India Inc. outsources IT infrastructure to specialists

ABB India set the ball rolling when it outsourced its entire IT infrastructure to IBM some years back. Today this trend is snowballing into a mega trend as specialist firms are bagging key IT infrastructure projects from the likes of ING Vysya Bank, Bharti Tele-Ventures, Bank of India, Dabur and IDBI, says Akhtar Pasha

Managed service providers need at least three years to give sufficient inputs for process re-engineering to customers, says Tiger Ramesh

Indian CIOs are contemplating outsourcing every IT function including those that were considered too vital and proprietary to be trusted to a third party in the not so distant past. The list of applications runs the gamut encompassing everything from databases, applications, networks, security and even storage and disaster recovery.

The business of IT infrastructure outsourcing began as a maintenance and support model that made sense in those days as enterprises largely dealt with static information. As business rules changed, market pressures have driven enterprises to start focusing upon what they do best.

Jumbo deals

The first phase of mega IT outsourcing deals that happened in the past six months, accounted for a cumulative deal size of over $2 billion. These long-term contracts have a tenure of five to ten years. IBM notched up the largest of these deals when it signed up Bharati Tele-Ventures for a ten-year contract worth $750 million. HP bagged a $150 million deal from Bank of India (BoI) for the same tenure and iGate won a $20 million, five-year deal from ING Vysya Bank. Accenture is the ten-year outsourcing partner of Dabur while Microland has contracts from IDBI Bank and Nirvana Business Solutions.

Industry pundits say that this market is growing at a CAGR of 30 percent and is expected to reach $800 million (per annum) by 2007.

Ravindra Datar, principal analyst, IT Services (India) and BPO (Asia Pacific), Gartner India, says, “Large enterprises are looking for long-term IT infrastructure support projects from providers as they bring best-of-breed solutions to the table. Secondly, it gets rid of complexity in managing multiple provider relationships. Customers feel that a global provider can bring in best practices and has the expertise to execute large and complex projects with a breadth of product and technology solutions.”

How does one account for the value IT brings to the business is a question confronting today’s organisations. It is fuelled by concerns about the high cost of information technology, and complicated as IT is a fundamental part of all business activity. IT is a ‘must-have’ feature of modern business, but it is also a ‘must-count’ feature of fiscal probity.

“Accounting for IT value means knowing enough about IT costs and related business performance to ensure that technology ‘dollars’ are going where they do the most good,” says Suresh Raman, vice president, Marketing, Microland.

Enterprise priorities

Providers of IT infrastructure have ‘resources on tap.’ They practically run the enterprise environment and offer complementary skills and bring tremendous value, says M S Rangaraj

Tiger Ramesh, head-BPO/BSP Operations at iGate Global Solutions asks, “Do your mission critical applications help bring in new customers? No, they don’t. Customers come to businesses because of better products, brands or customer support. What is required is to stay focused on what you are best at and outsource the rest.” Wal-Mart does not outsource the management of its supply chain because that is its core competence. Nike does not let other people decide which athlete should endorse its brand next. These firms know and hold on to what they do best and the rest is up for grabs.

Most high-level executives consider tracking and retaining customers, focusing on core competencies and business strategy the top three priorities for any business. Most CIOs say that IT infrastructure is a great enabler and a means to drive these priorities. Jean-Louis Lemaire, senior executive vice president, ING Vysya Bank, explains why it outsourced its IT needs to iGate Solutions. “We are in the process of rolling out the Finacle Core Banking System (CBS) at 220 branches across the country. The project engagement with iGate is for management of data centres, applications, operations, maintenance of hardware, software, databases, networks, transaction processing and application enhancement. Given the vast complexity of the project, we can either do banking, which is our core business, or become a specialist firm in managing IT infrastructure. We are bankers and we know banking best. IT is not our core business. It is best to focus on the core business and outsource support services to firms that focus only upon providing IT support services.”

Sanjay Sharma, head IT, IDBI bank says, “Businesses are outsourcing ‘pain areas’ within their IT infrastructure. These are routine and mundane tasks that require special IT skill-sets.” Other issues that influence outsourcing include:

• Outsourcing non-core operations: From a bank’s perspective, managing IT-related activities is a huge task. On one side it has to manage data centres, maintain systems (servers and PCs), data backups and ensure that service level agreements with providers are complied with. Other than this, there are housekeeping activities such as managing contracts with suppliers of hardware and enterprise application software and associated issues regarding warranties and software licences.
• Performance guarantee: Businesses that operate 24x7 want a round-the-clock support infrastructure that is capable of scaling when demand spikes.
• Network management: Network management across multiple offices or branches is another pain area. The complexity involved in managing bandwidth, routers and links in a complex network setup make it desirable to manage it from a single console .
• Technology obsolescence: Enterprises are finding it difficult to keep a tab on changing technology, upgrades, and migrating to new versions. This can become a nightmare for the CIO’s team to manage on its own.
• Standards compliance: Someone has to monitor and see that audits are carried out as per service level agreements (SLAs), monitor adherence to internal standards and re-engineer processes.

Money isn’t everything

Businesses are outsourcing 'pain areas' within their IT infrastructure requiring special IT skill-sets, says Sanjay Sharma

Lemaire says, “While we are saving 20 percent annually on our IT infrastructure expenditure by outsourcing IT infrastructure management to iGate Solutions, I expect long-term relations to yield more than just cost savings.” Cost is a driver while outsourcing IT infrastructure, but it is not the only reason businesses do it. Tiger says managing IT infrastructure in-house eats up management time. Sharma of IDBI Bank says, “There are a number of intangibles that justify IT infrastructure outsourcing.” For example, cost to company (CTC) is much higher if a company hires people to manage its IT infrastructure in-house as it has to pay salaries, employee benefits, insurance, etc.

The cost saving that result from outsourcing IT Infrastructure Management to a specialist firm are quite significant. Raman says, “We get reports from customers that show savings ranging from 20 to 60 percent. One of our Fortune 10 customers has been saving 53 percent on its IT infrastructure expenditure for the last five years.”

Specialists bring value

Specialist firms manage the IT infrastructure of multiple customers, helping them derive economies of scale. Cost becomes predictable for deliverables in case of outsourcing IT infrastructure to specialist firms. M S Rangaraj, chief technology officer, Nirvana Business Solutions, says, “Providers of IT infrastructure have ‘resources on tap.’ They practically run the enterprise environment and offer complementary skills bringing tremendous value.” The provider’s role is to do away with the client’s pain points. Specialist firms provide inputs for process re-engineering using the latest technology. They know process inefficiencies and look for technology gaps by automating mundane and complex tasks so that TCO goes down.

Driving business growth while trimming fat

IT infrastructure outsourcing can help drive growth in many ways. It can reduce operating costs by turning what is a fixed cost into a variable, get assets off the balance sheet, and free up cash for investments.

Analysts agree that the value of outsourcing IT infrastructure to providers is derived only in long-term contracts, typically those with a minimum period of three years. Tiger says, “The early part of a relationship is where providers invest and it is difficult to gauge the full benefits in a year. Providers need at least three years so that they can give sufficient inputs for process re-engineering to customers.” Datar suggests, “The way forward for Indian enterprises is to look for long-term provider engagement but with periodic revisions every two to three years. This will give more bargaining power to both parties.”

N M Sundaram, country manager, Marketing & Strategy, HP Services, says, “Customers are no longer looking to just acquire a box. They are demanding assured service levels. As a vendor we bring global best practices, transformation management with in-depth product offerings and project management capabilities. We are a one-stop solution for enterprise IT infrastructure requirements.”

Ashish Kumar, country manager, IBM Global Services says, “Indian customers are no longer looking for bit solutions; they want companies that can put everything together and give them a total solution.” In a multi-provider project engagement it becomes increasingly difficult to manage relationships with providers leading large enterprises to deal with large global providers.

IT infrastructure is a means, not an end

Analysts and industry pundits suggest that companies pick one thing that they do well and keep it in-house letting providers (specialists) take care of the rest. They also concur that the trend to outsource IT infrastructure to providers will result in enterprises becoming virtual enterprises focused upon their core business activities. This will let enterprises invest in R&D and become more competitive.

akhtar@expresscomputeronline.com