Opportunities and challenges presented by Globalization :IT Service providers in Continental Europe
EXECUTIVE SUMMARY Enterprises within Europe are increasingly trying to seek the advantages of global sourcing. Unlike enterprises in U.S. or U.K., continental European countries have historically been reluctant to engage with offshore providers. The reasons were far stretched, ranging from political sensitivity, labor laws, cultural compatibility and language requirements. Globalization, however, is creating new avenues that European companies can not ignore. A recent report by Gartner shows the potential IT Offshoring market to be in the range of about $ 200 to 240 Billion. The market is expected to register double digit growth for years to come. The current offshore spending by firms amounts to just $17 Billion worldwide. This clearly shows a big gap, a huge market potential which is yet to be exploited. The huge demand has also led to emergence and growth of several new players in the field of IT Outsourcing/ Offshoring services, this is leading to ever increasing competition in the marketplace. In order to cope up with this increased competition and to provide better services, these service providers are increasingly adopting Global delivery models. By selecting an advantageous and cost effective proportion of resources worldwide, Global Delivery Model boosts business performance while also lowering costs. It also helps the supplier deliver requirements that are met on-time, within budget, and with high quality; greater efficiency and responsiveness to their clients. In Europe, nearshore models still dominate the market. But these models are continuously being updated, with more and more providers setting up Offshore Development Centers in locations like India. A framework for building an optimal combination of onsite, nearshore, and offshore delivery capabilities is provided by Capgemini's Rightshore® model. A recent Gartner report has suggested that, the current US economic slowdown is expected to lead buyers of IT services to consider increasing the percentage of their labor in offshore locations. India will remain the dominant location for IT offshore services for North American and European buyers as a result of its scale, quality of resources and strong presence of local and traditional service providers.
INTRODUCTION: EUROPEAN IT MARKET * The European market remains a highly complex and competitive market with a large number of providers. Mergers and acquisitions will continue but will be balanced by new market entrants * Outsourcing adoption in Europe is increasing for both infrastructure and applications; the widespread lack of well defined sourcing strategies among buyers and the realities of ever-changing business requirements will generate frequent deal negotiations and renegotiations * Global delivery and utility services are irreversible trends evolving at different speeds among various European countries. The European multi country, multi language/culture composition increases the evolutionary complexity of these trends * Selective outsourcing with multiple providers will remain the preferred model of engagement for European buyers. Governance and end-to-end integration/management of different providers/solutions are the most challenging aspects of it * ITO market maturity varies: UK is the most matured IT market in Europe. The other European markets are maturing at different speeds. An acceleration in ITO adoption is now apparent in countries such as France and Germany A focus on achieving service delivery excellence and the best value/quality balance is increasingly driving European organizations (especially those beyond the first generation deal) to consider selecting multiple providers for an outsourcing contract. For example, in the IT Telecom sector, the most common division is by service tower, with customers opting to choose different providers for their network, desktop, data center and application competencies. At the moment, however, providers tend to join forces in an opportunistic manner, as a response to customer demands. This is the cause behind the ever-changing composition of the "providers teams"; as a consequence, consolidating best practices to manage IT service spin offs between different providers in an effort to guarantee end-to-end service delivery excellence remains challenging. As the number of providers engaged is set to increase, this challenge is likely to intensify. It will also be driven by other market characteristics, which include a persistent tactical use of outsourcing by European customers, insufficient process maturity, and lack of clarity in the definition of roles and responsibilities. As we look at global delivery, it is fair to say that there are two major misconceptions that still exist among the European market: 1) Global delivery is often considered as a synonym of "offshore," and 2) IT services delivered through global delivery capabilities are application services. In reality, in the past few years, the European market has witnessed a considerable expansion in terms of both geographical location options (in areas such as Eastern Europe or North Africa, for example) and portfolio of services offered (now including, for example, help desk and remote infrastructure management services). Global delivery and offshore, however, remain the key deal characteristics that need to be treated with extra care in many European geographies, and as a consequence, many deals remain confidential. Traditional providers' investment will be directed toward enhancing existing capabilities (especially "near shore" in Eastern Europe) and ensuring process solidity. Offshore providers' investment on the other side will be centered on creating front-end capabilities with a focus on specific country and vertical-oriented competencies. While these global delivery models mature and are refined/ optimized, customers' satisfaction will remain a challenge.
KEY TRENDS SHAPING IT OUTSOURCING MARKET IN EUROPE
CHARACTERISTICS Selective Outsourcing With Multiple Providers * Embraced by majority of European companies * Objectives: IT excellence and cost optimization * Integration and governance challenges Global Sourcing and Global Delivery Models * Near shore proximity key for European market * Expanding portfolio of outsourcing services * Key area of investment for providers and buyers IT Utility * Industrialization is accelerating * Convergence of IT utility and global delivery * Key drivers: flexibility, efficiency, optimized cost, speed Aggressive ESP Competitive Landscape * National, "global" and offshore ESPs converging * Mergers, acquisitions and divestitures to continue * Providers are implementing new business models * New offshore market entrants Application Outsourcing to Grow * Drivers: portfolio rationalization, legacy modernization * Global delivery will gain acceptance * Multitude of providers competing
Source: Gartner The U.K., Netherlands, Sweden and Finland are examples of countries more attracted by the global delivery model. However, in the meantime, the impact of global competition has started to drive countries such as Germany and France to consider global delivery as a viable option to be considered strategically, rather than when all other options have been exhausted. Despite a slower gestation and the fact that a complete infrastructure utility (IU) offering has not yet been developed, the IU model is continuing to attract new offerings and/or new providers. In the meantime, European customers, attracted by the idea of being able to access IT services in a flexible way, remain cautious as they expect further clarity on issues such as unit definition, pricing mechanisms, integration to existing systems, and security portability In the near future, we expect that the IU for ERP platforms will remain the most common battleground for providers; other providers are expected to instead mask their IU offering behind a package that includes "product and support services." The concept of software as a service (SaaS) or ready-to-use applications will continue to generate lot of interest. Expectations for a solid delivery and specific functionalities will drive providers to specialize their offerings. Finally, gains in terms of process efficiency will be seen as crucial to deliver enhanced competitiveness, flexibility, agility and cost optimization.
GLOBAL TRENDS: IT OUTSOURCING and OFFSHORING MARKET
IT Outsourcing market is showing an average growth of 9% p.a. IT Outsourcing Worldwide forecast (Million $)
Source : Gartner Dataquest In terms of volume, North America continues to be the leader in IT outsourcing. Ÿ Latin America and APAC have shown good growth Ÿ Europe has fast emerged as a big IT outsourcer Global offshore spending is continuing to register double digit growth. Worldwide Offshore IT Services Spending by Importing Region (million $) Source: Gartner Dataquest, 2004 and Worldwide and U.S. Offshore IT Services 2006-2010 Forecast n In terms of volume, the North America continues to be the leader in IT offshoring. n Once averse to the idea of outsourcing, Europe is now steadily adopting an IT offshore model to boost the economy n Global offshore spending is projected to increase to 29400 $ Million in 2010 The graph on the next page shows the potential market for various types of sourcing options. This clearly depicts that he IT and Business Process offshoring market has grown at a tremendous rate over the past 7 year and the market provides a huge potential which is yet to be exploited.
IT and BPO market Source Gartner, Dataquest, Aberdeen Group, McKinsey, Evalueserve, Infosys, IDC and Nasscom strategic review 2008 q Currently we are not even exploiting 10% of the potential market size ( IT services off shoring just at $17 Billion, whereas market potential is about $200-240 Billion *) q According to a new research by Gartner, the market is likely to grow further after the financial slowdown, as firms will try aggressively to reduce costs and improve efficiency
Different Sourcing Models In-sourcing / Shared Services: Sourcing from internal sources or from an affiliated firm in the home economy Onshore Outsourcing: Sourcing from a non-affiliated firm in the home economy Captive Offshoring: Sourcing from an affiliated firm located abroad Offshore Outsourcing: Sourcing from a non-affiliated firm located abroad
REGIONAL DYNAMICS ACROSS EUROPE The following section will describe the regional ITO trends and local dynamics across different European locations.
UK and IRELAND 2005: €17.2B 2010: €25.7B 2005-2010 CAGR: 8.3% ITO drivers: Improve IT quality for end users, speed/flexibility, access to technical skills, cost reduction Inhibitors: Loss of control, lack of trust, security/privacy, IP
Key trends: • Most mature market in Europe with wider number of mega deals (public sector) • Deal sophistication, including government. Increasing interest in new pricing schemes, business enhancement and shared services • More selective sourcing and global delivery • Areas such as Scotland and Ireland feeling pressure of Indian and Eastern European operations • Wide potential for application engagements to mature from project engagements into outsourcing based engagements Despite being the largest and most mature market in Europe, the U.K. remains also one of the fast-growing ones. Here organizations seem to have moved away from the equation of "outsourcing = cost reduction." While cost remains a key component, other objectives seem more important, such as improving IT service delivery, gaining specific skills, especially for application outsourcing deals, and becoming a more flexible organization. (See Appendix F) Inhibitions remain related to a general lack of trust in the ability to join forces with the providers to manage security, control over IT operations and IP. The U.K. market is characterized by a large number of mega deals, especially in the public sector. These outsourcing deals often include initiatives that have classically been carried out through project engagements and now are increasingly being performed in the initial phases of an IT outsourcing or BPO deal. This change reflects the growing desire of customers for a tighter link between investment and results (for which the outsourcer is responsible during the duration of the contract) and the important shift in role for the internal IT department. Rather than focusing on assembling and managing all of the necessary skills and capabilities to meet a certain objective, IT organizations, in this scenario, are responsible for coordinating the objectives of the Business Unit and the internal and external providers engaged to support them. Often infrastructure outsourcing is at the core of these complex relationships. At the same time, the U.K. is also the largest market in terms of adoption of IT services delivered through a network of global delivery capabilities (which include nearshore and offshore locations). From this point of view, areas that used to be considered as low cost for outsourcing operations (Scotland and Ireland) continue to feel the pressure of Indian and Eastern European capabilities. Finally, organizations that have engaged for a long period of time in project-based application deals are planning to elevate them into more-strategic, long-term application management engagements. This will allow them to gain a longer-term commitment from the service provider and the relevant support to re-evaluate their application portfolio.
NORDIC COUNTRIES 2005: €5.2B 2010: €7.6B 2005-2010 CAGR: 8.2% Drivers: Cost reduction, access to technical skills (especially in application outsourcing engagements), support in global operations, focus on core business Inhibitors: Loss of control, security/privacy, lack of trust
Key trends: • Nordic market generally mature. Many large deals are in second or third generation. Some likely to evolve toward multi sourcing • Large corporations see global delivery as a viable option. SMBs see nearshore option more favorably • Consolidation drives specialization by geography, vertical market or horizontal service • Increased competition between regional and global ESPs • Cultural affinity seen as crucial to guarantee deal success/longevity Each of the four country markets that compose the Nordic region has its own distinct characteristics and buying behaviors in IT services. However, if we look at the forecast growth between 2005 and 2010, we expect the region to grow at a similar speed (despite size differences) of about 8%. Denmark: Sometimes seen as the "entry point" for the global service providers to the Nordics. Expected growth is from €856 million in 2005 to €1.2 billion in 2010 (CAGR of 7.8%). Finland: Unique in the Nordic region as buyers focus much more on business value of an outsourcing deal rather than just cost. Expected growth is from €1 billion in 2005 to €1.45 billion in 2010 (CAGR of 7.5%) Norway: Remains the smallest outsourcing market in the region. Expected growth is from €1.2 billion in 2005 to €1.8 billion in 2010 (CAGR of 8.1%) Sweden: Largest market and very cost-competitive. Probably the Nordic country targeted most by offshore providers currently. Expected growth is from €2 billion in 2005 to €3.1 billion in 2010 (CGR of 8.7%) From a client perspective, the Nordic region market is generally mature, with many large corporations in second- or third-generation outsourcing deals. Global delivery is widely accepted as an option. Competition between regional providers and global providers is increasing; this was initiated by the inability of local providers to support the operations of key Nordic organizations around the globe. However, recent acquisitions and divestitures by both local and international providers prove that the market has still got room for further maturation and consolidation.
NETHERLANDS 2005: €3.4B 2010:€5B 2005-2010 CAGR: 8% Drivers: Cost reduction above all, agility/flexibility, improving service to end users Inhibitors: Loss of IP and control, security/privacy, high cost
Key trends: • Market shows mixed signs of maturity (organizations accept global delivery) and immaturity (sourcing strategy is often neglected) • Market split between large global corporations and wide portion of SMBs • Increased competition for local/national champions • Application under scrutiny for externalization The market in the Netherlands is one of the more modern IT outsourcing environments in Europe, closely following the U.K. in many trends. A focus on global delivery and the expansion of many deals into the application or business process layer points to more market maturity. This maturity is driven primarily by the relatively high proportion of large (and often multinational) enterprises headquartered in the Netherlands and competing in major markets such as financial services. But there are some contradictory characteristics that point to an immature market (cost cutting is by far the major driver, and sourcing strategy is often neglected); this, as a consequence, often inhibits the potential success of outsourcing initiatives. The market remains very challenging and competitive. This is due to the high presence of small and midsize businesses (SMBs), which traditionally tend to consider outsourcing as a threat more than an opportunity and require a higher level of customization, which tests the profitability model of service providers. Competition remains strong for national champions as global and offshore providers continue to target opportunities in the country. Increasingly, application outsourcing opportunities are emerging as organizations look at portfolio rationalization, legacy system transformation, and custom application software development initiatives and accessing application utility solutions.
FRANCE 2005: €6.6B 2010: €10B CAGR: 8.4 % Drivers: Cost reduction, refocus internal IT, speed/flexibility Inhibitors: Loss of control, lack of trust, security/privacy
Key trends: • Beyond its reliance on staff augmentation, France's outsourcing market shows opportunities in all facets of outsourcing: infrastructure, applications and BPO • Selective outsourcing has gained acceptance, and organizations show cautious interest in global service delivery • National champions remain under competitive pressure from the global and multinational providers France has long been considered behind in the outsourcing trend. Now, however, the French outsourcing market is consolidating and growing, while the long-standing reliance on staff augmentation is losing strength. The major driver that will support a CAGR of over 8% between 2005 and 2010 is the need for French organizations to reduce cost and enhance their level of competitiveness in the market by refocusing their internal IT skills on more-strategic tasks while gaining flexibility. On the other side, it is interesting to see that challenges related to HR management have lost strength, compared with the traditional fears related to loss of control and security and lack of trust. Large organizations have recently moved toward the adoption of selective outsourcing with multiple providers. This model has gained acceptance as organizations look at maximizing the balance between cost and service delivery excellence. There is also a new focus on application outsourcing. This trend is important not only because it signals an acceleration in the growth of outsourcing in France overall, but because it signals a major change in the way French organizations use different kinds of IT services. Increase in application outsourcing deals also touches on one of the major taboos of IT services in France: offshore outsourcing. As such, although offshore remains a word to be used with extra care in the French market, many organizations would consider that access to global delivery models is an appealing part of outsourcing, especially when delivered by traditional players. In this case, North Africa (Morocco, for example) is emerging as a viable near shore location. National champions, the providers that focus on a specific region or country, remain under competitive pressure from the global and multinational providers.
GERMANY 2005: €10.6B 2010: €16B 2005-2010 CAGR: 8.6% Drivers: Cost reduction above all, focus on core business, refocus internal IT Inhibitors: Security/privacy, lack of trust, loss of control
Key trends: • Global economic pressures have forced many organizations to look at outsourcing as a viable option • In the short term, objectives such as flexibility and agility are secondary • Pressure to divest internal IT departments or internal shared service organizations remains strong • Global delivery gaining ground especially toward Eastern Europe • Intensifying competition between strong German players and global ones • Legacy system modernization will remain a key objective The German market is “federated” in several ways: government responsibilities, industrial centers, buying centers within enterprises, and management structures in place. All of this makes doing business in Germany (and negotiating significant IT service deals) unique. Decision processes tend to be longer, require more consensus building and often entail more travel than in other parts of Europe. For a long time, the majority of German organizations have considered IT operations as a key component to maintain or enhance their level of competitiveness in the market. This has, as a consequence, slowed the outsourcing growth. In the past two years, however, economic pressures have forced many organizations to look at outsourcing tactically to cut cost. While in the short term, achieving flexibility is a secondary objective, organizations look at outsourcing as a way to refocus their internal capabilities while focusing on their core business. The traditional inhibitors around security, trust and loss of control apply. While non-German external service providers (ESPs) still find it difficult to position themselves in Germany (exceptions are IBM Germany, which established itself early on as a “German” ESP, and HP, based on its early SAP hosting business and penetration as a technology provider), German providers maintain strong domestic positions and are starting to focus on expanding their international presence (through T-Systems). In the short term, German organizations will still consider selling their own IT capabilities, while global providers will see these as viable targets to build capabilities as long as they provide financial support through a long-term outsourcing deal. Finally, beyond potential healthy growth for ERP application outsourcing initiatives (especially SAP), as many organizations look at legacy system modernization, it is likely that many projects will evolve and deploy model to include the long-term management of applications.
EASTERN EUROPE 2005: €1.1B 2010: €1.6B 2005-2010 CAGR: 7.9% Drivers: Acquisitions made by large Western European organizations, increased competition, need to revamp obsolete IT environments (leap-frog) Inhibitors: Low expertise to manage OS deals, high cost of OS, loss of control
Key trends: • Slow internal consumption of outsourcing • Key nearshore delivery hub for providers supporting operations of European organizations • Local Eastern European service providers will remain target for acquisitions • Long-term growth will be supported by increasing competition, acquisitions made by Western companies and the penetration of Western ESPs in the region • The region has become a strong global delivery hub Recent admission to the European Union has transformed countries such as Poland, Romania and the Czech Republic into attractive locations to establish global delivery capabilities designed to deliver IT services to European or global customers. Eastern Europe has been identified as an ideal region to establish a service delivery hub by U.S.-based providers (IBM, Accenture and EDS), European ones (Atos Origin, Capgemini, T-Systems, SIS and S&T) and offshore ones (Ness, TCS, Satyam, Infosys and Wipro). When necessary, providers are openly seeking acquisitions to gain scale; it is the case for SIS, which acquired ELAS, HT Computers in Slovakia, and Ibis-Sys in Serbia (February 2005). Others, like Austrian-based S&T, are pursuing a strategy of becoming the provider of choice in Eastern Europe through a combination of organic development and local acquisitions. S&T acquired Computacenter Austria to strengthen its product resale capabilities. Although internal consumption of outsourcing has been slow, it is expected to grow rapidly, thanks to increasing competition driven by the fact that private-sector companies and public-sector organizations are now focusing on bringing their systems into line with market standards. This is leading to some “leapfrogging” effects — the IT utility approach, for example, holds significant appeal without posing the same transition challenges as elsewhere — but because these markets are fairly immature, there is still a strong focus on products and product support services rather than more-sophisticated IT service engagements. Italy and Spain are two other major countries with an expected ITO market size of about 5 Billion $ each by the year 2010.
GLOBAL DELIVERY MODEL GDM is a unique approach to outsourcing and off shoring, which offers the best of both worlds by blending onsite, onshore and offshore resources and locations. By using a far-reaching network of onsite, onshore, and offshore resources, GDM aims to cuts across geographies to access the right resources, in the right place, at the right cost. By selecting the most advantageous and cost effective proportion of resources worldwide, Global Delivery Model boosts business performance while also lowering costs. It also helps the supplier deliver requirements that are met on-time, within budget, and with high quality; greater efficiency and responsiveness to their clients. In this section we would discuss in detail, the key drivers to a successful GDM. Source: Capgemini, 2008
KEY DRIVERS OF A SUCCESSFUL GDM
STRONG PROCESSES Strong processes are the backbone of a successful Global Delivery Model. There is a strong need for detailed, documented and time-tested processes for all the activities and interfaces. * Strong quality and project management processes ensure delivery excellence. * World class processes for knowledge management and sharing resources encourage improved learning among teams. * Processes for managing talent ensure that the projects get the best and most motivated people. * Strong processes for interaction and communication within team make it possible for globally distributed groups to interface and collaborate in an effective manner while delivering excellence on a continuous basis. On the other hand, processes, while strong, should leave ample space for creativity and flexibility. It is only then that the Global Delivery Model (GDM) can create far more value than the traditional sourcing models. Here is what it will translate into: * Quicker, seamless transitions, and early project ownership * Optimum onsite/ offshore mixes through intelligent allocation of the available resources * High degree of predictability through processes, sharing and reuse * A strong relationship approach to ensure continuity and business focus * Sharing of best practices and tools across the enterprise * Depth and quality of resources, continuously trained and retrained to suit project needs * Adherence to SLA based pricing models to ensure good Return on Investment (ROI) and drive customer satisfaction
PROCESS ARCHITECTURE Companies rely on processes to consistently deliver high quality solutions while executing a number of engagements from multiple locations. According to the policies adopted by a leading IT services provider: values, vision and policies should form the first level of the three-tiered process architecture. These are then implemented through process execution at the next level. These processes are defined with clear ownership and clearly defined roles and responsibilities.
Quality System Documentation Quality System Documentation defines clearly all the processes that should be put into place. These documents provide the engineers and consultations with a vast repository of detailed procedures, templates, standards, guidelines and checklists. The comprehensiveness of these documents supports all tasks from higher-level information abstraction and definition to tasks such as coding and documentation. This is crucial to assure clients with the delivery of high quality and predictable IT solutions that meet their business needs. These documents should also be monitored and updated regularly.
Knowledge Sharing Employees are given a forum like a website portal, to share knowledge gained from their experience at the organization. It is meant to be a central repository of the knowledge that can be tapped by peers and as sometimes external clients as well. The collection of documents on this portal is reviewed and classified into different areas: * Software development life-cycle activities such as requirements specification, design, build and testing documentation. * Software-related topics such as tools and quality documentation. * Topics of general or operational interest such as travel or HR policies, etc.
Process Assets This is a repository to facilitate sharing and giving out of "engagement learning" across the organization. The user has the facility to submit to the repository, retrieve from the repository and obtain information on the status of the repository. A process asset can be any information ranging from an engagement, which can be re-used by future engagements. Typically these include project plans, configuration management plans, requirements documents, standards, checklists, design documents, test plans, causal analysis reports and utilities used in the engagement, etc.
Process Database The Process Database is a software engineering database to study the processes at the organization with respect to productivity and quality. More specifically, its purpose areas are as follows: * To aid estimation of effort and project defects * To get the productivity and quality data on different types of projects * To aid in creating of a process capability baseline
Process Capability Baseline (PCB) Process Capability baseline is used to specify, what the performance of the process is, i.e. what a project can expect when following the process. This estimation is done based on the past data. The performance factors of the process are mainly those that relate to quality and productivity. Process baseline defines the productivity, quality, effort distribution, defect distributions, defect injection rate, cost of quality etc. Using the PCB, a project can predict, the effort that will be needed for various stages of the project, the defect densities likely to be observed during various defect detection cycles and quality and productivity for the complete project.
Tools Repository The list of tools that have been evaluated and judged “probably useful” for future use are stored in a centralized repository called Tools Repository. There is a coordination group which maintains the versioning f these tools and is the point of contact for information on these tools. The group's objectives are as follows: * Standardization of tools usage * Ensure evaluated technologies are transferred into normal practice across the whole organization * Identify and evaluate new technologies on a continuous basis to determine their benefits.
PROJECT MANAGEMENT The project management processes are aided by practices in line with the CMMI Level 5. These processes address every key aspect of a project across the project life cycle, including: * Project planning * Project monitoring, reporting procedure and review mechanisms * Project risk management * Configuration management * Change management * Issue escalation and resolution * Communication with client managers These processes form the basis that binds the Global Delivery Model (GDM) together. At the outset of every project engagement, management should ensure robust project planning and estimation processes delineating all aspects of the project, including: * Project profile * Project processes related to project life-cycle, change management, requirements traceability, process tailoring, etc. * Deliverables and effort estimation * Goals and milestones for the project * Project tracking: client feedback, reviews, reporting, escalation, tasks, issues, quality * Defect estimates and prevention * Project team roles, skills, key personnel, training * Risks foresight and risk mitigation plan Project management and project quality processes should be strengthened by the use of a variety of custom-built as well as third party tools, which can help a provider manage the complexities of the GDM.
Capability Maturity Model (CMMI) CMMI is an internationally recognized standard for measuring the maturity of an organization's software development processes and has become the primary benchmark multinational corporations use to judge offshore service providers' abilities to deliver high quality software. CMMI was developed under the guidance of the Software Engineering Institute (SEI) of Carnegie Mellon University in the U.S. (www.sei.cmu.org). It is organized into five maturity levels with CMMI Level 5 being the highest. By operating CMMI level 5, customers' benefit from the providers ability to consistently deliver high quality software on schedule, which ultimately results in a lower total cost of software ownership due to less rework and easier maintenance. Most of the big IT providers and the Indian providers are CMMI Level 5.
GLOBAL DELIVERY MODEL & SERVICE DELIVERY MODEL: GDM TOOLS The practice of GDM is bolstered by the use of robust tools. These tools helps providers keep some of the largest and most complex projects well on track. At the heart of the Project Management toolset are the Project Management (PM) tool and the Process database. A range of general purpose and specialized tools are integrated into these systems, this helps to automate number of tasks. These tools help in controlling a project, avoiding defects and slippages and help the provider in becoming more proactive. * Tools that monitor projects to track defects and benchmark them against earlier estimates * Tools for scoping, requirements gathering and impact analysis * Tools to monitor efforts, schedule adherence and task slippages * Process assets systems and tools to efficiently store and manage project documents and data * Specialized tools to track individual service projects like application maintenance * Tools to monitor automatic scheduling of audits based on detailed project guidelines, followed by tracking of audit results, non-conformance reports, and corrective actions * Tools to automate the workflow for senior management reviews, in line with engagement schedules and decided plans Delivering Quality to the client is of utmost importance in every aspect of the engagement. The next section describes what Quality means within the Global Delivery Model (GDM).
QUALITY PROCESS & METHODOLIGIES - with a focus on CMM Level 5 A commitment to quality underpins all IT projects and services. A lot of emphasis is given by providers to ensure that the IT services they deliver should not only meet but surpass client's expectations. Quality should be a way of life, and it should cover all processes, interfaces and outputs, in management, core and support process. It is this way organizations can deliver long term excellence, with predictability of returns, through the use of Global Delivery Model (GDM). Organizations benchmark themselves against international quality standards, like ISO 9000, CMM and recently, the Malcolm Baldrige framework. In addition, they use techniques like the Six Sigma Cross Functional Process Mapping (CFPM) methodologies (from Motorola University) to facilitate their process improvement. A number of quality tracking methodologies, tools, and processes are being put in place to ensure superior quality products and service to clients in each engagement and also across engagements, at each relationship level. These quality tracking methodologies are discussed below, and are classified based on the client objectives addressed using specific quality programs, tools, and systems: * Relationship Management and Governance * Software and Service Quality * Operations * Solution and End-User Focus * Resourcing Effectiveness
KNOWLEDGE MANAGEMENT FRAMEWORK AND SERVICES It is interesting to note that, beyond all the technology-driven hype lays the greatest untapped resource of the last two decades - Knowledge. With the increasing growth of interest in knowledge management services, many different knowledge management frameworks have been put into place. These frameworks grow on the reputation of the organizations that initially created them, and the depths of experience they offer. Knowledge Management is a means of creating, storing, accessing and reusing knowledge to accomplish the organization goals. Providers work with their clients to build the appropriate knowledge management frameworks and processes, as well as identify technology solutions for establishing sound Knowledge Management processes and systems. Providers provides end-to-end workforce collaboration and knowledge management services including Knowledge Management Process Consulting, Collaboration and Knowledge Management Applications, Portals, Content Management, Document Management Services, Enterprise Application Integration, Security and Process Workflow. Knowledge Management Services can help clients assess their needs, evaluate technologies and recommend best-fit solutions in the context of the prevailing business problem. Within a relationship, knowledge management processes operate at three levels:
Project Level: Teams have a project coordinator for each project, and specific knowledge management related goals within these projects. Periodic project reviews cover project management as well.
Account Level: Every client account has a knowledge management roadmap drawn out for the client deepening on the client's specific needs. Knowledge sharing is improved by a range of methods such as orientation training programs, online discussion boards and collaborative environments and sharing within projects. Also, a number of client-provider presentations and seminars foster knowledge sharing within client and provider teams in an account.
Organization Level: The organization should also hold a good knowledge sharing platform, an organization-wide Knowledge Repository portal, on an intranet. An organization-wide knowledge sharing ensures that the teams have constant access to best practices and the collected learning by working with the world's best organizations.
OFFSHORE DEVELOPMENT CENTRE An Offshore Development Centre (ODC) is essentially a dedicated intermix of specialized programming and engineering resources. Global Offshore Development Centres are instrumental in delivering faster, higher-quality services with less risk and more predictability. Irrespective of the operating location of the Business, Global Delivery Model provides an enterprise with access to proven methods, leading-edge tools and platform specific architectures, all managed by highly skilled and flexible professionals. Offshore Development Centres acts as a virtual extension of the clients development teams present on another geographical location. With sustained infrastructure investments over the years, several organizations have created knowledge and networked work environment from where their employees can provide high quality solutions to clients. These investments enhance employee productivity and reduce engagement risk for the clients. Global Offshore Development Centre, with the collaboration of well designed infrastructure, highly skilled and trained resources, proven and time tested processes is a doubly beneficial outsourcing delivery model with a powerful value proposition for businesses looking at IT Outsourcing. This network is a remarkable mixture of strategy and delivery, a proactive partner, and a unified team of highly skilled and experienced professionals, continuously working to provide high performance solutions in every part of the world. The fact that multi-disciplinary teams in each centre all work the same way across locations following a standard blueprint enables fast, seamless collaboration and continuous innovation no matter where the client is. This approach opens up new options for organizations needing to fuel organization growth while reducing costs. Clients can: * Draw upon resources from around the globe for better time-to-market and lower costs. * Benefit from economies of scale and distributed workloads when they outsource critical business or IT functions. * Reduce business risk and enhance business value by leveraging industry best practices embedded in the provider's standardized methods, tools and architectures. Offshore Development Centres are strategically located wherever organizations can tap an expansive pool of talented workers, and wherever the clients need specific language skills and geographic proximity to key global or regional markets. The choice of ODC sourcing locations are discussed in further detail in forthcoming sections of the report. Global Delivery Model helps ensure that clients can harness the power of globalization to achieve the competitive advantage needed to win in today's flat world.
RISK MITIGATION In wake of increased business complexity and increased industry competition, every business is wary of the risks associated with their Business. Global Delivery Model (GDM) has mature business continuity planning built into it. A detailed plan for risk identification, monitoring and mitigation is put together as part of detailed project planning. This plan covers risk identification, prioritization and mitigation of risks. Risk mitigation tasks are executed during the project and risks are monitored and re-evaluated at regular intervals. The status of risks is continuously tracked, and reviewed using the monthly milestone Reporting mechanism. Business continuity plans have a comprehensive focus on infrastructure and security redundancies:
Infrastructure Focus * Well-defined Business Continuity and Disaster Recovery Plans at organization and client level are looked into * Global de-risked development centers, by setting up GDCs in geographically spread out locations * State-of-the-art fail safe network connectivity with multiple fall-back options * Interoperability to ensure seamless relocation of project * Locations far away from potentially conflict-ridden zones
Security Focus * Stringent physical security and network security * Secure Human Resources practices * Regular external audits to ensure compliance of standards
Confidentiality and Privacy Focus * Access restrictions and controls of all Information Assets, strict adherence to client confidentiality agreements * Project dependent security measures including physical isolation of projects, if needed * Legal agreements with employees to ensure compliance * Agreements under relevant jurisdiction for the client * Regular monitoring and updating, if necessary of the compliance measures put in place
People Focus * Keep redundancies for key project personnel * Back-up of project artefacts and experiential repositories
CULTURAL SENSITIVITIES Organizations should have an effective process to help you cope with the cultural issues in a transition to the Global Delivery Model. Processes should be set into place, which should facilitate smooth functioning of cross-partner teams. It's important to promote better understanding of work culture differences, awareness and appreciation of different cultural backgrounds. The organizational impact of offshore and near shore development centres leaves a mark on process orientation, collaborative working styles and project management. Organizations should conduct extensive cross-cultural training of its staff: * cultural acclimatization * client business and organization overview * technical environment and processes specific to the client * creating non-intrusive interactions for the client Providers should adopt a Communicative Approach for strategic partners, by which they should help their partners and the client staff to: * Understand the offshoring process * Understand their offshore partner * Collaboratively improve project management skills * Make strategy for continuous process improvement.
INDIA AS AN OFFSHORE LOCATION The below shows a Global landscape of off shoring capabilities of various destinations. One axis shows “Cost of Labor” and the other depicts “Access to Qualified Talent”. The graph clearly shows that India provides a very low cost of labor while providing a very high quality access to Talent. This gives India an advantageous position vis-à-vis the competition.
GLOBAL LANDSCAPE OF OFFSHORE DESTINATION CAPABILITIES Note: Shading of circles indicates degree to which high skilled work is currently off shored to the specific country Cost of labor does not include all the operational costs involved in off shoring Source: Duke University / Booz Allen Offshoring Research Network 2006 Survey India as an offshore location is way ahead of competition. But at the same time India is facing an increased competition from some other alternate offshore locations (As displayed in the table below) Offshore IT services market size for low-cost locations Source: Merill Lynch, 2005 Both U.S. and European firms prefer India as an offshore location 70% of the imports for United States in offshore IT services are sourced from India 93% of the UK firms, already working with offshore providers, use Indian vendors 66% of European companies already using offshore have their offshore providers in India However, India will face increased competition from other emerging offshore locations: Canada and Eastern Europe are emerging as a near shore option and showing strong growth China is showing a substantial growth with the availability of large labor pool at low costs but rates poorly with respect to the quality of delivery Other emerging markets such as the Philippines and Mexico offer an alternate low cost offshore option and have made some headway during the past year. India has an IT workforce of more than 1 Million strong people
India Market: Availability of employees ('000) 2006 2007e 2008e 2009e Strength in IT 455.0 591.5 769.0 999.6 Strength in ITES 452.4 588.1 764.6 993.9 Strength in Captives 384.0 460.8 553.0 663.6 Total Strength 1,291.4 1,640.4 2,086.6 2,657.1 Additional required in IT 105.0 136.5 177.5 230.7 Additional required in ITES 104.4 135.7 176.4 229.4 Additional required in Captives 64.0 76.8 92.2 110.6 Total additions required 273.4 349.0 446.1 570.7 Supply of IT graduates 350.0 385.0 423.5 465.9 Non-IT graduates 100.0 105.0 110.3 115.8 Total Supply 450.0 490.0 533.8 581.7 Supply excess 176.6 141.0 87.7 11.0 Source: Merill Lynch, 2007 Source: Merill Lynch, 2007 The graph above depicts that in spite of the ever increasing demand of Indian IT professionals, there will be still be an excess in Supply of IT resources. India will continue to provide the lowest cost IT Labor. (Depicted in Appendix A)
SOURCING OPTIONS FOR EUROPE Source: IDC, 2004 The basis for the picture presented in can be summarized as follows: * U.K. organizations (large enterprises and the mid market) are predominantly sourcing from India) * The Nordic countries show a preference for Russian and Baltic State resources, largely based on historical/cultural reasons * The Netherlands is using both Indian and Eastern European near shore/offshore resources * Germany turns to Russia and Eastern Europe, again for historical/cultural reasons plus the fact that German is widely spoken * France turns to Northern Africa (Morocco, Algeria, Tunisia) and Romania (language skills) India has the highest OSP activity. The country accounts for 88% of all services, while Eastern Europe and Russia (including Baltic countries) represent less than 11%. Other countries account for less than 1%. These splits are shown below. China as an offshore location for Western European organizations remains a question mark. So far, no OSPs have emerged to make a significant impact in the Western European market. Source: IDC 2004 The below shows breaks down offshore specialist IT services spending by service type and changes in these splits between 2003 and 2008. Source: IDC 2004
SELECTING THE RIGHT ONSHORE/ OFFSHORE MIX Onshoring / offshoring ratio is a function of project size, duration, and volume as well as project complexity. Source : Capgemini, 2007 From the above table we can very well understand, what kind of projects can be best off shored and in what percentages are such projects usually offshore successfully. Discussed below are the Offshore/Onshore ratios for different activities in a typical Application Development Project. Source: Bitkom (2005)
CAPGEMINI'S DISTRIBUTED DELIVERY FRAMEWORK Capgemini follows a distributed delivery framework, which helps it to deliver successfully complex IT project across geographies. Source: Capgemini, 2007 Front and Back office work together to meet client's requirement
Distributed Delivery Distributed Delivery refers to engagements delivered using multiple widely distributed teams for various parts of the delivery lifecycle. Specifically this distribution is assumed to incorporate a Front Office, (normally the prime contractor in the delivery), and a Back Office such as a near-shore or offshore facility. Rightshore® relies on a network of industrialized near-shore and offshore centers. This is a unique option for clients who want to balance on-site work with near-shore and offshore capabilities. Rightshore® means having the right resource, at the right place, at the right time for a reduced Total Cost of Ownership (TCO). Source: Capgemini, 2007 Capgemini: A Tier 1 player regarding Offshore Capabilities Source: Capgemini, 2007 Capgemini is strong in both Application Management and IT Infrastructure Management Services Capgemini boosts of successful delivery of several large IT projects based on its Rightshore® model Source: Capgemini, 2007
ELEMENTS NEEDED FOR A SUCCESSFUL DELIVERY § Combined project teams § Open communication § Knowledge transfer § Trust and mutual respect § Responsiveness § Explicit risk sharing Capgemini draws its global resources, cost-efficient processes and extensive experience in diverse geographies, disciplines and industries to deliver: * Reduce costs: Save up to 40% on IT costs and improve your bottom line by leveraging the right balance of locations * Streamlined processes: Improve productivity and reduce operating costs by implementing agile, efficient processes. * Innovation: Free your energies from IT and focus on innovating and transforming your business. * Competitive advantage: Stay ahead of the curve with solutions that employ the latest technology to improve quality in delivery. * Growth: Implement solutions that increase productivity and help you expand your business. “It's the combination of flexibility, the right competencies, the blend of onshore and offshore resources and cost savings that make Rightshore® such an attractive proposition.” - Stefan Fransson, CIO
FUTURE OF THE EUROPEAN OUTSOURCING INDUSTRY
Current Competitive Landscape - Europe Source: Gartner IT Outsourcing, Europe 2007 The European outsourcing market remains overcrowded and highly competitive. While “national champions” and Europe-based service providers continue to face a tough competition from leading global providers, they also face a growing threat from leading offshore providers focusing on expanding their European coverage. As a consequence, consolidation among the European IT outsourcing market is set to continue, and customers must be aware that the impact of this consolidation process on their well-known providers and their established contracts could be significant. In this competitive market, where the predominance of achieving profitability rather than market share has consolidated, providers will be expected to maintain a high level of scrutiny on their geographical and portfolio reach. A prompt divestiture of unprofitable or no strategic operations will be a key requirement to survive in the market. In the meantime, as many providers continue to pursue necessary restructuring programs, financial investors will discover that this presents an opportunity to make money.
CONCLUSION This section presents a brief discussion on the current situation and the opportunities and challenges faced by Indian and European IT Service providers. Approximately 61 percent of the Indian IT sector's revenue comes from U.S. clients. For the top five India players who account for 46 percent of the IT industry's revenues, the revenue contribution from U.S. clients is approximately 58 percent. The current slowdown in the U.S. economy has made IT suppliers shift their focus from US to Europe. An Everest Research Institute's recent study says that the present crisis along with the coming to age of market models for infrastructure outsourcing, and Indian supplier's moving up the ADM value chain (like package implementations and consulting services) will have a deep impact on M&A activity in the Indo-European ITO sector. These M&A will also help the Indian suppliers in building up a Global brand while strengthening their Global Delivery capabilities. These providers have recently opened up new subsidiaries in Eastern Europe, thus hoping to quash any fears that potential west European customers might have of the outsourcing of IT services. IT companies like Atos Origin, Capgemini, Logicia CMG, Sopra Group have traditionally been the major players in the Continental European ITO market. These companies have stayed competitive on that promise that they offer better services because they understand their customer better than any other non-European firm. But things are changing fast; these firms are now facing a big challenge due to the increasing acceptance of Low cost Indian/ Global IT suppliers in Europe. Global players like IBM, Accenture, HP, etc have already established a strong base in offshore locations like India and are offering a much better value propositions as compared to their European counterparts. Some of the European companies are evolving rapidly to meet up to this new challenge. To sight an example, Capgemini has recently announced its plans to double its India headcount to 40,000 by 2010. Capgemini wants to position itself as the first European ITO firm which is truly global and which is capable offering end-to-end solutions to its clients while offering the best quality for a competitive price. An advertising campaign at Capgemini, rightly says; “Righshore is not an option, it's a necessity”
References DOCUMENTS "Gartner on Outsourcing, 2006-2007," By Lorrie Scardino, Kurt Potter, Allie Young, Lisa Stone, Claudio Da Rold, Helen Huntley, Cassio Dreyfuss, Jim Longwood, Gianluca Tramacere and William Maurer "Predicts 2007: IT Outsourcing Starts to Break From Tradition," By Richard T. Matlus, Kurt Potter, Laura McLellan, Thomas J. Bittman and Claudio Da Rold "Outsourcing Europe: Forecast Database," 2006. By Gianluca Tramacere, Robert De Souza and Cathy Tornbohm "Sourcing in Europe in 2010: Challenge Your Assumptions," 2006. By Claudio Da Rold, Gianluca Tramacere, Lorrie Scardino, Cathy Tornbohm, Roger A. Cox and Ian Marriott Duke University / Booz Allen Offshoring Research Network 2006 Survey IDC and Nasscom strategic review 2008 SHRM Research “Workplace Visions”, 2006 PAC. Le Marché Français de l'infogérance, 2006 Gartner IT Outsourcing, Europe 2007 Duke University / Booz Allen Offshoring Research Network 2006 Survey Capgemini Internal Documents and Presentations Annual reports: Capgemini, IBM, Accenture, Infosys, TCS and Wipro.
WEBSITES http://www.capgemini.com/ http://www.tpi.net/ http://www.globalbda.com/ http://dealarchitect.typepad.com/ http://searchcio.techtarget.com/ http://www.domain-b.com/
GLOBAL LANDSCAPE OF OFFSHORE DESTINATION CAPABILITIES The below shows a comparison between the average salary of an IT resource in the year 2005 and 2010. Source: Neo IT, 2006
IT SPENDING AND OFFSHOIRNG IN FRANCE Source: PAC. Le Marché Français de l'infogérance, 2006 • The market is growing rapidly in size • New Services offerings are constantly being created • Innovative delivery models with global perspectives are crucial for success
COMPOSITE OFFSHORING “ATTRACTIVENESS” SCORES BY COUNTRIES India is 80 % and will remain the bulk of the offshore market Composite Offshoring “Attractiveness” Scores by Country - ITO Source: SHRM Research “Workplace Visions”, 2006 India with a strong currency, a sustained economic growth rate of 9%, controlled inflation and stable political system has established itself as an IT delivery centre with stable cost base. India with a sound education system provides an unparalleled source of IT talent. India with its highly quality conscious culture and sound communication infrastructure provides a strong case for long-term attractiveness from an IT delivery perspective.
CAPGEMINI GROUP: A SNAPSHOT Shown below is the revenue breakup by discipline across the Capgemini Group. Source: Capgemini, 2008
APPENDIX E QUALITY PROCESSES AT CAPGEMINI Source: Capgemini, 2008
PERCEIVED VALUE OF OFFSHORE A survey done by Forrester in the year 2006 shows that the perceived value of offshore goes well beyond cost “How would you compare offshore providers with large US services firms on each of the following attributes?” Base: 44 firms using offshore providers Source: Forrester, 2006
OFFSHORE PERCEPTION IN EUROPEAN COUNTRIES Another survey done by Forrester in 2006 shows that, continental European companies have some reservations due to geopolitical, regulative and cultural challenges of off shoring. Source: AT Kearney
GARTNER FORECAST ON THE FUTURE OF THE OFFSHORING INDUSTRY Gartner forecasts that as labour arbitrage fades away, it will be replaced by productivity gains and synergies Source: Gartner
GLOSSARY Term Definition ASP Application Service Provider BPO Business process outsourcing BPU Business process utilities CFPM Cross Functional Process Mapping CMMI Capability Maturity Model ERP Enterprise resource planning EMEA Europe, the Middle East and Africa GDM Global Delivery Model ICT Information Communication Technology IT Information Technology IU Infrastructure Utility M&A Merger and Acquisitions ODC Offshore Development Center PCB Process Capability Baseline PM Project Management SaaS Software as a service SMBs Small and Midsize Businesses SEI Software Engineering Institute SWOT Strength, Weakness, Opportunity, Threats TCO Total Cost of Ownership TCS Tata Consultancy Services
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