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Sun 8 Nov 2009 04:00 AM

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Outward bound

Outsourcing is often touted as the answer to IT costs spiraling out of control - but does it really work? Imthishan Giado investigates.

Outward bound
CHOUDHURY: Application development is outsourced because it can be a very difficult skillset to find.
Outward bound
NAGARAJAN: When I brought in outsourcing staff for some projects, existing employees felt like they were being sidelined.
Outward bound
BHADAURIA: Saudi Arabia is definitely the leading market in terms of outsourcing in the region, followed by the UAE.
Outward bound
KUNWAR: The SLA represents a point of departure – you need to constantly improve the signed agreements as you move forward.
Outward bound
GUHA: Any non-core activity which does not need day-to-day decision making from the IT team should be outsourced.

Outsourcing is often touted as the answer to IT costs spiraling out of control - but does it really work? Imthishan Giado investigates.

For years in the world of IT, outsourcing has been the equivalent of a no-brainer.

In theory, it allows CIOs to, at the stroke of a pen, cut their overall headcount, with all the attendant benefits that brings not just in terms of salaries, but also in terms of management overhead and human resources. It allows IT teams to be smaller, better skilled and more focused on achieving business objectives, as opposed to dealing with relatively petty issues like user support or server management. And most importantly, it cuts costs while improving standards, as enterprises can grow faster while using teams of best-in-class service providers to carry out their projects.

This is the theory - and for most of the world, it's nothing less than a fact. However, the Middle East has noticeably been slower in its uptake, and large IT teams are still very much a fact of life in this region. Kavita Bhadauria, senior analyst for IT services at IDC Middle East, Turkey and Africa reveals more.

"Saudi Arabia is definitely the leading market in terms of outsourcing in the Middle East, and then followed by UAE. The uptake has been relatively slow in other countries. In KSA, spending has largely been in verticals like telecoms, transportation and e-government projects and also smart cities. They are definitely a huge potential for outsourcing," she says.

Most companies tend to think of outsourcing as still following the same pattern it did in the early 2000s, when companies farmed out call centres and basic telephonic support to overseas firms, usually in India. Today however, outsourcing is a much broader umbrella term that can cover a whole spectrum of functions.

Yes, it may still involve setting up a pipe to Bangalore where a team of agents respond to your helpdesk tickets, but it can now also cover all day-to-day general operational functions within an organisation - from basic server maintenance to capacity management and even application development. This type of outsourcing - different from outshoring, described above - is where the managed services provider sends in a team of individuals to work alongside the regular IT team on the projects at hand. It has the added benefit of considerable savings in HR management - for example, if an employee goes on leave, the outsourcer must replace them regardless, as it would be a breach of contract not to provide the stated headcount.

At this point, one might ask - why would CIOs prefer to have these teams present in the country at all? Would it not be easier to have the entire operation based overseas - or more appropriately, "true outsourcing"?

IDC's Bhadauria admits that the more basic model is widely prevalent here and that cultural concerns still win out at the end of the day:" That has yet to happen in this market - the Middle East is not really open to that model. There are service providers providing the highest level of support services from their offshore centres, but that model is not very accepted in the ME market. It's a desire to control the entire system and also related to the security concerns some people still have in this part of the world."

In terms of what functions are actually being outsourced, there is no clear consensus, but most organisations tend to dip their toes in the water first with service desks and desktop support, and if successful, move to outsourcing their entire IT operations.

BT's Tareque Choudhury suggests that application development and security are also growing areas of interest: "Typically, it's about application development, because it's very difficult to get that core skillset within your organisation. A lot of security monitoring is being outsourced - people are taking security quite seriously right now and they don't know what's happening on their part of their organisation. They tend to outsource it to companies that can, like a security guard, watch their organisation for threats."

Not everyone agrees with this view. One such company is the UAE's Road and Transport Authority(RTA), which has invested heavily in outsourcing through Indian vendor Wipro - but has yet to entrust security to an external party. Indranil Guha, manager for IT infrastructure management, explains his point of view.

"The most easy bit people are ready to try is desktop support and service desks. The next step is core operations - server and datacentre operations. I have seen many companies that are a little reluctant with that but they are OK with the idea when they see some successful implementations. But security is an area, I still think everybody including RTA would give it a really microscopic look before outsourcing. I've seen a reluctance among people to put their security environment, logs and all these things in the hands of the outsourcers. How transparent would the company be with the parent company?" he suggests.

Guha elaborates on the RTA's outsourcing mindset: "Our strategy is: any non-core activity which does not need day-to-day decision making should be outsourced. What IT has done is taken that strategic decision and has implemented it from day one since we launched our IT services in April 2006. We had our service desk outsourced and our IT operations completely outsourced. What I mean by the latter is day-to-day backing up of servers, checking the server health and doing the capacity planning.

"As a policy, we said that we will not hire too many field engineers here. We'd rather manage multiple projects or specific large projects and have these engineers outsourced. That has come up as a very successful model," he states.

While this may sound as everything within IT is up for grabs, Guha adds that there are some things which should be never be up for discussion: "Strategic decision making, innovation. CIOs and the key people in the department involved in innovation and strategic decision making or recommending strategic initiatives to the respective verticals, whichever business they are in - I don't see that being outsourced."

Contract Law

Indranil Guha, manager for infrastructure management at the RTA, is well aware of the crucial rule contracts play in outsourcing. Here, he reveals how he structures his own service agreements.

"We have service standards divided into gold, silver and bronze categories. They're supposed to meet gold standards all the time. If they miss gold, they get a percentage penalty. If they fail silver, then it's a higher penalty - and that's not a linear scale. If it's a 99.5% and they met 99% which is missing gold but into silver, then there is a penalty. But if it is below 99%, they are into bronze and the penalty is much higher. Below bronze, there is mutual discussion and we could even consider termination of the contract if we feel that the company is not capable of pulling back into gold," he says.

"There are also financial penalties for not meeting the SLAs and NDAs. I would not like to quote a number here, but it usually varies from 10% to 20% of the total value or the monthly invoice," adds Guha.

Not everyone, however, experiences such good fortune with outsourcing. T Nagarajan, IT manager for Toyota agent AAB Qatar took a crack at outsourcing for his main ERP project after being unable to find the right skilled staff - and is still trying to disengage from the process, describing it as a "bitter experience".

He says: "Normally, when I have to recruit somebody, the cost goes very high. The easiest way is to get someone for three to six months - postponing the problems, instead of a finding a permanent solution. But when we started looking at the real quality of the staff coming into our business and trying to support us, then things completely changed.

"When the outsourcing staff comes in as an expert for a particular field, I found that the existing employees are being sidelined. The enthusiasm and morale were less, and their productivity was going down because automatically the importance was being given to the other staff as they were considered as experts when they were brought in," he continues.

Nagarajan adds that the outsourcing staff were not always up to his standards: "I did notice that even the top companies sometimes won't take so much of care while recruiting. They just recruit and then immediately push them to this part of the world. The company is also not aware of the credentials of that guy, his attitude. When we start interacting with him, then we find that this is not our exact requirement. Maybe technically he is very good, but it's not always about the technical things."

And finally on the subject of people, it's important for outsourcing companies to understand the cultural sensibilities of their clients, if one is to avoid situations like what Guha faced with his non-Arabic speaking new staff.

"People raise a service desk ticket and the engineer goes to see him. He prefers to describe the problem in Arabic. We've beefed up the Arabic speaking engineers, even at the service desk end. Infrastructure didn't matter much because these are the people who never see the end customer. It's the front-end desktop and service desk engineers and once we did the ratio change - initially it was more non-Arabic speaking - now it's 80:20 of Arabic speakers versus non-Arabic speakers," he confirms.

As one might expect, the service level agreement (SLA) governing outsourcing projects is of crucial importance. It defines what the parties involved can expect from each other over the course which is usually a multi-year deal. In years past, says Nagarajan, the power of negotiation was heavily tilted in favour of the outsourcing provider - but thanks to the global financial crisis, this state of affairs is now changing.

"Previously, we were not having much opportunity to negotiate the prices. They would say: this is the consultant, this is the charge, take it or leave it. Today it's not the case. I do have a little opportunity to negotiate and get the best price," he believes.

In fact, outsourcing is not always as cheap as it seems. IDC's Bhadauria warns that enterprises need to be wary of moving goalposts during the project lifespan.

"Service levels are bad and then there are hidden costs which come up during the project. For example, if a service provider is working on an application outsourcing project, during the course of the project they can raise change requests for the support services. Since the client is in the middle of the project and if it's already been say 11 months, the client cannot say no - he has to accept the change request. I will not say it's common, but if you have to put an average to it, in say 100 cases of outsourcing, it happens in almost 20 cases," she states.

Atul Kunwar, president for MEA, Europe, India and APAC at newly-formed service provider Mahindra Satyam admits that over the past year CIOs are looking at contracts far more stringently to eliminate such types of scenarios, but overall believes that the recession has introduced an element of reality into negotiations.

"The SLA represents a point of departure - you need to constantly improve them as you move forward," he claims. "The approach is more partnership as opposed to confrontational. You need to work together to find the right solutions - you can't hedge your risks. It is a lot of hard negotiations but it is more reasonable and something people are more amenable to."

"The other thing is that there should be more involvement from the CxO level. It's more active participation as opposed to leaving it and saying: "I've given you a deadline, now it's up to you to do it." Wherever we've partnered closely like this, we've seen things improve," adds Kunwar.

Guha agrees with this observation: "Outsourcing is an extended team. That team spirit has to be there for the core team and the outsourcing team to make it happen. That has to be brought in right from the senior management level to the CIO. It shouldn't be treated as company X performing badly - if they are, we are performing badly. We do have steering committee meetings with the top management [of the outsourcer] at the senior VP level every three months, showing there is a strong bond between the two companies."

But teamwork aside and increased agility aside, outsourcing is still for many about one thing and one alone - saving money.

Guha reveals his figures - with a proviso: "We have done some high-level studies, but we didn't get down to the nitty gritty details as to how much we are benefiting. I would say about 10%-15%, not more than that as of now.

"That's considering the tangible and intangible. If I just take the tangible, dirham to dirham, salaries that I would have paid, probably the savings are hardly there or it's a single digit figure. But considering the intangibles, the amount of decision making one would get involved in operational issues like upgrades and so forth, there is a savings," he believes.

In the end, it's clear that for outsourcing to succeed, several elements need to come together simultaneously. The impetus needs to be strategic and led from the highest level. It also needs to focus on more than just cutting costs - which is where CIOs need to step in with plans for improving core functions. On the departmental level, management needs to be aware of the pitfalls of new staff that may come from different backgrounds, and how to make sure existing staff do not feel threatened.

It's quite a balancing act - and for CIOs, there's more than just pain to be had if they fall off the wire.

Purloining professionals

One of the more rarely-reported aspects of outsourcing is that the "visiting" employees often find that they would prefer to work with the client - which can cause friction between the two parties, not to mention potential loss of intellectual property.

T Nagarajan from AAB Qatar relates his own experiences: "With a couple of cases last year, I put it in the contract and made the company agree with my terms and conditions. The guys came down for six months to one year and then they joined me with all the proper permissions from both sides in place.

"We always think that it's a cost saving but it's really not. At the end of the day, the person comes and learns my business and then he goes out of the organisation with more knowledge. If I had recruited somebody and trained that guy with the complete culture of the company, that will give me long-term benefits. Tangible benefits are more," he adds.

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