A Case for Infrastructure Outsourcing

Soumya Prakash Mishra
PGP 2003-2005
Xavier Institute of Management

Information Technology (IT) brings along with it big opportunities for today's managers and technopreneurs. But it also brings in big challenges. Requirements from business managers and end users are increasing every day, e.g. the demand for around-the-clock support from systems as well as from support personnel, the demand for system mobility, flexibility and new applications in a fast pace.

Costs are increasing, especially the workforce costs and the hidden costs, i.e. the cost of system downtime, the cost of poor support etc. In addition, finding and keeping the IT skills within the company can be difficult and costly. New technologies require new training and sometimes new support software.

Market competition for talent is difficult, and even if a company is able to keep the most skilled professionals, they often find that they always want to staff the most important projects with the same people. Sometimes there is a conflict between day-to-day operations staffing and staffing of strategic projects.

In this light we begin to think could infrastructure outsourcing be a solution.

Infrastructure outsourcing may broadly be classified into two types.

  • Total infrastructure outsourcing
  • Modular sourcing.

Total infrastructure outsourcing refers to a company handing over its entire IT infrastructure to another company in design, implementation and maintenance. This happens predominantly because of differing core competencies. For example a cement company primarily wants to concentrate its major attention and workforce towards its strategic capability i.e. making cement and marketing it. It realizes that IT is very important and can be a source of competitive advantage. But it doesn't have the necessary wherewithal to do it cost effectively. Hence it decides to outsource its entire IT operations to a vendor who can take care of it better preserving its cost benefit advantage.

Modular sourcing occurs when a company wants to retain control over its IT management but wants to selectively outsource certain parts like security to vendors who can manage it better and cost effectively. 

According to experts, it makes far more economic and business sense to outsource total IT processes versus strategic pieces. In outsourcing certain pieces of infrastructure, companies lose scale advantages and management leverage over the remaining pieces. In situations like these, the overheads increase as costs are required to hire and retrain quality workforce over the remaining pieces. The problem gets more complicated if chunks of infrastructure pieces are outsourced to different providers since additional managerial responsibilities are needed to orchestrate the operation.

Before going further let us analyze today's changed business environment that necessitates the need for strategic IT infrastructure outsourcing.

  • Unpredictable nature of users and customer demands
  • Customer interaction today is very much a dynamic 2 way process. They have an equal     say in the development phase of the project.
  • Enhanced customer access to information
  • Considerable security and integrity risk
  • Complex and interdependent nature of Information Systems Architecture and Application flow.
  • Real time management and continuous assessment so far as system performance and capacity is concerned
  • Volatile geographical reach.

Now, is your organization perfectly well equipped to match the ever changing needs of the business environment? If the answer is no, then it is a case for IT infrastructure outsourcing.

Genesis of Infrastructure Outsourcing

Specialized solutions in the market come at a premium. For example Network Management software available in the market today gives good service but comes at a premium price. And it is very standardized. Therefore it can't form a solution to a company's very specific needs. Thus arose the need for finding people who could take on the development of a company's IT infrastructure and subsequently manage it. If companies found it cost beneficial, they would obviously be interested for an infrastructure provider who would customize its solution as per the needs of the client.

The Case for Infrastructure Outsourcing

Web Hosting

Web Hosting refers to a provision of standardized arrangement of solution for client requirements. Whereas Web Hosting does provide some advantages, most companies today look for vendors who behave as an extension of their own IT department, not a secluded made to order company.

Strategic Outsourcing

As the name implies, strategic outsourcing is strategic and as such tied to overall business strategies and decisions. The partnership between customer and vendor is normally long term 5 to 10 years and covers substantial parts of the IT related services needed during this period. Good strategic outsourcing partnerships are characterized by a strong wish for a partnership based on mutual trust and commitments with substantial benefits to both parties. In addition, strategic outsourcing has a major element of change since it involves helping the customer through a critical business transformation process.

As more and more B2B opportunities surface, applications intensify in the complexity of their delivery, infrastructure outsourcers will come to occupy a prominent position in the business environment. They provide help so that you can stay in touch with other important businesses.

Again IT resources have to keep evolving as business changes. They have to keep pace with the latest trends in technology so that people don't miss out on important leads. Infrastructure outsourcing is obviously going to facilitate better management as the case is now with specialists.

As mergers and acquisitions continue, and rapid consolidation becomes necessary, outsourcing will become an increasingly popular way for companies to manage their IT infrastructure.

Security and Availability of data is vital to any organization's strategic objectives. This builds a case for outsourcing particularly if there is a greater probability of effective management in this area.

Poor systems architecture leads to poor integration among business functionalities. Many customers undertaking new e-business initiatives have little experience in projecting Web site activity and designing appropriate solutions. They either underestimate requirements or over-engineer the site. The result is an experience that either leaves users dissatisfied and looking to competitive alternatives, or one that is not cost competitive. You need a provider with the experience to help design an appropriate site based on anticipated volumes and on business objectives.

Vigilant monitoring is absolutely essential for the success of business processes. To optimize return on Web investment, customers need to know exactly how their sites are performing and how users are interacting with it. Vigilant monitoring is necessary to tell you if a critical element of your site is not working. It is the provider's job to provide proactive monitoring and reporting services that keep the customer in control and in touch.

Offshoring gives companies a cost advantage. So does global consolidation of resources at one place. Process maturity is a third advantage that a third party brings. A company that handles the management of multiple networks quickly gathers enough experience in processes to solve problems rapidly.

Before going in for IT outsourcing companies should factor in all possible costs and benefits arising out of their decision. All said and done, the project simply falls apart if it does not have a financial viability to it. They should take care of the following:

  • Strategic objectives of an organization
  • Core competencies
  • Strengths and weaknesses
  • Cost effectiveness of outsourcing
  • Level and depth of support needed from an outsourcing provider
  • No. of infrastructure providers needed
  • Speed of Implementation

Infrastructure Outsourcing in India

Wipro Technologies entered the infrastructure outsourcing market four years ago. Today, it is a $44-million (Rs 200 crore) business with 650 people and 95 customers. The business grew 24% this year. Wipro has some large orders, including one for $20 million from Thames Water in the UK.

Wipro is not the only one showing good growth. Its rival HCL is growing quickly too. HCL Comnet, the subsidiary that handles the infrastructure outsourcing business, has 1,000 people already and earns about $31 million (Rs 136 crore). HCL Comnet also has big orders, including one for $50 million from AMD. HCL has 11 international deals worth between $9 million and $40 million (these deals are for several years) and 73 domestic customers.

IBM, already a large player in the domestic infrastructure outsourcing business, is planning to start two large NOCs in India. Officials did not comment, but it had recently issued Requests for Proposal (RFP) from companies to set up these NOCs and run it. IBM will be the front end for the customer. Setting up and running these NOCs would mean earnings of about $30 million a year, if someone bags the order.

Infosys Technologies, a relatively late entrant to this business, has 250 people now and 17 customers. Cognizant has 150 people; it has bagged 10 customers in 18 months. Business is growing fast for both these companies, but growth rates have no meaning in the early days of a business.

Cognizant started applications development for Duty Free Shoppers (DFS), the world's leading chain of duty free shops. DFS has 150 outlets in 16 countries in the Asia-Pacific and the west coast of North America. Cognizant began with small onsite engagements, but gradually took over data centre administration, global customer support and technical help-desk services and enterprise-wide platform migration. The offshore component kept increasing. It now stands at 70%.

Wipro and HCL began their infrastructure outsourcing business with small contracts, managing small portions of networks. Outsourcing from India offer immediate benefits to a US firm. Real estate and people cost at least 40% less in India. But Indian companies need to prove that they can manage large networks before taking over the business lock, stock and barrel.

Thus the benefits of Infrastructure outsourcing may be summarized as:

  • Reduced cost of IT infrastructure operations workforce costs, e.g. salary, training, systems management costs.
  • Reduced hidden cost of IT infrastructure trough improved system availability and increased support quality.
  • Increased access to world class skills & resources in all technology areas.
  • Increased ability for IT organization to focus on prioritized project.

Infrastructure outsourcing could be the next big opportunity for IT. In fact, it could be as big as software services.

Soumya Prakash Mishra
PGP 2003-2005
Xavier Institute of Management

Source : E-mail September 22, 2004

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