Global Services
A CYBERMEDIA Publication
An integrated media platform which connects the various constituents of the global technology and business processing services industry ecosystem.
Pradeep Gupta Chairman & Managing Director Cyber Media (India) Ltd. E. Abraham Mathew President
Directory of Services
Ed Nair Editor ed@cybermedia.co.in
Newsletter A regular digest of key industry happenings.
Satish Gupta Associate Vice President satishg@cybermedia.co.in
Digital Magazine The fortnightly digital magazine features research reports, articles and experts’ views. Available on www.globalservicesmedia.com
Smriti Sharma smritis@cybermedia.co.in
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Sruthi Ramakrishnan sruthir@cybermedia.co.in
Global Services’ web-based seminars aim to impart useful information related to outsourcing industry in the form of presentations and discussions by industry specialists.
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Research We deliver indepth analysis and research reports on sourcing subjects. Microsites Online resource center designed to provide focused content on special subjects to the outsourcing community. Events From multi-day, high-level, resort conferences to intimate breakfast discussions we offer a number of opportunities that connects the outsourcing community.
Offices Global Services Media LLC. 806 Green Hollow Drive, Iselin, NJ 08830 T: 678-665-6005 Global Services Cyber Media (India) Ltd. CyberHouse, B- 35, Sector 32 Gurgaon-122001, India Tel: +911 24 4822222 Fax: +911 24 2380694 Contact: globalservices@cybermedia.co.in Disclaimer All rights reserved. No part of this publication may be reproduced by any means without prior written permission from the publisher.
CUSTOM PROGRAM Customized services rendered through different media platforms. OSOURCE BOOK A directory of global outsourcing service providers. www.osourcebook.com 3 GlobalServices
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January 2011
January 2011 Volume 2, Issue 2
features
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Utility Computing: the Reality Check
by Ed Nair Virtualization and cloud computing has brought utility back into the discussion though neither of them are a precondition for a utility-based model of IT delivery
8
18
Emerging from the Eye of the Storm, Waking Up to Changed Rules
Engineering Services - an Outsourcing Evolution by Runa Mookerjee, Analyst, ValueNotes Sourcing Practice
by Sruthi Ramakrishnan The main challenge the MPO (mortgage process outsourcing) industry faces today is the changed environment it finds itself in
An increasingly competitive market for engineering services has made outsourcing indispensable to the industry, more so following the downturn
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16
The Next Stage in Managed Print Services is Here by Sruthi Ramakrishnan
A New Role for Benchmarks by Max Staines, President of North America, Compass Management Consultingn Traditionally a bargaining tool for clients to set pricing targets for service providers, outsourcing benchmarks are increasingly being used to collaboratively drive transformational initiatives.
Managed print services and IT- BPO processes traditionally stood at different ends of the services spectrum. Not anymore.
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xperts
Global Services LIVE!
Finance and Accounting Solutions Client: Coca-Cola Enterprises Provider: Capgemini
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‘Lift & Shift’ Migration
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Client: Owens & Minor Provider: Dell Services
4 GlobalServices
Message Migration and Management
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Client: A Fortune 100 company Provider: Microland Limited
Streamlining Operational WorkfloW
Client: Metlife Provider: Ci&T
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January 2011
Global Services LIVE! Q1, 2011 EDITION
Releasing March 2011 Case studies are invited from service providers. For more details click here or contact Satish Gupta at satishg@cybermedia.co.in
Editor’s Note
Dawn of a New Decade F
irst things first, let me point towards two articles in this issue that deal with significant shifts in IT and BPO.
Utility computing used to be one of those buzzwords thrown around in the IT circles a few years ago. It was supposed to be a game changer on the IT infrastructure delivery side (which it is), but the IT world got swayed by other developments like service-oriented architecture, virtualization, and business process management. Years later we are once again at a point where virtualization, SaaS, IT standards, managed services model, and cloud have come together to change the way IT infrastructure services are delivered. This has renewed the interest in standards-based utility model where the pricing is based on consumption of services.
Ed Nair Editor ed@cybermedia.co.in
As we look back to the decade that went by, the outsourcing industry or the global services industry had many momentous shifts
In this issue, we take a reality check on where utility computing stands today. One key message is that it is not about technology or the sourcing model; rather it is about the behavioral changes needed (on the client side) and the realization that revenue per client would decrease but margins would increase (on the provider side). Another exciting trend we examine in this issue is about the evolution and convergence of MPS (managed print services) into broader IT services and BPO markets. This has implications for many document-driven industries like mortgage, insurance, healthcare, and others. The article traces the antecedents of this trend, explains the realignment of service providers, and presents the possible dynamics of this convergence and its impact on the industry. As we look back to the decade that went by, the outsourcing industry or the global services industry had many momentous shifts. The transition from the previous decade was marked by the culmination of a frenzied programming effort called Y2K, the shift into developing e-business applications, and the boom in call centers in India and the Philippines. We are once again at the start of a new decade. The transition this time is marked by mature global delivery, the promise of the cloud, the convergence of IT and BPO, the quest for transformation, and the clear recognition of global sourcing as a strategic lever. Wish everyone a great and rocking year 2011!   GS
7 GlobalServices
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January 2011
Industry- specific Processes
Emerging from the Eye of the Storm, Waking Up to Changed Rules The main challenge the MPO (mortgage process outsourcing) industry faces today is the changed environment it finds itself in by Sruthi Ramakrishnan
M
ortgage processing was one of the verticals directly affected by the economic collapse in the US. Now that the economy seems to be on the path of recovery, this industry too is attempting to find its feet. But the main challenge faced by the industry is the changed environment it finds itself in -- one of increased regulation and caution, not to mention the general paranoia that the economy might slip into recession again. As Taylor Woods, president and CEO, Genpact Mortgage Services, puts it, “ The post- recession period saw a bit of overreaction to the type of lending that was seen, and that created a very difficult environment for people to borrow, versus what we’d seen in the run-up where everybody could get loans. As a result of the fewer eligible people in that space, it resulted in lower (origination) volume.” Changes Wrought by the Crisis Keshav R. Murugesh, Group CEO, WNS Global Services, sees two major changes in mortgage processing since recession began. One, changes in the appraisal process that was much abused in the pre- recession time, and second, the rigor around verifying earnings, debt ratio calculations and sub-prime mortgages. “Historically household income reported on mortgage applications were checked with a reasonable amount of rigor. But in the early 2000s, with the value of real estate climbing steadily, the rigor was loosened in favor of faster processing. This lack of rigor led to many families taking on too much debt backed by housing that dropped in value once the bubble burst. With a number of families overextended, a small drop in housing
8 GlobalServices
Taylor Woods President and CEO, Genpact Mortgage Services value caused significant pricing stress that quickly began to affect the entire market,” he says. “Much stricter rules have been brought into play to prevent a reoccurrence. To correct the inflationary appraisal scam, strict regulations have now been enforced on how often a house can be appraised and also many strict guidelines and review processes have been put in place. The increase in processing rigor has had an effect on the MPO market, requiring better training of processors, significant increase in quality reviews, and financial penalties if proper controls and reviews are ignored.”
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January 2011
Industry- specific Processes
Back in Business A MarketsandMarkets report ‘Post Crisis Changes in Mortgage Lending in U.S. - Forecast & Analysis 20102015 ‘ says that currently, conventional fixed rates are at their lowest in decades, with pricing of 30-year and 15-year fixed-rate mortgage at its lowest. Such low rates are generating significant refinance activity in the housing sector. Refinance in 2009 increased by approximately 78% to $1,364 B, indicating that borrowers have been responding to low mortgage rates. Genpact saw its business pick up the same year. “In 2009, the market sort of stabilized in volume and activity started increasing,” says Woods. “Those outsourcing partners who were able to survive during the downturn for the last couple of years were able to pick up business”. The various mortgage modification programmes (Countrywide, Making Home Affordable Program consisting of HAMP and HARP) — started to help borrowers pay back their mortgages through loan modification, provided they met certain criteria— have also, to some extent, helped third party providers garner business. “The government is running its programmes primarily through Fanny Mae and Freddie Mac. Through these two entities there’s tremendous work that is being outsourced primarily through components serving individual companies to provide very specific services, much of which have been along loan modification and mortgage origination,” says Woods.
about for now. “Due to the recession and the number of mortgage companies that closed down entirely, I think the amount of work being offshored went down dramatically,” says Woods. “But the pressure around costs is very critical. More work is starting to be offshored and we are seeing a recovery now.” Strong Opportunities, New Investments Companies are looking at the new opportunities presented by the changed industry scenario. “Firstly, there continues to be strong opportunity for mortgage origination and within that, the strongest components seem to be areas like underwriting, processing and even sales. The loan officer or origination activity- these are the highly skilled elements of the origination process that are in really high demand,” says Woods. “Number two, there is very significant pressure on existing portfolio, existing investments in real estate. The demand comes from the number of people struggling to make their mortgage payments.”
There have been two major changes in mortgage processing since recession began- one, in the appraisal process which was much abused in the prerecession time, and second, in the rigor around verifying earnings, debt ratio calculations and sub-prime mortgages.
Not a Cakewalk But such programmes have also run into rough weather, with allegations, among others, of mistakes in the review process of foreclosures. This had led some accusing fingers to point at third party servicers, but the latter are unperturbed. “Those who are negative on outsourcing may attempt to blame an MPO for the issues that have been encountered in the processing of mortgage origination documents. In reality MPOs like ours carefully follow regulatory and client policies and procedures. It is always possible for a human error to occur, but that is true of any process, business or industry,” says Murugesh. The US government’s anti-outsourcing stance, which could potentially affect offshore servicers, is also something they are not choosing to worry too much 9 GlobalServices
Genpact expects its investments in technology over the past couple of years to pay off now. “We invested in two major ways. First, we have a proprietary platform within our origination offering. In our platform we have tremendous amount of pipeline management, workflow management and automated communication. Secondly, we made an investment early in 2010 for automation of processes that takes the processing time down. Our investment allowed us to gain a very strong additional market activity and also loan origination that we are taking into the next decade,” says Woods. WNS looks to grow by utilizing its “collective knowledge that is transferrable across WNS clients” and “providing cost margins that can only be realized by using an experienced and trusted MPO provider” which would help offset the pricing and margin pressures that occur in a down market. So while the third- party MP servicers are hoping for some sunshine after the recession storm, how they will fare in the coming year is linked to the fate of the mortgage industry. GS
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January 2011
Special Report
Utility Computing: the Reality Check
Special Report
Utility Computing: the Reality Check
utility computing: the reality check
Max Staines, in a chat with Ed Nair makes the case for utility computing
Special Report
Utility Computing: the Reality Check
Utility Computing: The Reality Check
The concept of utility computing is not new. In the first phase, it failed to become mainstream. Virtualization and cloud computing has brought utility back into the discussion though neither of them are a precondition for a utility-based model of IT delivery. On the other side, from the sourcing world, managed services of various types rose to maturity and popularity and it contained some flavors of utility computing. But we learn here that utility computing is sourcing agnostic. Regardless, by whatever name you call it, IT delivery is increasingly moving towards a multi-tenant, consumption-based, standardized services model. Like a utility. So let’s once again call it utility computing. Max Staines, President-North America, Compass Management Consulting (recently acquired by ISG which also owns sourcing advisory company, TPI) advises leading organizations on performance management and benchmarking of service providers and brings in unique insights into the value creation process in service delivery. Here, in a chat with Ed Nair, Max Staines makes the case for utility computing and reveals the nature of its evolving dynamics.
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S: What’s the case now for utility computing? MS: Traditional improvement initiatives drive incremental efficiency gains within the existing operational environment, typically resulting in savings of between 10 percent and 20 percent. A transformational approach to improvement establishes a new, optimized IT delivery model that fully leverages the benefits of standardization and utility computing, often yielding overall cost savings of up to 40 percent. Regardless of your business, 90 percent of your IT is standard and common. Once an organization recognizes that most of its IT requirements can be addressed through standard services, it can develop and implement appropriately tensioned pricing mechanisms that create incentives to drive standardization and increased efficiency. For the rest of 10 percent, by identifying the cost of specialization, the business can make value-based decisions and support comprehensive demand management. The important point here is the recognition by business that defining IT requirements in consumption-based, utilitarian terms yields a critical competitive advantage. For example, rather than managing the TCO of 10,000 desktops, a client organization can now define
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its requirements as follows: access to desktop resources for 10,000 users, from between 9:00 a.m. and 5:00 p.m. Eastern. Under this approach, importantly, the client pays only for those resources that are actually used. Managing the infrastructure to deliver those resources is left to the internal or external IT service provider. GS: What’s your best argument about utility computing? MS: It is my opinion that the largest component of a properly structured utility-based compute model of standard service offerings is that technology capabilities are not the only drivers in making the dreams of utility consumption based computing services come true. Rather it is the ability for IT provisioner (in-house or outsourced does not matter) to have a very pragmatic conversation with their customers about behavior, about proper demand management, about educated demand management. These discussions are based on clear and well- articulated understanding of what is cost and what value is derived from various kinds of service delivery. As such, utility computing is less a technical innovation than it is a reflection of a maturing marketplace that produces more effective commercial agreements for the delivery of services.
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January 2011
Special Report
Utility Computing: the Reality Check
GS: How far does the buyer community or the provider community understand this? How much of the former’s understanding is colored by the latter’s tall promises? MS: It is like once bitten twice shy. Service vendors need to know and accept that revenue per client is likely to go down. But, what they get in return is margin control and they are willing to take less revenue if it means they can control margin. They’re willing to do so for a number of reasons. One of which is that they believe that if they can start to get people to standardize, and yes, charge less for it, then they can attract more clients on to that virtualized state of IT infrastructure. That’s a key point in the outsourcing view of this. When it comes to the internal view, the most progressive IT operations - the ones who already have a better than average relationship with their business customers - are the ones who are going to have an easier time taking it further. Clients who have implemented a well defined catalog of services are going to be able to take the next step of removing the constraints. There needs to be a discussion about demarcating who does what or who is responsible for what (between the vendor and the client). It is going to be a tough decision in some cases, because some business units through the hard knocks that they have gone through with their IT provisioners (even internal), are used to having a quite a bit of say. Now, if you can have a discussion that says are you sure you need that or are you sure you can’t let us do that for you or make those decisions for you, so that we can standardize across the much broader set of IT assets – application infrastructure so on- to get the cost of producing it down. If you can make that business case, that’s the decision those CIOs and CFOs want to happen, that’s for sure.
“As standardized service delivery continues to grow, key sourcing decisions will be around how best to drive standardization and utility-based consumption of IT as extensively as possible.” Max Staines President-North America, Compass Management Consulting
GS: What are some of those sub-trends that are making utility computing a real possibility? MS: Governance tools are making it possible, as well analytical agents are making it possible to properly understand consumption in a meaningful way. There is a new mindset that 90% of what is accomplished in the IT shop, you 13 GlobalServices
could easily consider it to be ‘commodity’. The rest need special attention. This generic, one-size-fits-all approach to service delivery is becoming increasingly viable, thanks to growing business acceptance of the proposition that up to 90 percent of the IT requirements of most organizations can be addressed through standardized services. In other words, while a bank’s activities are obviously very different from the activities of a retail manufacturer, the basic IT functionality that each business requires to support critical processes and systems is largely identical. There is bound to be a real paradigm shift; you will have historic premiums. There will be initially a barrier to get to a truly standard utility based model. As time goes, those historic hurdles will be out. The mind set shift will start to take hold. At a conference in October , a group of vendors were talking about their ability to deliver their services on a consumption model and they were even willing, in right commercial circumstances, to have virtually no contract— which means pay-as-you-play and optin and opt-out as you wish. If they are going to do that kind of a model, then they are going to have to have an economic base of a very large estate where they can leverage enough. So, investments are being made in setting up that kind of estate to let people come in, plug in, plug out. That’s another shift happening, another enabler.
GS: When you approach an organization with this idea of utility-based computing services, how do they generally respond? How does one prepare to start with utility computing? MS: The very first thing you need to do is to understand how ready you are. That gives you an indication how far you need to travel. Also, that gives you an indication of what kind of investment it’s going to take and if you can also model what the future could look like, then you can start to lay out proper business case for change. So, you need to take a very well structured look at how you deliver currently. Ask questions such as what’s in
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January 2011
Special Report
the IT group, what are the activities and what are the costs, what’s the value contribution to the business, and such. The other thing you need to do is to take a model of standard IT services, take a well functioning model of IT services and you start to lay the groundwork of what the future could look like so, you actually lay out a scenario or two of what if we did the following standardization or utility type activities to get us to a future state. What could that future state look like? Interrogate that model, analyze the assumptions and you make a very well thought through future state assessment. Now, you have a current and future and you make a roadmap to getting there. You do all that in paper before you unplug a server. GS: How dependent is all this on your sourcing modelin-house, offshore, outsourced…..? MS: You need to look at not where it comes from, but what’s delivered. As long as the organization can provide as efficiently as a professional sourcing arm would. Then, that’s no reason to look elsewhere. What matters is how its delivered, where it comes from is secondary. As standardized service delivery continues to grow, key sourcing decisions will no longer be around outsourcing, offshoring, or repatriation, but rather, around how best
Utility Computing: the Reality Check
to drive standardization and utility-based consumption of IT as extensively as possible. In some cases, outsourcing will be preferable. In others, where, for example, in-house incident management capabilities are more mature than the service provider’s, or if assets are already owned by the client organization, a retained approach will prevail. GS: Normally, in any kind of standardization you lose some flexibility. What do you have to say in this case? What would the organization end up losing? Flexibility also has a bearing on agility. MS: Agility is one thing, standardization is another. You do not have to be bespoke in everything you do in order to be agile. Look at any standardized service for example- dial tone, I can make a call any time I want, I can disconnect any time, I can do call forwarding and it is standard. I have the same dial tone as you have. You may not need any of those fancy services. That is the difference. But how you deliver has to be standard. You will lose some control as the client, but that is part of the bargain. You have to be participatory with IT provider. This is not a one way stream. That’s where, I go back to the point about modeling out what the future would like and knowing what is going to change not only on cost side but also on the behavioral side. GS
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January 2011
Emerging Trends
The Next Stage in Managed Print Services is Here Managed print services and IT- BPO processes traditionally stood at different ends of the services spectrum. Not anymore. by Sruthi Ramakrishnan
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anaged print services (MPS) have traditionally been associated with document printing, faxing, scanning— basically managing the document- related functions and infrastructure of an organization. Handled mostly by imaging firms, these services were not something that could be, or were outsourced to traditional IT/ BPO service providers. But the past 2-3 years have seen developments which promise to change this. HP’s acquisition of EDS (Electronic Data Systems) in May 2008, Xerox’s strategic alliance with HCL and its more recent acquisition of ACS, Canon’s 2010 collaboration with Accenture- all these clearly mark the growing convergence of the hitherto completely distinct MPS and IT/ BPO markets. “There is a huge opportunity at the intersection of document management and business process outsourcing, much of which centers around paper intensive tasks. This creates a real demand from enterprises and governments for the services we can deliver, including MPS, on a global scale,” says Russ Buchanan, vice president of Worldwide Alliances (a division of Xerox’s Global Services unit).
Not Unexpected This convergence was not entirely unanticipated. Print/ document output has come to be viewed, as James Joyce, senior vice president, Xerox Enterprise Print Services’ put it, “the last unmanaged frontier when it comes to optimizing IT infrastructure” (‘Managed Print Services Drive Value for Businesses’, Global Services Media, July 02, 2010). But the maturing of managed services as a whole has been greatly responsible for this. “As we start getting into Stage 3 and 4 (of the evolution of managed print services), there is an awful lot of IT integration potential with document management systems,” says Edward Crowley, CEO, Photizo Group. “So it’s clearly becoming a focus area for the IT organizations. And in fact we see that in 16 GlobalServices
“The (Xerox- ACS) deal gives Xerox the scale to attack the $150B BPO market through a combination of services, technology and innovation,” Russ Buchanan VP of Worldwide Alliances (a division of Xerox’s Global Services unit)
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January 2011
Emerging Trends
nearly 70 percent of MPS engagements, it is driven by IT organizations, they are the ones actually managing that”. How has this integration come about? “Customers are looking for companies that can help them do two things: one,solve the big, complex problems they face in today’s fast moving and highly competitive marketplace and two, focus on core business areas where they can create differentiation for their products and services. An outsourcing partner that can help them do both is very attractive,” says Buchanan. “Imaging or document technology and document management companies have great expertise in a particular area, but the scope of their expertise isn’t always sufficient to solve the customer’s real business problems.” This is where IT/ BPO companies come in. “By acquiring or partnering with ITO/BPO companies, these companies can address a much bigger set of customer problems in a more comprehensive way, significantly expanding their addressable market opportunity.” The results are there to see from Xerox’s acquisition of ACS. “The deal tripled Xerox’s services business to more than $10B. And, it gives Xerox the scale to attack the $150B BPO market through a combination of services, technology and innovation,” he says. The Next Big Opportunity Robert T Sethre, senior consultant, Photizo Group sees this growing integration as the next profit opportunity for both groups. “Imaging OEMs (Original Equipment Manufacturers) and vendors recognize the need to develop and support services, at first “close to home” with a strong document management component, then later promoting IT services independent of the document space. IT services and BPO consultants may have been disinterested in document management, or possibly simply overlooked the potential, as it has been traditionally “messy” both from the technical support as well as from the financing and administration standpoint. But they will address the topic as well. MPS provides a framework where both groups, emerging from their core business base, will discover the profit opportunities— MPS is in this sense a true facilitator,” he says. HP was the first to recognize this opportunity. The EDS acquisition was done keeping in mind the company’s Phase 2 goal- ‘to develop a layer of leading software applications, with a particular emphasis on management automation, to optimize the performance of HP’s hardware and differentiate it in the marketplace. Phase Three has addressed the services side with a goal of bringing the business into the forefront of global providers’. Xerox and Canon followed suit, each collaborating with or acquiring IT and BPO heavyweights to provide more fully integrated end-to-end services, thus creating “a new class of solution provider,” according to Ursula M. Burns, Xerox chief executive officer. 17 GlobalServices
Geographical expansion has also motivated some of these partnerships, like in Canon’s case. Growth in Europe was one of the key reasons for its collaboration with Accenture last year, besides that of expanding its services line. As Gary Horsfall, Head of Consultancy Services, Canon Europe had commented at the time, “One of the biggest challenges faced by European organisations today is the management of their information, imaging and media assets. Through our collaboration with Accenture, we will create a series of propositions delivering customised solutions for large European organisations to manage this challenge. The launch of Consultancy Services is further evidence of Canon’s transition towards a service-led organisation, which is a key strategy in supporting our continued growth in Europe.” The More,The Merrier The prospects are not lost on smaller players. With MPS burgeoning with opportunities ranging from software, IT services and hardware manufacturing and management, this space is set to be crowded by many more providers than could be imagined less than a decade ago. “While the traditional OEMs have recognized the opportunity and necessity for developing services, this is not their strength. New market entrants who excel in the software, IT and process management and consulting space will discover and start to leverage these opportunities. Interestingly, these non-traditional players can also add hardware products and service offerings through partnerships without being forced to develop a complete hardware portfolio on their own,” says Sethre. The USP factor here would be the range of services a provider offers. This is what the big players are trying to build on, in a bid to grab the biggest slice of the MPS market pie. “One of the core premises of MPS is that nobody has a lock on all of the necessary skills or product offerings. As a result, we see new players entering the market as they start to address that new opportunity. The usual group of players may be surprized and even threatened by new vendors. Some respond through partnerships and acquisitions (Xerox/ACS, HP/EDS, Canon/Accenture). The newcomers will bring a unique set of skills that the established players cannot offer,” he says. The net result will be a great benefit for the market and respective users, but the process, he predicts, will be messy as different vendors jostle for attention and position. The winners, as Buchanan puts it, will be “the ones that go beyond traditional MPS to address production print and virtual/mobile print needs, and offer complementary capabilities in BPO and ITO to deliver innovative solutions for a broader range of client business needs.” GS
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January 2011
ADVISORY
xperts Engineering Services An Outsourcing Evolution
by Runa Mookerjee
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ngineering services outsourcing is likely to skyrocket from $15B in 2010 to around $200b by 2020. In a recent ValueNotes survey1 we found that traditional design and manufacturing services make up the largest portion of outsourced engineering services. An increasingly competitive market for engineering services has made outsourcing indispensable to the industry, more so following the recent global economic downturn. An increase demand for engineering services is leading to a corresponding increase for outsourced services. Current spending on engineering services of $750B is expected to increase to $1.1T by 2020. Industry sources expect India to play a large part in the outsourced engineering services sector.
cut back on their costs and downsize in terms of operations, processes and employees. This benefited the outsourcing industry as more was outsourced, and the trend is expected to continue through 2020. Certain regions which are also among the favoured outsourcing destinations are more popular for engineering service buyers. Besides, led by rapid industrial growth some of these Asian countries form the client base as well as provide outsourcing services.
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Growth drivers include Changing demographics among western countries - as a ‘dominant engineering service employed’ baby boomer generation reaches retirement, the availability of skilled engineering workforce is on the decline in the west. Outsourcing helps clients concentrate on core services – the availability of specialised talent that can deliver regular processes helps the firm to focus on its core competencies or development of newer technologies.
Going beyond traditional outsourcing Our survey findings indicated that outsourced engineering services are popular in aerospace manufacturing, industrial and automotive domains. A decade ago, the nature of engineering work being outsourced involved lower end services like creating digital models and drawings and sending these back to the buyer who then incorporated these in his designs. However, engineering work currently undertaken involves a substantial portion of the actual design activity. This has come as a result of buyers realising that to have
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18 GlobalServices
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January 2011
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ADVISORY
design process for its high selling Prius model. Toyota’s is a case where open innovation and crowd sourcing merge- adopting a best practice method that invites all the best minds (albeit at large!) to participate in its collective effort to cut back costs and come up with a better design for its product.
a competitive edge, they need to realise the full value of outsourcing rather than just cost savings. Subsequently, service providers have evolved into providers of specialised services with a better understanding of their customer product lines. They have also had to build new competencies, such as knowledge based engineering, life cycle management, technical publication - to adapt to changing customer needs that allow them to support complete product development. Some companies are successfully turning to technology to further their engineering services needs, effectively using Web 2.0 technologies to an outsourcing advantage. These companies take the help of means such as ‘open innovation’ and crowd sourcing - i.e. outsourcing of tasks which are traditionally performed by an employee or contractor to a large (undefined) group, community (a crowd), through 19 GlobalServices
an ‘open and usually interactive platform’. The tasks outsourced could be as simple as generating competitive or cost cutting ideas or as complex as the designing of an entire product range or a completely new product. In a multi polar global space the knowledge process outsourcing industry has grown beyond conventional outsourcing. Apart from using third party services for regular engineering services, increasingly, engineering service providers are turning to outsourced innovation to contribute to the ‘product design’ itself. Let us take a look at some examples that showcase just this – Toyota: Outsourced innovation The Japanese auto maker’s ‘value innovation’ strategy involves its suppliers beyond cost cuts and lower prices for supplies – engaging them in the www.globalservicesmedia.com
Boeing: Testing the model Boeing also made optimal use of open innovation technologies to stress test the hydraulics of the 787 Dreamliner, combining the inputs of companies in the US, UK, Japan, China. Boeing allowed over a 1,00,000 entries in its World Design Team, an Internet based global forum encouraging participation and feedback from various stakeholder groups during final states of development. Their ideas and inputs were then collected through online surveys, in turn providing updates as the design of the plane’s exterior and interior evolved. This novel innovation method allowed Boeing to build a prototype using inputs from several thousand engineers and run tests as the design emerged. Though the use of open source technologies is a debatable issue, its use in generating ideas for products is more of a win-win situation for engineering firms. Even if the design comes out eventually flawed, the firm then has a prototype which is a test of ‘what can go wrong’. On broader level, it is clear that outsourcing engineering services is here to stay and go even further in the coming years. GS (ValueNotes conducted a survey across the engineering services industry to gauge sentiment for outsourcing among buyers and service providers. A subsequent report gives in depth insights to these trends.) Runa Mookerjee is Analyst, ValueNotes Sourcing Practice
January 2011
xperts A New Role for Benchmarks
ADVISORY
by Max Staines
Traditionally a bargaining tool for clients to set pricing targets for service providers, outsourcing benchmarks are increasingly being used to collaboratively drive transformational initiatives. The result: an enhanced partnership and significant performance improvement.
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enchmark analyses of outsourcing contracts are a longstanding and commonly applied management tool to gauge the competitiveness of service delivery in the context of competitive market standards. Traditional benchmarks are often used to set a target price for service providers. In justifying an aggressive number, clients will argue that top performance should be the goal and standard that service providers aim for. Service providers, meanwhile, typically counter that top-performance targets defined by the benchmark are arbitrary, inaccurate, or based on cherry-picked numbers from myriad environments, not necessarily reflective of the unique, customized, and often constraining reality of the individual client. In this context, the process often becomes contentious, and the benchmark’s role is limited to that of a club to wield during the negotiation process. The task of finding efficiencies and savings rests, moreover, largely with the service provider. As a result, the lower the price target, the lower the vendor’s profit margin. These traditional rules of the game are fundamentally changing. Increasingly, benchmarks are being used to define and implement broader transformational change programs characterized by demand management, standard service delivery, and usage-based “pay by the drink” utility 20 GlobalServices
computing models. In this context, benchmarking is the first step in a mutually agreed program of client/ provider transformative change. The Optimization Opportunity While the utility concept of a model has been around for years, implementation capabilities have been lacking. Now, thanks to a combination of better measurement tools and more mature pricing mechanisms, businesses are increasingly looking to reap the benefits of usage-based standard service delivery. Compass data shows that traditional improvement initiatives drive incremental efficiency gains within the existing operational environment, and typically produce annual savings of 10 percent to 20 percent. A transformational approach to improvement, characterized by an optimized
IT delivery model and utility computing, often produces overall cost savings of 40 percent or more. In other words, rather than tightening the screws on the way things have always been done, IT leaders are establishing a new and significantly better way of doing things – a clean slate that fully leverages the benefits of standardization and utility computing. The improvement reflects both increased delivery efficiency from the supply side, as well as improved commercial management from the demand side. Growing interest in optimized service delivery is raising the bar for the comparative benchmark standard. The question is no longer, “How does performance compare to the what is of existing performance (either average or top quartile)?”, but rather, “How does performance compare to an optimal what could be state?” In
Total Monthly Cost Cost delta due to imposed constraints
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Cost in Unconstrained Environment Hosting
January 2011
ADVISORY
the could be state, client organizations effectively manage demand and service providers to drive efficiency and leverage economies of scale. Here, the target is no longer the best that can be achieved in the existing environment; rather, it becomes the best that can be achieved in a transformed environment. Squeezing Out Constraints Following a benchmark analysis defining the “size of the prize” of standard service delivery, usage-based pricing models can be applied to gain transparency into the business drivers of IT spend as well as the cost implications of business decisions regarding how IT is used. A business can then apply this transparency to create “tensions” between the demand for and supply of IT services. Ideally, the tensions produce incentives for the business to cost-efficiently manage consumption and for the service provider to costefficiently manage delivery. Pricing tensions can also be applied to assess the operational constraints identified by the benchmark analysis and to determine whether their cost is justified in terms of value to the business. These constraints typically come in two forms, either “contracted” – whereby the client dictates a particular custom requirement, or “non-contracted,” whereby lack of clarity surrounding processes, roles, and responsibilities drives duplication of effort and inefficiency. Realistically, not all of these constraints and premiums can or should be eliminated. But a benchmark analysis, coupled with tensioned pricing, identifies and quantifies the constraints, allowing the business to more effectively apply value-based decisions to its IT investment. Embracing the Concept A focus on transformational optimization rather than incremental 21 GlobalServices
improvement redefines the roles and responsibilities of client and service provider. Rather than place the onus solely on the service provider, the process is becoming collaborative; specifically, clients are assuming increasing responsibility for looking inward to identify the historical behaviors and operational constraints that lead to inefficiency and high costs. By allowing the service provider to leverage economies of scale and, potentially increase profit margins, this approach makes the aggressive cost reduction target more palatable to the outsourcer. Indeed, many vendors are embracing the concept of usage-based pricing and standard service delivery, because it provides them with greater control to leverage economies of scale and their expertise at efficiently delivering IT services. Coupled with the increased incentive to drive efficiency, this creates a significant opportunity to grow profit margins. In addition, the savings generated through a utility exercise are likely to be re-invested by the client organization www.globalservicesmedia.com
into new initiatives, which can be new opportunities for the service provider to generate revenue and strengthen the relationship. That said, it’s certainly true that approaches to sourcing negotiations and contracts will have to adjust, as account managers are typically compensated by revenue or size of the deal. Moreover, while the concepts of utility computing and usage-based pricing mechanisms are gaining increasing credibility, much work remains to be done in terms of refining these mechanisms and establishing effective metrics to measure and manage IT delivery and consumption in a utility-based environment. That work is underway among service providers and advisors who have proactively recognized the opportunity, as well as by others who are being pushed by competitive pressure to meet the reality of changing business requirements. GS Max Staines is President of North America for Compass Management Consulting. January 2011
Platinum Sponsors
22 GlobalServices
www.globalservicesmedia.com
January 2011
CONSUMER PACKAGED GOODS
COCA-COLA ENTERPRISES
Finance and Accounting Solutions Capgemini enabled Coca-Cola Enterprises to achieve major cost savings through a finance optimization project The Client: Coca-Cola Enterprises is the world’s largest marketer, producer and distributor of Coca-Cola products. Operating in 46 U.S. states and Canada, CCE is the exclusive CocaCola bottler for all of Belgium, continental France, Great Britain, Luxembourg, Monaco and the Netherlands. Sales represent 16% of The Coca-Cola Company’s worldwide volume.
million per annum in CCE’s transaction work, through a finance optimization project. Solution: CCE chose Capgemini to implement comprehensive finance and accounting (F&A) solutions throughout CCE’s global business to create an efficient process in a cost-effective environment for order-to-cash services, purchase-to-pay accounting, and record-to-report activities, as well as a comprehensive document management solution. The transformation project focuses primarily on a joint CCE-Capgemini unique order-to-cash approach, utilizing a best-of-breed credit toolset designed to increase the effectiveness and efficiency of credit and collection departments. In addition, the automated credit module enables CCE to apply a single set of approved rules and procedures to every credit decision, improving the efficiency and consistency of the decisionmaking process.
Situational Analysis: In early 2007, Coca-Cola Enterprises (CCE) conducted a benchmarking exercise to see how the organization’s effectiveness and efficiency stacked up against the competition. With this study they identified that to become more efficient, CCE would need to conduct as much of its transaction processing as possible in a low cost country, either with a third party outsourcer or a captive shared services center. The economic goals were to achieve cost savings of $20
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We are on track to achieve the targeted savings at the tail end of the transition with Capgemini. Our internal benchmarks have gotten better, and through good people management, we have reduced severance costs. The concept of Capgemini’s Rightshore solution is a definite plus on their side of the ledger.”
SUCCESS METRICS The contract with CCE will run for seven years from July 2008, and the total contract value amounts to approximately $137 million. The partnership will realize the following benefits for their business: � Accelerate the transformation and help achieve near world-class performance through standardizing and streamlining operations. � Deploy a global unified solution across all CCE business units to support the business that includes standardization and process improvement while maintaining high standards of control and compliance. � Achieve a minimum savings target of 25% � Mitigate risks while transitioning the work and implementing new tools, systems and technologies.
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JOE HEINRICH, VICE PRESIDENT, FINANCE GLOBAL INITIATIVES, CCE 19 GlobalServices 23 GlobalServices
At A Glance
CLIENT Coca-Cola Enterprises SERVICE PROVIDER Capgemini INDUSTRY Consumer Packaged Goods SERVICE PROVIDED Finance and accounting solutions SOLUTION A unique order-to-cash approach to the transformation project
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For more information on Capgemini, write to Claude Hartridge, Vice President, Executive Sales at Claude.hartridge@capgemini.com
December 2010 January 2011
OWENS & MINOR
HEALTHCARE
‘Lift & Shift’ Migration Dell Services used a “lift and shift” migration to modernize a heavily customized ERP platform The Client: Owens & Minor, Inc., a Fortune 500 company, is a leading national distributor of name-brand medical and surgical supplies and a healthcare supplychain management company. Situational Analysis: The company needed to modernize its systems to provide for future enhancements and growth, while improving performance. The decision to migrate all mainframe processing of its mission-critical enterprise resource planning (ERP) system to a framework based on Microsoft® Windows® was also governed by the need to preserve the company’s 20 years of IP-based data, systems, and unique business logic. Specific project goals included: � Achieving timely or early project completion to allowing termination of mainframe services � Preventing disruption to ongoing business operations � Delivering defect-free software in the Windows environment � Implementing change control processes to allow business-critical
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changes to current systems during the migration period Sustaining adequate performance of applications in the Windows environment Ensuring that the project stayed within the approved budget
Solution: Dell Services used a “lift and shift” migration to Windows to modernize Owens & Minor’s heavily customized ERP platform. The first aim of the lift and shift migration was to achieve a “like-for-like” system by running extensive testing. The implementation of a relational database management system reduced risk by introducing minimal change to applications, while providing for data tier modernization. The key steps followed by Dell Services in the migration exercise were: � “Lift and shift” Cobol from Mainframe to Wintel � Configure Database I/O routines in Wintel Environment � Retrofit � Test and Fix � Implementation
This was a complex and mission-critical project, and we are proud of the benefits this successful collaboration brings to Owens & Minor. The migration establishes a powerful and flexible computing platform to drive future growth and innovation.” CHUCK LYLES, PRESIDENT OF DELL SERVICES PUBLIC SERVICES SECTOR
26 24 GlobalServices
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At A Glance
CLIENT Owens & Minor SERVICE PROVIDER Dell Services INDUSTRY Healthcare SERVICE PROVIDED Mainframe Migration SOLUTION Used a “lift and shift” migration to Windows
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Cost savings. The project is expected to yield substantial annual savings while improving efficiencies for supply chain management. Planning for the Future. The migration ensured that the company’s core IP remained intact and achieved greater optimization. Higher performance. The new IT infrastructure delivers greater performance capabilities. Enhanced customer service. The user interface modernization will deliver better online tools for Owens & Minor customer service representatives. Increased staff productivity and efficiency. Simplified business processes.
For more information on how Dell can help your organization, please contact Sujata_Rakhra@Dell.com or Savitha_Lakshman@Dell.com. Please also visit dell.com/services for more information on their capabilities.
December January 2010 2011
DIVERSIFIED
A FORTUNE 100 COMPANY
Message Migration and Management Microland ensures Six Sigma class email availability and zero error migrations for the world’s largest Microsoft Exchange installation The Client: The client is a Fortune 100 diversified company with a strong set of global businesses in infrastructure, finance and media. The client operates across multiple segments including aircraft engines, power generation, medical imaging, television programming and consumer goods.The client is listed in the NYSE and is a constituent of the Dow Jones Industrial Average (DJIA). Situational Analysis: The client houses the largest enterprise Microsoft Exchange setup in the world today, with over 400,000 mailboxes. The messaging infrastructure is spread across 19 data centers with over 500 servers around the world. In addition to this, the infrastructure also caters to about 50,000 mobility users. The client needed a partner who could: � Manage the messaging infrastructure and the user accounts from a centralized offshore location while ensuring continuous availability to the business � Lower the operational costs & implement a shared services model across the organization � Migrate mailboxes to newer Microsoft Exchange platforms when needed 25 GlobalServices 23
Solution: Microland started this engagement in 1999 and continues to manage the messaging infrastructure for the client. At that time, the infrastructure consisted primarily of Exchange 5.5 servers. Over the years, in addition to managing the messaging ecosystem, Microland also undertook platform migration from Exchange 5.5 to Exchange 2000 and later to Exchange 2003. The salient points of the Microland solution are � A total ecosystem based approach for managing the messaging and the associated infrastructure viz. instant messaging, security, mobility, storage, backup etc � Consolidation of the exchange environment and a single SLA driven ITIL based messaging management model across the organization � Extensive leverage of Six Sigma and FMEA (Failure Mode Effect Analysis) methodologies to ensure continuous process efficiencies � Proactive monitoring and management of incidents using automation frameworks � High visibility and control of operations to the client through a customized CIO Dashboard www.globalservicesmedia.com www.globalservicesmedia.com
At A Glance
CLIENT A Fortune 100 company SERVICE PROVIDER Microland Limited INDUSTRY Diversified SERVICE PROVIDED Messaging Management & Migration SOLUTION Leveraged Six Sigma and FMEA methodologies
SUCCESS METRICS � TCO Reduction: Vendor management costs reduced by 30%; Data center consolidation and virtualization reduced server footprint by 30%; Delivered yearon-year reduction in cost per mailbox � High Performance: Maintained email service availability at 99.9X%; Ensured defect free-migration and deployment, and zero end user impact on migration � IT – Business Alignment: End to end service delivered to client’s shared services group offering them ease of management and chargeback; New site/cluster deployment time reduced from 32 to 9 days, thus increasing the IT’s teams’ responsiveness to business needs; Enabled automatic retrieval and download of warranty and contract details and triggered automatic alerts 30/60/90 days before warranty expiration, thus streamlining and internal business process for the client’s IT team
For more information on Microland Limited, write to TransformIT@microland.com or visit www.microland.com
January 2010 2011 December
METLIFE
BANKING, FINANCIAL SERVICES & INSURANCE
Streamlining Operational Workflow Situational Analysis: MetLife was looking for a solution to streamline its operational flow, reducing the amount of manual processes and consolidating proposal information into a single database while continuing to meet the company’s high quality standards. In order to do this, MetLife needed a reliable partner to provide: �
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A new, automated operational flow for life insurance issuing process High-quality IT applications, process controls and business rules. Project deliverables in a timely and well-scoped manner.
Solution: MetLife chose one of the top application development companies in the world, Ci&T. Ci&T delivers con-
sulting, application outsourcing and digital marketing services to its customers – with its innovation, expertise and skill set. Through the partnership, MetLife was able to work with Ci&T’s experts to streamline life insurance issuing process, creating a state-of-the-art automated system named Morpheus. This allowed MetLife to achieve higher workforce productivity and better databank control management, vital in accomplish its goal of increasing clients to 100 million worldwide by 2010. Ci&T was able to meet every preestablished milestone and the project was completed within five months. � MetLife has achieved a reduction in the time required for issuing life insurance policies from 10 days to less than 24 hours. � MetLife’s Brazilian unit reduced the insurance proposals approval time by 90 percent.
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“When we invested in the implementation of a new application by Ci&T, MetLife sought an innovative tool that would allow the issuance of policies with significantly greater efficiency. Once successfully in use for our individual and SMB customers, we decided that our corporate clients would benefit from the tool as well. What began as an isolated support tool is now critical to the daily operation of our business.” BRENO GOMES, CHIEF INFORMATION OFFICER, METLIFE BRAZIL
8 GlobalServices 26 GlobalServices
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At A Glance
CLIENT MetLife SERVICE PROVIDER Ci&T INDUSTRY BFSI SERVICE PROVIDED Mainframe Migration SOLUTION Created a New Automated System
SUCCESS METRICS Ci&T was able to meet every pre-established milestone and the project was completed within five months. � MetLife has achieved a reduction in the time required for issuing life insurance policies from 10 days to less than 24 hours � MetLife’s Brazilian unit reduced the insurance proposals approval time by 90 percent
For more information on this service from Ci&T, write to leonardo@ciandt.com or visit their office at Ci&T, 640 Freedom Business Center, Suite 210, King of Prussia, PA 19406. Phone: +1 610 482 4810 Fax: +1 267 775 3347
December 2010 January 2011