R. Arun Kumar, Sr. Vice President, Global Sales Leader, Application Services, CapgeminiPrint This Page
Back when IT Outsourcing and Offshoring were still novel concepts in the
early 1990s, the main motivation behind them was cost, the idea being that
Western companies with high labor costs could save thousands and millions of
dollars by sending work to ‘low-cost’ countries with a quality IT labor pool.
There was also the notion of these countries slowly developing into IT
specialists with the technical knowledge required to develop software that
supported the businesses they probably knew little about. Back then they
probably didn’t have to.
Circa 2013 and the story has evolved in some surprising ways. And this is
largely due to the Five Disruptive Trends that I wrote about in the
Aug 2012 issue of the
SIG newsletter. These trends relating to i) Higher automation in IT services
leading to lower labor costs, ii) Increased availability of affordable talent in
local markets leading to more Reshoring, iii) Flexible delivery options
and adoption of Cloud, iv) Simplification and Rationalization to link IT
to Business value, and v) A more nuanced understand of the associated Risks
including the reputational one, have today moved the IT Services outsourcing
discussion from being cost-centric to a more business value-centric one.
Let’s take a look at how these trends are re-writing the current IT Global
Sourcing Playbook and forcing CIOs and service providers alike to rethink
traditional paradigms of sourcing.
#1 – From a Labor-costs to a more TCO-driven Approach
Labor cost as a percentage of Total Cost of Ownership (TCO) has gone down
over the last 3-5 years. The cost arbitrage of the low-cost destinations for IT
services, like India, has steadily eroded due to higher local costs of living,
increasing pay and aspirations, and resource churn. Therefore, the efficacy of
labors costs alone as a lever to reduce TCO has also significantly reduced. CIOs
too have realized that over-utilizing labor cost as a lever can even jeopardize
the stability of their overall program.
CIOs have also opened their eyes to the possible pitfalls of outsourcing to
one or two ‘cheaper’ destinations like distance from the end customer, hidden
costs, loss of connection with strategic parts of the business, and a large
labor turnover which is inherent to the IT industry.
Slowly and surely, other factors like physical infrastructure and support,
communications, training, BCP and possibly ‘softer’ aspects like transition,
governance, change management are making their mark on the overall TCO for any
large IT outsourcing project.
In parallel, just as is happening in the auto manufacturing industry, the
role of automation in IT services is chipping away at the use of labor and FTEs
in delivering long-term support and maintenance engagements.
The CIO today realizes that the way to manage overall financial impact or TCO
in the current scenario is to look at it holistically rather than focusing on
only one or two obvious components like labor costs.
#2 From India-centric to Location-agnostic Global Sourcing
Generic Electric, one of the pioneers of outsourcing has been in the news
recently for bringing more than 1,100 IT positions back to the US over the next
couple of years. Others, like General Motors, another early adopter of
offshoring, are also following the same trend today. The Economist has recently
come out with the results of a
survey that terms this trend as ‘Reshoring’!
More and more, this is reflective of a trend where companies realize that
it’s not only about cost but about what’s right for the business and its
customers. Terms like re-shore, in-source, homeshore and rightshore®
are today the new reality of global sourcing where companies work with a network
of suppliers from all over the world including internal captives even, based on
capability and value rather than cost.
The availability and growth of IT service delivery centers around the world,
including in Eastern Europe, Latin America, and even in low-cost locations
within the US, is a phenomenon that needs to be taken into account in any
strategic sourcing decision framework.
This is a huge shift from the India-centric offshoring model that was
prevalent in the last decade. Distributed, equally compelling global centers and
further erosion of the ‘location’ consideration due to emerging new cloud-based
service delivery models are a key feature of the emerging sourcing playbook.
#3 From a Traditional Delivery Model to Multiple As-a-Service Oriented
Cloud, mobility and social media are leading to the consumerization of IT –
they are changing the very way we interact with each other, consume data, derive
insights, shop, plan vacations, or even choose the very person we plan to marry.
Now this consumerization is making its way into Enterprise IT.
For the CIO, this means static applications are making way for dynamic,
on-demand services that customers and employees are accessing via a range of
devices from desktops and laptops to tablets and smart phones. Add to this the
complexity of delivering these through a combination of owned and shared
infrastructure. And doing it in real-time, securely!
CIOs are therefore rethinking the way their systems, or for that matter,
their very business model, needs to be geared up to deliver products, services
and data to their end customers and employees. And it has an impact of the
sourcing model they adopt to implement and deliver the same.
This can be achieved by not only adopting, but fully embracing and developing
a case for newer delivery platforms whether it is the ‘as-a-service’ models or
the ubiquitous cloud.
In fact, with the advent of Cloud-based services and providers, the role of
‘location’ as such is becoming less important. As one of the senior Gartner
analysts eloquently and cheekily put it, ‘It is no longer about your place or
mine’! With a Cloud-based service delivery model, companies have less of a say
in the specific locations, and their approach will move towards being more
#4 From a Monolithic to an Integrator-led Collaborative, Transparent
The new realities of our constantly connected, social and mobile world
introduce new competitive dynamics. CIOs are closely tied to and measured by the
business value they create and have to worry about new products, better response
times, business results, and innovation. To effectively respond to these
changes, CIOs, and even other CXOs with high technology spend, are beginning to
think about their IT organizations not as a single provider but as an
interconnected ecosystem of partners, suppliers, and end users. There is a
definite shift from the past model of ‘developed in-house’ to ‘off-shored’ to
today a complex ‘network of suppliers’. Why, some CIOs are even beginning
to co-create with their end customers and suppliers.
At the same time, the increased complexity of the technology systems and
architectures requires a more simplified and rationalized approach to IT
governance, higher transparency, and a more collaborative approach to sourcing.
The need of the hour therefore is not a service provider that can simply
develop, deliver and maintain applications, but an integrator that can also
bring in standard processes/tools, consolidate service performance management
across suppliers, create a common interface with business, and work with shared
SLAs and agreements. All this while delivering increased customer satisfaction,
reducing non-discretionary spend, ensuring a transparent governance system and
freeing up the customer’s IT organization to get closer to the business.
It’s the coming together of people, technology and process in a manner not
unlike a symphony orchestra where the conductor energetically leads the
performance of a band of musicians who look calm (at least on the outside!)
#5 From a Single-threaded Cost-benefit Approach to a more Holistic
Risk-oriented Decision Framework
With the recent upswings and downturns the global economy has seen, what has
continued to increase is the regulatory and other constraints on business. This
has forced CIOs to change the way they have been operating and look at the
bigger picture rather than living from IT project to IT project.
The single-threaded cost-benefit analysis that used to take into account
basic risk items like disaster recovery and business continuity no longer meets
the complex risk scenarios and environment now; spanning ever-growing regulatory
patchworks at global and local levels, reputational risks with stakeholders and
community, and the continuing political and economic fallouts of global
As businesses become more agile, mobile and social, the need to manage risk
has moved from being reactive to more about proactive prediction and mitigation.
CIOs today are looking for strategic partners who are aligned to this way of
thinking and can approach risks more holistically and provide them with
comprehensive mitigation plans – those who are willing to share risks and
rewards and demonstrate ‘skin in the game’.
The Way Forward
As the global economy and indeed the globe shrinks, CIOs and service
providers are grappling with the new realities of the way we do business today.
The current sourcing playbook is becoming irrelevant with the disruptive trends.
The need of the hour is to once again shift the paradigm from thinking about the
‘now’ and trying to maximize the current value, to thinking about how a
strategic IT sourcing model can influence and get in front of the changing
business trends and maximize future value.
How does one adopt a Sourcing Model that future-proofs the enterprise? Food
for thought for the next article!
 Rightshore is a trademark belonging to Capgemini