Traditional Infrastructure Outsourcing (IO) is on its decline with increasing levels of dissatisfaction among clients due to its complex structure and rigid Service Level Agreements (SLAs). Many companies, who signed long-term contracts with traditional infrastructure management vendors have expressed dissatisfaction on the vendor competency and ability to adapt to dynamic needs. This is driving the decline of traditional IO model and is encouraging businesses to invest in next-generation business partners who bring flexibility and agility to the table—in tune with evolving business dynamics.
Understanding the Dynamics: The Story So Far
In traditional outsourcing, IT outsourcing vendors provide only a specific service, such as business applications, servers and storage environments, network and security environment, operating systems and tools, or databases. A certain number of vendor employees’ work for a pre-determined number of hours, per week or month to provide these technical services to the client. However, they do not necessarily help companies decide what else they can do to achieve business benefits.
The foremost objective of using traditional IT outsourcing model was cost optimization and enhancing efficiency to manage and build various heterogeneous components of the IT infrastructure. Companies signed syntactic and semantic agreements generally referred as ‘black box’ contracts. However, effects like poor contracting models, loss of control, lack of flexibility, poor customer-vendor alignment, and every piece of work being called a change request, have resulted in a growing disquiet amongst businesses. This dissatisfaction has given rise to a shift towards partnering with service providers who are more agile and innovation driven.
A report by Forrester Research attributes this shift to emerging technologies. Although traditional IT infrastructure vendors are adding automation and real-time data analytics capabilities to their portfolios, clients are still replacing these vendors at the rate of approximately 40%. This reflects the shift to more agile and newer service providers. This paper highlights how and why traditional infrastructure outsourcing market is shrinking dramatically. It also explains how the new-age vendors can adapt to new technology to provide benefits to Gen 2.0 clients.
Deep Impact: How Market Dynamics Effects Outsourcing
Traditionally, outsourcing has been the ‘go to’ strategy for reducing cost and improving business efficiency. According to Gartner, the IT outsourcing market is poised to grow at a slower than before rate, reaching $288 billion in 2013, a 2.8% increase from 2012. Gartner also predicts a 5.4% CAGR in the global outsourcing market through 2017. Given these feeble growth figures, we can say that the traditional outsourcing model is under unprecedented pressure. This may be due to the following factors: uncertain markets, economic slowdown, and changing laws/regulations in the last five years. This has resulted in lower business value being delivered by traditional outsourcing models. Many customers are wary of multi-year contracts amid economic uncertainty and are facing a number of challenges, such as unpredictable demand cycles, increased cost pressure, and uncertain revenue streams to focus on cost savings.
After the economic downturn of 2008, customers forced their service providers to reduce prices and identify potential savings along the entire value chain. Common solutions here are to get in sync with the dynamic environment, and de-bundle services and assets to address these market and economic uncertainties.
The technology landscape also evolved with the emergence of new, disruptive technologies such as social media, mobility, analytics, and cloud. The meteoric growth of mobility and digital has shaken the foundations of the IT industry and has changed forever, the way we connect, do business, and deliver products and services. According to Gartner, while traditional IT service offerings still represent a significant market share, the steady demand from customers for these new technologies has resulted in failure of traditional IT outsourcing approach. Companies now feel encouraged to invest in the new models.
The Growth Story: Changing Outsourcing Models
While traditional outsourcing contracts are primarily based on fixed cost models, the currently preferred, pay-per-use models allow companies to scale up and down on demand. Companies using this flexible model have changed their focus from SLAs to achieve key metrics and deliver business value, innovation, and a superior customer experience. The evolving nature of outsourcing contracts has also helped companies achieve transformational change and manage uncertainty; further reducing operational costs and risks.
Companies can now concentrate on creating new capabilities and comprehensively managing critical business processes. Emerging customer behavior focuses on what the service offers rather than how it is implemented. For example, customers in the US are using pay-per-use models in all walks of life.
They pay only for services—data and call plans—based on their usage and need, and not for the mobile phones they use. Using pay-per-use models is beneficial as users can easily adapt to any new technology by just exchanging their old mobile phones with the new ones, without changing their usage plans.
Renewed Focus: Meeting Customer Expectations
The 2008 recession was a wake-up call for the new breed of educated Gen 2.0 customers. After the 2008 financial downturn, these customers expected shorter business cycles, 24X7 support, business linked SLAs, evolving business models spawned by social media, mobility, analytics, and cloud, and consumerization of IT. They completely rejected inflexible vendors and multi-term contracts in favor of service providers willing to respond to new situations and important changes. Changes in technology and clear customer expectations, thus, drove service providers dealing with the intricacies of technology to adapt, innovate, and transform the way they manage IT assets.
Next Generation Business Partners
While IT service providers face increasing pressures due to the economic downturn, emergence of new technologies and change in outsourcing models, customers are also forced to simplify their business processes and enhance efficiency in this increasingly competitive market conditions. They continue to look for strategic/solution partners who can:
- Educate and guide them on how to meet customer needs
- Support them in optimizing operations and business processes
Figure 1: Top Priorities/Key Drivers [Source: Gartner]
Customers can achieve financial improvements and business efficiency, and improve agility by using services of these strategic IT partners.
Success Story: Delivered an Enterprise Mobility Solution for a Manufacturing Company
Business Scenario: The client is a global company employing more than 80,000 people, with production sites in across 70 countries. The client’s core businesses include manufacture and distribution of cement, and production, processing, and distribution of aggregates (crushed stone, gravel and sand), ready-mix concrete, and asphalt. The client wanted to increase overall productivity by enabling their delivery people (truck driver) with an enterprise mobility solution. The mobile solution should enable truck-drivers to deliver material enroute to the customer, handover a commercial invoice printed wirelessly on a small Bluetooth printer, and allow truck drivers to collect spot payments from the customer.
The client was looking for a technology partner who could provide a turnkey solution implemented in real-time, vis-à-vis an enterprise SAP system.
Solution: The client partnered with Coforge to develop a mobile solution—mINVOICE. The mobile solution enabled truck drivers to exercise a variety of functionalities using their GPRS-enabled mobile handset. They did not require laptops, desktop computers, specific application software, or internet connectivity to connect to the enterprise SAP system. Instead, drivers could process and print invoice on-the-fly in real-time with the handset at the backend and an application integrated with Enterprise SAP servers in the front-end. The invoice generated was printed using a small, wireless, and portable printer that connected to the mobile device using Bluetooth technology
The new invoice generated is recorded in SAP for the delivered quantity. Simultaneously, Stock Transfer Note is also modified in the SAP system for the quantity delivered. The application also enables on-the-spot collection of payment by providing retail invoice.
- Considerable savings on secondary freight as the material is supplied enroute to the customer
- Marked improvement in bottom-line due to reduced freight costs
- Faster delivery of goods to customer— resulting in higher customer satisfaction
The Coforge Thought Board:
Reinventing the Wheel: Transforming Traditional IT Infrastructure Outsourcing
The Road Ahead
The IT services market is changing and traditional infrastructure delivery models do not meet the needs of next-generation customers. Service providers need to choose alternative delivery models that focus on customer priorities and can easily adapt to new processes. They should also offer flexible and responsive services aligned to business, and understand the customers’ business and pain points. Further, to provide business value and adapt to these alternative delivery models, IT service providers need to understand sourcing needs of customers and support them in their business transformational goals. This will help them enter new markets. In today’s demanding business environment, the customer and service provider should work on a delivery model that helps them be strategic partners who are able to take joint business decisions for growth. While choosing between available delivery models, customers look for agility, responsiveness, commitment, and platform, operational, technology, and multi-vendor flexibility. From a technology point of view, service providers must assist clients in decision-making. They must provide help on IT infrastructure—Labs and Centers of Competence (CoCs), tools, and platforms. Service providers can also help clients by providing them services that can help them to stay ahead of the competition.