements are increasingly used in establishing offshore centers, particularly in India. The client and supplier set up an arrangement, through which the supplier is contracted to establish the operation, such as the acquisition of facilities and staff, and then to provide the services for a defined period. At a point where the center and services are properly established, management and ownership is transferred to the client. Vendor who offers the solution usually makes the investments for a BOT project. The commonly used instances where BOT is used are:
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Work that is being offshored by an organization is core in nature and therefore while in the initial stages the work is done in a set-up situation by a vendor, thereafter it is pulled back by the organization into its own fold.
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The organization wishes to commence business in a country where it does not have any base at all. The organization would look at getting a local company to
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de-risk its venture into the new country. The organization would tie up with a local service provider to set up the project, run it for some time till the project stabilizes, and then take it over from the vendor who has set up the project. Typically a BOT offers the following benefits to the client:
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Infrastructure: In the BOT model, the incubator starts the relationship with the incubated in the ODC mode, earmarking exclusive infrastructure resources such as bandwidth, networks, systems and office space. It enters into a contract with the incubated client for a pre-defined period with clearly labeled Service Level Agreements.
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Resource Pool: The BOT model provides seed resources across levels for all the key functions in the technical and support arenas for jump-starting operations, for instance, Project Managers, Project Leaders and Team Members along with personnel from Quality, Corporate Communications, Human Resources, Finance, Administration and System Support are provided by the incubator to the incubated. It also undertakes project execution and management, and ensures that the deliverables are on time and of the highest quality.
In short, the BOT model provides an opportunity to capture market share rapidly or address a crying need in a short period of time, the advantage of not getting distracted while setting up a new venture and being able to continue to focus on the organization’s core competency, possibility of accessing best in class skill-sets, conservation of capital expenditure, cost effective outsourcing during the initial period of build out and operating, and reduced operating risk and knowledge retention when related to sensitive processes. The main challenge in the BOT model is to do with transfer of employees from vendor to customer's entity in the transfer stage, the transfer price and fair return to the vendor for the efforts in the Build and Operate stages.
OFFSHORE DEVELOPMENT CENTER An Offshore Development Center (ODC) is a dedicated development center, located outside the client’s premises, solely engaged in developing, testing and deploying software solutions and applications, most often in a country outside the client’s country. The purpose behind an ODC is to take advantages of the technological know-how, cost advantages or the reduced time-to-market. The initial phase of setting up an ODC requires accomplishing the infrastructure set up for the development facility, which would include setting up of the physical infrastructure such as office equipment and development environment, besides the assignment of professionals with relevant skill sets to the ODC based on the requirements of the client. The next phase is very critical to the long-term functioning of the ODC. This phase deals with setting up of a functional process, which will be implemented and improved upon through out the life of the ODC. A detailed discussion is held with the client to decide on the process to set up the communication protocol, operational efficiency/reporting structure, specific roles and responsibilities assigned to specific personnel, project delivery methodology, and the escalation procedures. The process of setting-up an ODC in India has matured and Indian vendors as well as clients have been advocating for ODC as a
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means to leverage offshore destination. As a part of the process, the following issues are also being addressed in a structured way:
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Protection of IP
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Exit policy
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Security and backup policies
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Ramp up and ramp down
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Attrition issues
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Cultural Integration
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Transition/skill orientation
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Change management system.
Risk management plan
JOINT V ENTURES A Joint Venture is a model wherein a client and offshore supplier may set up a joint venture vehicle, which will predominantly service the client's business. The offshore supplier brings the local expertise and service skills while the client brings its knowledge of its existing business function and maintains greater management control. Both the client and the JV partner share the risk and the revenues resulting from the operations. In general JV offers following benefits to the client:
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Easy transition of assets and staff and high service continuity during the deal and transition phase.
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The client has an influence over the resources, organization and strategies of the Joint Venture and also has an option for buying the company so established.
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Possibility of selling service and solutions in the open market and hence high revenue creation.
However, due to the complexity of the engagement and the level of commitment required from the client side as well the JV Partner, the following challenges are faced:
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The negotiations at times can become sticky since both client and vendor control the joint venture.
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Knowledge transfer from vendor to joint venture partner is limited.
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Consolidation and economies of scale are limited. Cost reductions are seriously limited.
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SELECTING AN APPROPRIATE ENGAGEMENT MODEL AND POTENTIAL OFFSHORIZABLES The selection of an appropriate Engagement model and devising an effective transformation strategy is the key to a successful relationship. Broadly, organizations and vendors should evaluate the following parameters to come-up with an appropriate transformational offshoring roadmap and potential offshore candidates:
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Turn around time required: Low turn around time requires high sense of ownership. The timely delivery can have long-term business implications.
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Requirement clarity and stability: High requirement clarity reduces dependency on own resources. It also helps in ease of transformational offshoring.
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Level of user interaction required: High user interaction requires faster and robust access to information. Cultural diversity is inversely proportional to the level of interaction required.
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Application complexity: Highly complex applications require long-term planning, skilled resources and high costs.
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Degree to which application is aligned with current and future business needs: High alignment of applications with business processes require low technological and cultural gap.
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Nature and number of resources: Availability of adequate resources with right skill-sets reduces the dependency. It also helps in executing short-term projects.
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ROI: Cost of initiating and managing the relationship in a given Offshore engagement model and benefits delivered (in the form of cost arbitrage, better quality application leading to lower maintenance cost, better aligned application and productivity benefits) will be key to a final decision to offshore in a particular engagement model.
As shown in the following diagram, selection of an offshore engagement model would depend on two key parameters: Level of control required and Size of operations.
Figure 5: Level of Control and Size of Operations of Offshore Engagement Copyright Patni Computer Systems Ltd., 2005. All rights reserved
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In addition, there are other parameters like: knowledge about geography, required process maturity, strategic needs and long-term business focus, economical feasibility that will drive the decision to select a particular offshore engagement model.
CONCLUSION A study by Mckinsey Global Institute shows that the potential cost savings from a typical offshoring engagement will be in the range of 45 to 55%. Offshoring with a focus on transformation will add another 15 to 22% in the total cost savings. Setting key objectives for an offshorization strategy and performing a detailed analysis of business and IT practices, IT portfolio and need for business/IT alignment will help in identifying an effective offshore engagement model and potential list of offshore candidates. Based on these key objectives, organizations should assign weights to each evaluation parameter and identify the fitment of a particular offshore engagement model in their scenario. This will result into a best-fit offshore engagement model and potential offshore candidates, based on which a detailed cost-benefit analysis should be performed and a final decision should be taken. Subsequent to this, the client and offshore vendor can focus on application and knowledge transition and ongoing management of relationship with the help of a structured Vendor Management Team (VMT) or Offshore Program Management Office (PMO). Organizations deciding to go offshore should also plan for change management in the internal IT department and the way IT and business (end-users) interact with each other.
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ABOUT THE AUTHOR Prashant Halari is a Technical Architect working for Patni Computer Systems Limited, India with key focus on Application Offshorization, Application Modernization and Application Portfolio Management. He has a core research background from IIM, Ahmedabad, with key focus on “Implementing IT Strategy in an Organization”. He has been instrumental in developing Assessment Methodologies to map business requirements/limitations to appropriate BI and EI frameworks. He has also developed an ROI model to compute returns for investment made in technology implementations like EI and BI. At Patni, he leads the Offshore Advisory Center and is involved in developing guidelines for setting up a transformational offshoring engagement model. He has also developed a ROI framework, which helps clients in estimating the returns on an Offshorization initiative. Prashant even co-authored a book titled Migrating to .NET: A Pragmatic Path to Visual Basic .NET, Visual C++ .NET, and ASP.NET for Prentice Hall PTR, USA. (ISBN-0-13100962-1).
ABOUT PATNI Patni Computer Systems Limited (BSE: PATNI COMPUT, NSE: PATNI) is a global IT Services provider servicing Global 2000 clients through its industry practices in Insurance, Financial Services, Manufacturing, Telecom, Retail, Media & Entertainment, Energy & Utilities, and Logistics & Transportation; and through its technology practices. With an employee strength of over 10,000; multiple offshore development facilities across eight cities; and 24 international offices across the Americas, Europe and Asia-Pacific; Patni has registered revenues of US$ 326.6 million for the year 2004. Patni's technology focus spans enterprise applications, embedded technologies, e-business, business intelligence & data warehousing, and RFID. Our service offerings include: application development, application management, business process outsourcing, infrastructure management, product engineering, verification & validation, process consulting, engineering services, and IT governance. Committed to quality, Patni adds value to its client's businesses through well-established and structured methodologies, tools and techniques. Patni is an ISO 9001:2000 certified and SEI-CMMI Level 5 organization, assessed enterprise wide at P-CMM Level 3. In keeping with its focus on continuous process improvements, Patni adopts Six Sigma practices as an integral part of its quality and process frameworks.
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