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BUSINESS CASE FOR IT OUTSOURCING & LINUX APPLICATION MGMT 396 - Autumn 2003 S. BUSINESS CASE FOR IT OUTSOURCING & LINUX APPLICATION MGMT 396 - Autumn 2003 S. Kohli Kaustuv Mukherjee 25 th November 2003

Contents n Introduction n Process/Best Practices n Current Scenario / Future Trend 2 Contents n Introduction n Process/Best Practices n Current Scenario / Future Trend 2

Business Issues l l l l What are the critical buying criteria in the Business Issues l l l l What are the critical buying criteria in the offshore market? What is the potential of the North America market for growth? How do different industry segments use offshore? What applications are most ripe to outsource offshore? What countries are providing offshore services What Linux Application are Business Ready? Advanced Linux technology 3

Key Drivers for Offshoring Time differences advantages l 24 x 7 x 365 work Key Drivers for Offshoring Time differences advantages l 24 x 7 x 365 work cycles l Cost benefits l Quality Processes – CMM and ISO l Talent/Skill Pool l Capacity Issues resolved l Higher value chain l 4

North American IT Services Market GR . 1% CA 12 5 North American IT Services Market GR . 1% CA 12 5

U. S. Offshore IT Services Spending AGR %C 26. 4 Source: International Data Corporation, U. S. Offshore IT Services Spending AGR %C 26. 4 Source: International Data Corporation, 2001 6

Challenges facing CIO’s today… Talent constraints faced by IT department Business pressures l l Challenges facing CIO’s today… Talent constraints faced by IT department Business pressures l l l More cost effective use of IT dollars. Demand for IT spend continues to outpace the increase in budget forcing CIOs to postpone/rationalize spend Compressed time-tomarket. Application development cycles have reduced from 12 -24 months in early 1990 s to 3 -6 months in early 2000 Higher quality and performance standards. Use of enterprise applications in more mission critical areas, e. g. , e. CRM has reduced the tolerance of errors/faults Source: Mc. Kinsey analysis; IDC, Giga; client interviews l Intense war for technical talent. n Increasingly difficult to win against ISVs, service providers and new economy players n Overall shortage of technical talent increasing to 8 -9 million worldwide by 2004 l Rapid escalation in professional services fees. n Average US based consultant costs twice as much as a fullburdened IT employee Key challenges l CIOs cannot rely solely on internal organizations to develop and maintain enterprise IT systems l Traditional “outsourcing” service providers are not costeffective 7

… can be addressed by outsourcing to vendors More cost effective use of IT … can be addressed by outsourcing to vendors More cost effective use of IT dollars Challenges faced by the CIO l l l Compressed time-to-market 30 -40% lower costs than traditional IT service providers Likely to sustain lower costs for the next 5 years n n n Source: Mc. Kinsey analysis, Satyam, Infosys, Wipro, Morgan Stanley Dean Witter l Tested and robust business model with manageable risks l Well established and competitive vendor base Up to 40% shorter development cycles n Higher quality and performance standards l Shorter learning curves 24/7 production runs Ramp-up capacity faster Shorter rework cycles More established methodologies and processes for meeting higher performance standards 8

Country Comparison Skills surplus countries Regional hubs User countries US India Germany China Indonesia Country Comparison Skills surplus countries Regional hubs User countries US India Germany China Indonesia • • Number Cost Skills • Talent sophistication High UK France Philippines Ireland Singapore Low High Vendor sophistication • • Number Quality 9

Contents n Introduction n Process/Best Practices n Current Scenario/Future Trend 10 Contents n Introduction n Process/Best Practices n Current Scenario/Future Trend 10

Evolvescape’s Right. Sourcing Model Satellite Based Communication Client / Off-site Location Project Near Shore Evolvescape’s Right. Sourcing Model Satellite Based Communication Client / Off-site Location Project Near Shore u u l. Approach/Model n n n Near Shore Process Offshore Process Optimum mix between onsite, off-site, and off-shore n Post implementation support u Rapid reaction support Use of dedicated development centers around the world n u u Analysis and planning High level design User interface design Project coordination Onsite testing Implementation “ 24 X 7” delivery model Project u u Offshore Development Centers (Key elements of cost savings approach) u u u Offshore Project management Detailed design Coding Testing Documentation Post implementation support u u u Bug fixes Warranty support Maintenance 11

Customers need to address key outsourcing process issues Outsourcing Strategy l l How do Customers need to address key outsourcing process issues Outsourcing Strategy l l How do we maximize benefit from outsourcing to vendors? What kind of relationship should we establish with vendors? How do we select vendors for specific projects? How do we manage the transition to offshore development? Outsourcing Execution l l Which projects are suitable for offshore development? How do we manage the transition of individual projects? What kind of organization and governance is required to manage vendor performance? How do the vendors customize its processes to customer requirements? 12

Best practices in outsourcing processes Outsourcing to vendors should be much more than offshoring Best practices in outsourcing processes Outsourcing to vendors should be much more than offshoring and staff augmentation Adopt a partnership based approach to IT outsourcing and move towards a competency based vendor selection Best Practices Follow a staged approach for transition to an offshore partner with a careful selection of projects Prepare detailed transition plans for each project, especially maintenance projects Establish strong governance and management oversight to manage relationship and performance Ensure that outsourcing processes are tailored to business requirements 13

Outsourcing to vendors is more than offshoring and staff augmentation “Traditional” Mindset “Winning” Mindset Outsourcing to vendors is more than offshoring and staff augmentation “Traditional” Mindset “Winning” Mindset u Use vendors for project components u Outsource complete projects u Maximize offshore component u Use offshore, offsite and onsite presence judiciously u Use staff augmentation approach for onsite presence u Maintain onsite presence for managing and delivering solutions u Focus on software outsourcing only u Extend IT organization virtually (includes software development, network management, call centers, infrastructure projects, decision support systems, etc. ) 14

Think partnership not transaction “Transaction” approach “Partnership” approach u No long term commitment u Think partnership not transaction “Transaction” approach “Partnership” approach u No long term commitment u Medium/Long term commitment u RFP issued for every project u u Vendors not expected to invest u u Vendors follow customer orders with limited value add u Competency based vendor selection Vendors expected to invest in infrastructure, knowledge transfer, etc. Vendors expected to leverage their knowledge base and contribute to overall strategy and planning issues u Vendors not involved in technology strategy and planning u Vendors expected to be actively involved in technology planning u Insufficient focus on risk mitigation u Proactive measures for mitigating risks While a partnership approach is recommended, in certain situations a transaction approach may be more appropriate. For example: u Initial engagements to test the capabilities of a vendor 15 u Projects involving confidential and proprietary knowledge, etc.

Partnership model has benefits l l Enables vendors to offer lower pricing because they Partnership model has benefits l l Enables vendors to offer lower pricing because they have better visibility into revenue streams Reduces the vendor total cost of doing business which can be passed to customer. Cost l l l Learning curve benefits help in improving quality Allows vendors to prepare resource plan in advance and staff projects with appropriate resources Helps achieve best practice transfer by vendors Quality l l l Learning curve benefits help in faster time to market Releases important customer resources for more value added work Reduces time spent in the RFP process Time to market 16

A staged approach helps transition to offshore partner Test the partnership Increase scope and A staged approach helps transition to offshore partner Test the partnership Increase scope and scale Complete outsourcing Key Success Factors in a Transition l Typical projects l l Presentation screen rewrites Database cleansing l l l Back-end l systems maintenance l 24 x 7 QA* E-business l front end Re-architect back-end Implement middleware Server consolidation Increasing management complexity and mission criticality * Quality Assurance l Involve the end user closely in the transition n Discuss in existing IT governance forum n Involve end user in oversight Management of the CMM level gap between offshore partner and user organization is critical 17

Careful selection of projects required Large projects are generally more successful. . . … Careful selection of projects required Large projects are generally more successful. . . … and also those requiring low customer interaction Project Size Actual Savings <$10 million 21% $10 -$100 million 27% >50% of low interaction projects deliver greater than 40% savings Best Practice u u u More emphasis on projects requiring low level of user interaction Less emphasis on choosing small projects Generally favors projects with less schedule pressure but higher business priority 18

l Business Stability n n n l Quality of scoping Changing market (e. g. l Business Stability n n n l Quality of scoping Changing market (e. g. , Internet applications) Release version - higher versions are more stable System Complexity n Number of interfaces to other systems, some of which are also under development Management Complexity A simple framework for planning transition and selecting projects High n n Applications related to core business processes Pioneering technology work Not recommended to offshore May require longer transition and Requiring vendors Medium higher onshore presence, medium with high interaction saving potential of 30 - 40% handling capabilities and Suitable; tools Low There will be exceptions to the above framework in certain situations. Examples of projects typically not outsourced Requiring vendor with high management abilities high saving potential of 40 - 60% Low Medium High Interaction Requirements l External interactions n n l Customer input on interface design Third party input (e. g. , JV partner) Internal interactions n n Missing or bad documentation forcing interactions with other developers Complex business knowledge requirement forcing interactions with business partner 19

… technology provider successfully followed a phased approach CASE STUDY Marked up SLAs Scaled … technology provider successfully followed a phased approach CASE STUDY Marked up SLAs Scaled down SLAs to give time to vendor Started attending partner conferences Year : 1998 No. of people : 60 Year : mid 1997 No. of people : 30 l l Development project to test vendor capability Low priority and low complexity maintenance of a small component l Year : 1999 No. of people : 90 l Medium priority and medium complexity maintenance (including analysis and design) l l Year : 1997 No. of people : 6 -8 Year : 2000 No. of people : 125 l l Medium priority and medium complexity maintenance Regression testing High priority and high complexity Full testing of products Contribution to new releases (development) Jointly bidding for implementing solutions Started presenting at partner conferences Moving up the value chain with increasing customer confidence in vendor capabilities 20

A detailed transition plan is required for each individual project Steps for offshoring project A detailed transition plan is required for each individual project Steps for offshoring project – Application Maintenance example Project Planning Knowledge Acquisition Onshore/Offshore Transition Offshore Simulation Training/Pilot Offshore Execution 21 Further details on Outsourcing Processes available in the ‘Outsourcing Processes’ section of the ODC Boot Camp binder

Strong governance and management oversight is critical Key Levers Best Practices u Partnership Board Strong governance and management oversight is critical Key Levers Best Practices u Partnership Board u u Relationship Management u u u Performance Management u u u Partnership board consisting of senior management from both sides is the final decision making authority Every quarter, partnership board reviews the level of outsourcing and the performance scorecard Every year, partnership board conducts joint strategic technology planning sessions Day-to-day project management is performed by dedicated relationship managers from each side Relationship managers facilitate smooth project execution, define processes and act as trouble shooters Performance tracking should be automated n Performance scorecard (SLA’s) for off-shore vendor n Commitment tracker for US partner Clear definitions of success and failure Predefined processes for increased and decreased collaboration Exit clauses that define responsibility and timelines for knowledge transfer, documentation and intellectual property rights 22

Risks associated with outsourcing to vendors manageable Perceived risks Why we believe risks can Risks associated with outsourcing to vendors manageable Perceived risks Why we believe risks can be managed l High attrition rates due to large demand l Leading vendors are investing heavily in training, compensation and partnerships with universities to train more students l Complex projects have many failure points l CMM level 4 and level 5 certification Active governance policies with interactions at all levels Talent Project l l Differences in work culture l Leading IT vendors proactively manage culture gaps l Electricity and telecom not reliable Different IPR laws l Government actively promoting uninterrupted power supply and telecom to technology companies Established legal system Cultural Infrastructure l l l Political/Country Geopolitical events can destabilize trade e. g. with India l US and Indian governments agreed to de-link the IT trade from politics 23

Linux Business Application l l l 66 % of the Internet Server market $2 Linux Business Application l l l 66 % of the Internet Server market $2 Billion investment by IBM & HP Office Automation to Space Travel (NASA) Runs in Multiple Hardware Architecture PC, Mainframes, phones & embedded systems Security and Availability 24

In summary. . . l l Move towards competency based vendor selection To obtain In summary. . . l l Move towards competency based vendor selection To obtain the largest benefit from offshoring: n n n l Adopt a partnership based approach Not rely heavily on staff augmentation Move the vendor up the value chain in a phased manner Successful execution of outsourcing strategy requires n n n Careful selection of project Detailed transition plan for each project Strong governance and management oversight 25

Contents n Introduction n Process/Best Practices n Current Scenario/Future Trend 26 Contents n Introduction n Process/Best Practices n Current Scenario/Future Trend 26

Historical Market Maturity Pre-2001 l Traditional key drivers to the market: n n n Historical Market Maturity Pre-2001 l Traditional key drivers to the market: n n n l Therefore, offshore deals were focused on: n n l Inability to retain IT staff internally Lack of internal skills to support key strategic initiatives Ability to scale staff Staff augmentation Speed to completion Shorter-term non-strategic relationships Little due diligence Offshore Provider sales structures were: n n Delivery-oriented Mid-level technical focus In-bound client vs. company generated demand Repeat/referral (word of mouth) business 27

Current Market Conditions l Current market drivers include: n n n Return on Investment Current Market Conditions l Current market drivers include: n n n Return on Investment Cost containment More extensive due diligence/strategic partnering u u u n l Industry references Third-party evaluations Domain/application experience/expertise Market Leverage Shifting to the next phase of market maturity! 28

New Market Realities l To be effective, offshore providers must retool their sales and New Market Realities l To be effective, offshore providers must retool their sales and marketing in the following areas: n n n n Business requirements must be addressed in tandem with technical requirements Value propositions that differentiate your company will be required “Share of client” will become a meaningful success metric Domain, application, and industry knowledge will become increasingly important Emphasis on sales process and methodology Emphasis on client creation Sales and marketing not driven by delivery 29

World business leaders bullish on India World business leaders bullish on India "A truly global company will be one that uses the intellect and resources of every corner of the world. And, India is a developed country as far as intellectual capital is concerned. The opening of the research center marks a new level of commitment by GE in India. ” Jack Welch August 2000 "Three years ago during my first visit to India, the country was emerging as an IT super power. Today the country is handling the most sophisticated projects in the world. Going ahead, we would be investing over 50 million dollars on the development activities of the center. ” Bill Gates September 2000 30

Questions Thank You ! 31 Questions Thank You ! 31