Offshore Outsourcing Trends and Practices

Presentation to Swedish Delegation from DFS, ISA & REVAST

Confidential
Copyright 2006 by Infosys

Contents

Outsourcing Background and Trends Why offshore-outsource: Business Drivers for offshore outsourcing Where: the choice of an offshore location How: Developing and Implementing a Sourcing Strategy

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The IT and Business Process outsourcing industry is experiencing rapid growth, with offshore outsourcing leading the trend
Onshore Outsourcing Outsourced
700 600 (in USD billion) 500 400 304 300 200 100 (in USD billion) 664

Outsourcing and Offshoring

180 160 140 120 100 80 60 40 20 0 17 164

Ownership

0 2001 2008

2001

2008

By 2008, approximately USD 300-400 billion worth of services will be moved offshore
In-sourcing / Shared Services
182

In-Sourcing / Shared Services

3500 (in USD billion) 3000 2500 2000 1500 1000 500 0 2001 2008 (in USD billion)

Captive Offshoring
200 180 160 140 120 100 80 60 40 20 0

CAGR: 0%
3000 3000

Sourcing from internal sources or from an affiliated firm in the home economy

Captive

Onshore Outsourcing
35

Sourcing from a non-affiliated firm in the home economy

2001

2008

Captive Offshoring

Onshore

Location

Offshore
Offshore Outsourcing Source: Gartner, Dataquest, Aberdeen Group, McKinsey Analysis Evalueserve Analysis, Infosys Analysis

Sourcing from an affiliated firm located abroad Sourcing from a non-affiliated firm located abroad

Market size figures include offshoring of IT and business processes

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Contents

Outsourcing Background and Trends Why offshore-outsource: Business Drivers for offshore outsourcing Where: the choice of an offshore location How: Developing and Implementing a Sourcing Strategy

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Global Sourcing now beyond providing cost savings it has become a competitive necessity
Key Trends in Global Sourcing Cisco wants to raise revenue productivity to $1M per employee by enhancing operational effectiveness and focusing employees on valueadding activities - John Chambers, CEO Cisco Systems

The board of directors of virtually every big company are now insisting on very articulated outsourcing strategy Businessweek, 2006

Global sourcing is becoming a core component of F500 companies corporate strategy The scope is expanding beyond traditional ITO or transaction processing to Centers of Excellence or Specialized Skills Companies are using global sourcing as a means to position themselves for long-term capability building (both skills and capacity) Global sourcing has become a competitive necessity The new frontier is to integrate process and IT operations to improve effectiveness and efficiency

Dont tell me how much I can save. Show me how we can grow by 40% without increasing our capacity in the US Client executive, Jan 2006

This isnt about labor costthe issue is that if you dont do it you wont survive MD of Deutsche Bank Global Business, Jan 2006

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There are 3 strong business drivers for this rapid growth in Offshoring (1) Reduce Costs (2) Build Competencies and (3) Increase Revenue
Reduce operating costs Reduce capital investment Turn fixed costs into variable costs Meet downsizing requirements Reduce development costs Obtain intelligence of competitiveness C OM PE TEN C Y FOC U S Focus on core business Gain access to technology not in company Gain access to needed skills Provide alternative to building capability Create additional capacity Provide backup capabilities Align with policy/philosophy/culture Increase flexibility and responsiveness R E VEN U E
18% 34% 42% 55% 52% 29% 81% 60% 38% 35% 81% 58% 89%

Key CompetencyRelated Drivers

C OS T

Key CostRelated Drivers

60% 46% 42% 40% 38% 22% 0% 20% 40% 60% 80% 100%

Key RevenueRelated Drivers

Increase speed to market Improve quality Reduce customer response time Grow revenue Gain access to markets

Source: AT Kearney, Outsourcing Strategically for Sustainable Competitive Advantage, 2005

Percent of Respondents

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Therefore an optimal sourcing solution should offer multiple benefits, besides of course, that of low-cost

Typical Benefits
Fast scalability flexible cost structures
Fast and easy scale up and down of resources

Cost reduction
Up to 30% less, taking advantage of first class workforces in low cost countries

Reduced time to market

Leverage time zones and availability of right resources, high ratio of on-time delivery

Pool of knowledge workers and experts

Leveraging on labor market in other countries

Improved predictability and transparency

Formal processes (CMM), defined and measurable SLAs

Elimination of non-core activities

Allows to focus on core-activities

Improved quality due to process orientation

Improves also own processes, reduces risks and dependencies on individuals

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Contents

Outsourcing Background and Trends Why offshore-outsource: Business Drivers for offshore outsourcing Where: the choice of an offshore location How: Developing and Implementing a Sourcing Strategy

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Global Sourcing locations can belong to one of three categories: Onshore, Nearshore and Offshore, depending on the location of the customer

Source (Onsite) Infosys Presence Nearshore Destinations Offshore Destinations

Source: McKinsey Global Institute 2005

Infosys has proactively invested in development centers worldwide to offer clients Flexibility, value and stability against cost escalation
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While several countries are improving their standing as destinations, India retains its leadership as the destination to achieve both cost and scale goals
Infosys Development Center

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Contents

Outsourcing Background and Trends Why offshore-outsource: Business Drivers for offshore outsourcing Where: the choice of an offshore location How: Developing and Implementing a Sourcing Strategy

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Infosys Modular Global Sourcing (MGS) is an approach to sourcing that allows acquisition of seemingly-conflicting capabilities simultaneously
Aims of an MGS solution Desired Sourcing Capabilities The Sourcing Black Box
Alignment of business & IT Flexibility to quickly respond to business changes or events Optimize for Speed and Innovation

Predictability of cost, quality and delivery of IT execution y Productivity to sustain leveraging processes / knowledge across global presence Cost management to maintain lowest operating costs across the IT value chain

Conflicting Imperatives?

Optimize for Efficiency and Predictability

MGS takes a more comprehensive view compared to traditional outsourcing, including elements such as alignment, flexibility, and predictability, besides costs

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Through MGS, this problem of conflicts is addressed by using the principles of modularity across the tiers of infrastructure, application, business process

Traditional Sourcing

The New Modular Approach

Execution processes Design Build Operate IT and Business Process Assets Business Process Business Applications H/W & S/W Infrastructure

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Infosys leverages a suite of time-tested frameworks to develop a modular global sourcing strategy by answering the 5 fundamental questions
Enterprise Assessment Framework What functions drive competitive advantage? Hence what are your desired Business Process and IT capabilities? What are the source-able processes, applications and infrastructure in your enterprise? What is your global sourcing maturity? What are the metrics you can use to measure current and desired sourcing effectiveness? Modular Structuring Framework How can you bundle key functional processes with underlying apps/ infrastructure and align business with IT? How do you determine sourcing imperatives for the various bundled Modules?
Captive NearShore

1. What?

2. How?

3. Who? 4. Where?

Vendor 2 JV

Sourcing Decision Framework Who could carry out potential activities in each module? (Potential Sourcing Strategies / Models / sourcing options for each Module) Where could the activity be best performed? (Near-Shore/ Captive/ Global Source Vendor/ offshore JV etc) Global Execution Framework When do you roll out across modules? (Overall Implementation Planning and Roadmap) When do you undertake key change initiatives? (Transition and Change Management) When do you institute a steady state Governance structure?

November

December

January

February

March

April

April Release Pilot Phase

Knowledge Management Track Kick-off & planning

M ap & d ocum ent

Training prep.

Ons ite Training

5. When?

Offshore Operations Track Recruit and Induct Initial Onsite Team (IOT) Recruit and Induct Offshore Assoc iates Offshore Training

T echnology Management Track US kick-off T echnology Assessment India kick-off Procurement Design Offshore deployment

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Answering these questions leads to an execution roadmap for effective global sourcing
Shifts in Sourcing Practices for Effective Sourcing Current State Sourcing Decisions Offshoring Mix Vendor Model
Siloed sourcing decisions driven by IT project managers

Future State
Centralized sourcing decisions, driven through Global Sourcing organization

Low proportion of IT staff offshored

High proportion of offshoring

Fragmentation across hundreds of vendors High proportion of onsite contractors Staff augmentation model, with adhoc search for required resources and skills Ad-hoc acquisition of competencies and skills on as-needed basis

Consolidation to few, selected, strategic partners / vendors

Resource Model Competency Building Execution Framework

Managed services model, with predictable delivery fully managed by vendor, freeing up client resources for strategic work Focused creation of competency-centers based on technology, deep skills, and joint capability planning Standard execution framework with predictable quality, outcomes, and efficient execution

Fragmented, non-standard processes used to deliver services

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Custom applications are evaluated for feasibility and attractiveness of Global Sourcing using the Fit-Value framework
The key parameters of Fit & Value dimensions

Illustrative

Technical Feasibility of global sourcing

Service Expectations from the application

Application Profile

Potential for Cost Reduction

Need for investment prior to offshoring

FIT Feasibility (execution ease) of global sourcing

VALUE Attractiveness of global sourcing

Interaction Requirements between stakeholders

Knowledge Readiness regarding the application

Business Considerations

Potential for Quality Improvement

Potential for Resource Optimization

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The fit-value matrix categorizes application clusters based on their readiness for offshoring
Example of Fit-Value matrix for your application portfolios

Illustrative
Moderately Suitable
App App App App CCAM

Most Suitable
App App

Most Suitable

Business Value

Less Suitable

Moderately Suitable

Most Suitable

Less Suitable
Less suitable means that compared to the status quo, there is benefit of offshoring, but the increased benefit is small

Less Suitable

Moderately Suitable

Global Sourcing Fit

Transaction Mgmt Systems Web Apps Data Interchange Packages, others DW/Reporting Sun-setting

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From a sourcing perspective, there are four commonly pursued offshoring models, with the last three models being ownership based models
Off-shoring Ownership-driven Models of Sourcing Outsource
1.

Offshore Development Center (ODC)

Classical client-supplier arrangement where the client enters into a contract with the supplier The supplier operates a dedicated facility for the client. In most cases the center functions under a look and feel that is very similar to the client environment rather than the suppliers The business sets up its own subsidiary offshore so that all assets and staff are owned by the client business

In-source

2. Captive Unit

The client then sets up its own operations through hiring local staff and leveraging expatriate staff

The client and offshore supplier set up a JV vehicle to predominantly service the clients businesses

Co-source

3. Joint Venture
The offshore supplier brings the local expertise and service skills while the client brings its knowledge of existing business functions. The client and the supplier set up an arrangement, through which the supplier is contracted to establish the operation 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

4. Build, Operate Transfer (BOT)

Source: Gartner + Infosys analysis

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There are different levels of maturity in Global Sourcing, with their own drivers and benefits
Characteristics Outcomes
Fully bought-in global delivery model Improved Business-IT SLA driven governance tied to program and Alignment business outcomes Strategic partnership with few Workforce globalization a strategic imperative selected vendors at top management level Balanced scorecard and Collaborative co-existence of captive with program level metrics for strategic partner-vendors measuring business value

Step 3 Strategic Global Sourcing

Step 2 Early Maturity

Managing outsourced projects, not FTEs Joint program and change management office Outcome based relationship Collaborative project and budget planning SLA pilots in key business areas SLA based incentive system, not Training vendor resources on domain and necessarily tied to business outcomes company managers on global delivery processes

Step 1 Inception Tactical Global Sourcing

Staff augmentation approach for offshore resources Managing FTEs, not projects Organization change initiation for adjusting to Global Delivery

Cost reduction the primary driver Discretionary decision making on offshoring Ad-hoc requirements based staffing model

Characteristics

Outcomes

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Sourcing Maturity Model

Degree of Client Control Model 1. Staff Augmentation Model Highlights Vendor provides specific skilled resources to supplement client personnel Vendor takes on very little accountability or risk Managing FTEs not projects. Client retains overall control while asking vendors to perform certain functions Vendors responsible for the functions (eg programming) outsourced, and not for end-to-end projects Generation 2 Outsourcing 3. Project Outsourcing Clients outsource operational control of IT to vendors but retain control over business outcomes dependent on IT Vendors are held accountable to project failure our success 4. Managed Services
Low

High

Generation 1 Outsourcing

2. Out-Tasking Out-

Clients outsource entire gamut of IT services to one or more vendors Vendors are responsible for the entire operations including managing the other vendors

Generation 3 Outsourcing

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Performance Management in Outsourcing: Moving towards what is important to the business

Business SLAs are based on businessrelevant service metrics at this level thus Process SLAs committing are closer to upon those the that are thingsidea of Business SLAs, relevant to the measuring business process community throughput etc Common SLAs are at these levels, predominantly focusing on technology metrics those related to these enablers E.g., availability, response time

Service Users

Service 1

Service 2

Service M

Process 1

Process 2

Process N

Processes

Application Application

Applications Application
Link Server

Application

Application Application
Enabling Technology

Database

Link

Infrastructure Server Server Database

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Following transition, the client-vendor relationship changes to one of partnership smaller span of direct responsibility

Manage Processes Initial Sourcing Model

Manage Processes and Results Emerging Eco-system

Manage Results Partnership Model Eco-system

Span of Responsibility
Span of Direct Control

Span of Responsibility
Span of Indirect Control

Span of Responsibility

Client organization is new to global sourcing and will leverage vendors as pure-play contractors Operate in an environment where the majority of IT efforts are managed and executed internally CIOs span of direct control is very large and span of indirect control relatively small Will leverage vendors to source non-core / noncritical applications and process

Client organization is experienced with global sourcing and leverages vendors as partners Operate in an environment where a large proportion of IT efforts are sourced to the strategic partner(s) CIO span of direct control has decreased, proportionate increase in span of indirect control Will leverage vendors (strategic partners) to support core / critical application and process efforts

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Best Practices from organizations with successful global sourcing efforts

What has worked
Setting up of a centralized Global Sourcing Organization (GSO) instead of very decentralized decisions Upfront sourcing strategy assessment arrive at and share the vision of the desired To-Be landscape Upfront determination of appropriate metrics, baseline values, target levels and sources for actuals Monitoring dashboards with varying levels of data aggregation Proactive assessment of desired skills and capabilities for the IT team Governance and Change Management practices

What has not worked

Excessive focus on costs inadequate attention to the other benefits that Global Sourcing can provide Underestimating the effort involved for internal buy-in and focusing too much on partner / vendor selection Permitting various internal groups to follow their own sourcing processes Letting partners develop their own scorecarding systems

The key to success in any global sourcing initiative is a top-down (CXO-driven) approach with a focus on transparency and commitment
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