Outsourcing

The outsourcing game-plan

If outsourcing was the buzzword of the Indian economy for the last couple of years, today it is IT outsourcing. This practice has spread from large companies to smaller ones. By Kusum Makhija

Within small businesses, BFSI and pharma seem most bullish on outsourcing their IT essentially because it has become a key business enabler for them. The degree of outsourcing varies among these verticals. Out of the 180 companies surveyed under the IMRB-Express Computer annual survey on IT spend, the maximum percentage of outsourcing has been witnessed in the BFSI vertical followed by pharma and consumer durables.

Limited to the desktop

As per the survey, most companies plan outsourcing their desktops only, followed by network and application development. Outsourcing of business processes is still a far cry for most CIOs. This is more evident in verticals such as BFSI, pharma and education. CIOs still have a lack of trust when it comes to outsourcing the critical aspects of their business process. The mindset that this could actually enhance their productivity and let them focus on their core competencies does not seem to have evolved.

"Whatever outsourcing small companies do depends on two factors: the cost advantage and the trust they have in the third-party" - Lt Col H S Bedi Managing Director Tulip IT Services

“Small companies always work on the basis of the trust that they have in the third-party. Whatever outsourcing they do primarily depends on two factors: the cost advantage that they are going to get out of it, and the trust or the relationship they have with the third-party,” points out Lt Col H S Bedi, MD, Tulip IT Services.

Concurs Debobroto Goswami, EDP-in-charge at Supreme Paper Mills, “It is very important for us to know the outsourcing partner well and be sure of his credentials before we decide to hand over to him our assets.”

"A large part of the IT infrastructure of small companies is formed by desktops which are neither very critical nor very troublesome" - Prateek Garg CEO Progressive Infotech

According to Prateek Garg, CEO, Progressive Infotech, “A large part of the IT infrastructure of small companies is formed by desktops which are neither very critical nor very troublesome. Most of them are taken care of internally by the in-house systems administrator.”

Planned outsourcing on the rise

Outsourcing activity is increasingly getting incorporated into the planned initiatives of small businesses. Companies are chalking out an outsourcing roadmap for IT. However, the planning is focussed around the outsourcing desktop and having a third-party help-desk to manage routine queries. Interestingly however, companies are looking at outsourcing their application development and data-centre management too. As per the survey, networking stands second on the list of planned outsourcing components for the next fiscal.

Going by verticals, BFSI continues to rule the roost with outsourcing not only of their desktops and networks but also business applications. The textile or the garment sector is the most bullish on outsourcing their desktops. Textile companies also are proactively outsourcing their business applications. These are typically the ERP or CRM applications which companies deploy. However, most of the outsourcing and standardisation of IT that is happening in small businesses today is predominantly driven by supply chain demands. Small garment export houses which are part of the global supply chains are forced to comply with certain standards as far as their IT infrastructure is concerned. Says Bedi, “Data-centre and connectivity are two major areas where small businesses like to outsource because these two are the most mission-critical for their businesses.”

Adds Goel Verma, EDP Manager, New Era, “Internet connectivity and data recovery are two important things that we need to manage all the time. Given an option, I would like to outsource these two so that internal hassles get reduced.”

According to the survey, there has been an upsurge in planned outsourcing activity for desktops as compared to last year. Companies are also showing interest in outsourcing their application development and management to third-parties. This is essentially because having an ERP is become a norm in businesses today. Many companies are looking at small mom-and-pop shop-type vendors to implement their cost-effective home-grown solutions. Others are doing it in-house. Says Vikas Kumar, Systems Administrator, Gir Movers, “We never felt the need to outsource as our IT requirements are not very large. We just run an in-house-developed ERP solution which satisfies our business needs.”

Points out Prateek Garg of Progressive: “Small businesses would essentially buy maintenance as IT is not very critical for them. They do not have the necessary requirements and the volume to outsource. Some who have a large installed base of desktops get a third-party to maintain their systems. Beyond that, outsourcing has not really picked up among smaller companies.”

Factors driving outsourcing

While companies are realising the benefits of outsourcing, the willingness to spend among small businesses is not very high. Cost-saving is the highest on the priority list of the CIO when it comes to outsourcing, followed by speed of delivery and access to expertise and technology. By and large, CIOs of small companies consider outsourcing of their IT only when they see that the cost of doing it in-house is more than getting it done outside. Sachin Koldate, IT Manager, KJMC Global Marketing India, subscribes to this line of thinking: “Price is certainly a very important factor for us. What is the benefit of getting an outsider to do the wok for you if he can’t do it cheaper than what you are doing yourself?”

However, this is changing in some verticals like BFSI where small companies are using IT for process automation and mission-critical business applications. Most BFSI respondents in the survey said that they would outsource their IT activities to speed up their delivery cycle. Notes Pradeep Mohant, IT Manager, India Leases Development, “It is important for us to make sure that our clients get our services in time. Most of the services today are e-enabled, hence we are outsourcing a large part of our IT to third-parties.” Verticals like BFSI and pharma seem most aggressive in reducing cost and streamlining operations; closely following is the textile segment.

Most IT managers believe that small companies are outsourcing not on account of resource constraints but because they want to gain access to various technologies and have a hassle-free IT infrastructure. However, some of them, especially in the textile segment, believe that they outsource simply because they do not have the required resources. Small businesses perceive outsourcing to be a solution to their day-to-day problems so that they can focus on their core competencies. They are also looking at outsourcing as a means to have access to the latest technology which can help their business. An important criterion for businesses while devising an outsourcing strategy is that the third-party should be able to speed-up their delivery process within their budget constraints. “A third-party can definitely make us more aware about the various products and latest technologies available in the market since we are not into IT, and we do not know which product and solution will be the best for our business and make us more profitable,” says K Sukhmaran Nair, Systems Manager, Oswal Woollen Mills.

The education vertical seems lacking on these parameters. The scope of outsourcing here is limited; on top of that there is a clear lack of focus when it comes to having a planned outsourcing strategy, mainly because small businesses/institutes in this vertical have not matured enough. Most educational institutes, including those in IT training and education, do not have any high-end systems and applications. The basic desktop, a small LAN server, and a dial-up or broadband connection can easily be managed in-house by the good old EDP handler. By contrast, textiles appear to be a fast-growing segment both for IT adoption and outsourcing.

Choosing a third-party

Factors affecting the choice of third-party among small companies essentially revolve around the service support and technical competence that a third-party can provide to the IT manager. The same factors like technology and sales support are more or less dominant when it comes to choosing an IT vendor for infrastructure.

Most companies choose a third-party on the basis of its ability to give them support and service. They also look at the third-party’s track record and past experience and how well it aligns itself to the organisation’s business needs. Service level agreements (SLAs) and annual maintenance contracts are the parameters on which the performance of the third-party is measured. “How well the third-party can meet the SLAs is very important when it comes to making a decision because ultimately that is the criterion for measuring their performance,” states Amit Kaul, Senior IT Manager, Foremost Factors.

Interestingly, price comes third on the list of cost-conscious small businesses. Price is a key factor while making the outsourcing decision, but companies are willing to overlook it when comes to performance of the third-party. “Cost is also important, but if a partner can provide excellent technical support and additional value adds in terms of service, we do not mind paying a premium for it,” concedes Dhaval Gandhi, EDP Manager, Lincoln Pharmaceuticals.

Agrees Sunil Prasad, IT Manager of JC Chains, “At the end of the day what matters is what the third-party is delivering to us, and whether or not it is able to meet the required SLAs.” Small companies also take into account the past experience they have had with a vendor. “If I have had a good relationship with a vendor in the past, I would certainly prefer the same person or company so that I can leverage on the relationship both in terms of discounts and deliverables,” explains Mohant of India Leases.

As per the survey, textile seems to be the most price-conscious segment with 60 percent respondents giving importance to price. It is followed by manufacturing, with 24 percent respondents considering price as the most important factor. However, very few small businesses actually go in for professional consultants to help devise a sound IT strategy; most of the formulation is done on the basis of word-of-mouth or past experience.

Still the CEO’s call

By and large, the decision-making power regarding outsourcing still rests with the CEO. While the CIOs and business/functional heads seem to be fast rising up the ladder, the CFO’s involvement does not seem very high. This is a paradox, considering that reducing cost is on the agenda for any company considering outsourcing. While in the education vertical the board of directors seems to be having the decision-making power, CEOs control things in banking and textiles. Reveals Kumar of Gir Movers, “Any IT-related decision comes within the purview of senior management. Depending on the manpower and infrastructure requirements, the CEO decides and sanctions the amount of money that is to be spent.”

Most small businesses do not have a fixed annual IT budget to begin with, and hence the importance given to IT is also minimal in terms of dedicated human resources for the same. Any IT-related decision is taken as and when the need arises. There is no contingency planning done.

Observes Garg of Progressive, “Despite IT not being a very important function for small businesses, the control of top management over IT is very high. Barring routine decisions pertaining to maintenance, all the major decisions, such as choice of vendors, are taken by the CEOs. But this can be correlated to the fact that most of these companies do not have a specialised IT department.” Concurs Surendra Chowdhary, Senior Hardware Engineer, Eel India, “We just have one person who looks after the entire IT set-up in our organization, and therefore any purchasing decision has to be sanctioned by the top management.”

Preferred processes

Most IT decisions are taken behind closed doors without any transparency as companies do not wish to invite open bids for tenders or go to IT resellers operating in the market. Across verticals, companies prefer to invite proposals and quotations from vendors. Appointing a reseller partner is also not finding much acceptance among small businesses largely because they see this as an additional cost to the business. Quotations and tenders are a preferred method to invite outsourcing bids. Similarly, hiring consultants for specialised services is also not a common practice among small companies.

61 out of the 180 companies surveyed said that they would request quotations from third-party servicing companies. However, these quotations need to correspond to business requirements. “The outsourcing decision has to be based on what the business needs rather than what is available in the market,” insists Bedi.

54 respondents said that they would request quotations from vendors. “Vendors are a trusted source since they have standardised offerings and have good offers for corporate customers. Their service level offerings are also standardised, and they have support centres across the country,” points out Vinod Vincent, Network Administration Executive, Sun Healthcare.

73 respondents said that they would prefer a vendor as an outsourcing partner because they have the right mix of products and technology, and provide them good service and support. 65 said that they would prefer vendors since vendors offer them a cost-effective proposition. Word-of-mouth is the lowest on the list among small businesses. Very few companies see benefits like lower TCO as a factor governing the choice of brands. Says M K Aggarwal, Systems Manager of Harvest Gold, “As we expand our business we would need to outsource. As and when that happens, we would like to go for a vendor who can offer professional services to us.”

While outsourcing may be picking up among small companies, this is largely to cut costs and have better management of their assets. These companies are still very far from looking at outsourcing from a strategic business-decision point of view. Most of them see it as just passing on the burden of IT management to someone else, and not as a means to gain productivity and efficiency. The awareness and vision in terms of having well-defined SLAs and a clear set of deliverables also seem to be lacking significantly among small businesses.

For them, at the end of the day, the outsourcing game is all about who can give the maximum service at the minimum cost.