The Allure of Outsourcing
Lee Ting Ting
Computerworld Malaysia-05/11/01
IN the current economic slump, every decision that involves a financial element becomes an increasingly difficult one to make. The decision regarding a company’s IT requirements is no exception.
In extreme cases, some local companies are already starting to collapse under the burden of having to sustain their IT operations in order to stay in business. Yet, on the other hand, many of those with the foresight to outsource their IT requirements months or even years ago can still afford to look at the storm ahead in the eye with the assurance that their backs are covered by their outsourcing partners as in many rough patches before.
Main motivations:
The prime motivation to outsource a business’ IT requirements is the attributed cost savings. The scenario painted by the service providers is basically "Let us handle your troubles, for a small fee". With the increased complexity and widening definition of IT systems, the prospects of being free from all the taxing demands of IT requirements on the company’s limited resources, becomes very tempting indeed. The carrot looks juicier for those in service-oriented businesses, which depend heavily on the reliability of the IT service they get, in order to supply quality service to their clients. Financial institutions, and web services providers are two examples of such businesses. However, the economics of outsourcing goes beyond sweeping all the trials and tribulations of running IT—costs, management, and even equipment—out of the enterprise and into someone else’s. According to Douglas Brown, director of consultancy at CSC Asia—a global IT services provider that operates through local company CSA Malaysia—the most costly things to companies today are time, and talent. Outsourcing allows management to pry time and resources from the need to evaluate applications and hardware, train specialist employees, and deal with IT vendors. By concentrating on their core business, companies are no longer constrained by expertise, facilities and technology to observe the high levels of demands from their customers. Outsourcing is also a good way to expand one’s business. "Not only is your company free from the roller coaster uncertainties of managing IT requirements, but also prevented from having to embark on failing initiatives," says Lim Tick Boon, general manager for Atos Origin Malaysia, a global consulting and IT service provider.
Specialised service providers also bring about significant value adds. An example is Cordoda, an enterprise broadband network provider which offers managed network services. Network management is not new as some local telcos provide the option of incorporating this service into their leased line packages. The difference, according to chief operating officer Shane Hodge, is that service providers like Cordoda provide a much higher level of service. "With a ready ATM-based data network wired throughout the country, and state of the art equipment and porting systems, we can offer added value others cannot, such as sophisticated online monitoring tools." Cordoda, he says, thrives on its nimbleness in being able to quickly respond to clients’ business changes, or ad-hoc special assignments, without being bogged down by bureaucracy. Debunking the outsourcing myths Despite the inherent benefits of IT outsourcing, this practice is yet to be considered a hot trend in the local market. Frost & Sullivan reports that the IT outsourcing concept is still quite nascent in Malaysia. "An example is the limited success of the ASP model here, due to the low awareness level among local businesses. The outsourcing practice in the storage management and networking areas are also quite minimal," says Nitin Bhat, industry manager at the research firm. Outsourcing is still yet to be accepted by the masses. "The decision to outsource in Malaysia is often more a personal and cultural motivation, rather than being dictated by the economics," says Johan Duim, general manager for outsourcing at Atos Origin. Perhaps the debunking of some outsourcing myths could help rectify this.
Outsourcing has long been associated with certain notions such as granting businesses 100 per cent freedom from IT related troubles. This is the first myth. "Outsourcing is not a "hands free" situation. Instead, it is very much a close and long-term partnership," says Lim from Atos Origin. Like a marriage, the successful relationship between a business and its outsourcing service provider is built on communication. "An open, collaborative environment fosters the trust that the goals of the outsourcing partner are in lock-step with that of its client," says CSC’s Brown.
The second myth is that outsourcing means layoffs. Johan disagrees. "I have never retrenched anyone in my 12 years in this business. The real idea behind outsourcing is doing more with the same people. Redeployment is the word," he says.
Third on the myth list is the issue of ending up short-changed. While there are incidents of unsatisfactory outsourcing deals, Lim says that this is primarily due to a mismatch of expectation and the services provided. This happens when clients start comparing apples against oranges, and account for the wrong things. "Hence it is extremely important that clients make the outsourcing decision in a business context, so that the service provider can align its resources to achieve its role in the big picture of the clients’ strategy," says Lim. He warns against superficial comparison, especially when the IT guys can only guess what the top management wants. The fourth myth is that outsourcing equals a loss of control. "On the other hand, it actually gives management more grip over its financial and operational matters," says Johan. Outsourcing, he adds, eliminates the hidden costs of meeting IT requirements.
The SLA relationship:
Negotiating an outsourcing agreement is often a lengthy process between two parties. Often, a complete cultural change and attitude needs to take place within the client’s organisation. "The partnership is built on trust, and it is essential that the client has complete faith in the ability of the outsourcer to achieve the agreed level of performance and service," says Nick Jackson, general manager of Modus Media’s Asia Pacific eFulfillment Centre. Modus Media provides outsourced support through procurement, inventory management, financial management, and customer relationship management. Each SLA (Service Level Agreement) is unique, and requires in-depth customisation by default. There isn’t a "one size fits all" solution, and clients are rarely dictated by the service provider, but made to understand what would actually constitute value to them. Audit trails, frequency of performance reports and level of availability are defined in the SLA’s contractual terms. The key performance indicators in each SLA are also different according to the project at hand, and will be monitored by both parties on an ongoing basis. Failure to peform according to the SLA could result in penalties for the outsourcer.
The IT outsourcing business can be quite volatile as clients can easily switch partners if they are not satisfied. But in the event the company wants to revert to an internal system, some outsourcers help with the transition, for a service fee of course. Despite the gloomy outlook in the general economy, the opposite is true for the IT outsourcing service space. "Companies still need to maintain their services to encourage spending, exports, online transactions; but to keep cost down at the same time. So, no doubt IT outsourcing is a good way to achieve just this in the current business slowdown," says Hodge from Cordoda. And this is obviously the current sentiment now, as outsourcing service providers in the country report an increase in the number of companies enquiring about the alternative of delegating their IT needs.
How much is actually saved? Cost savings associated with outsourcing are widely subjective. Experts give a rough idea of what to expect. Outsourcing to an ASP Nitin Bhat, industry manager at Frost & Sullivan: Outsourcing to an ASP brings about lower up-front investment and predictable on-going costs. The high cost of implementing an enterprise application deters many companies from owning the technology. For example, a branded ERP application can run into millions of dollars for a single implementation due to the high level of customisation required. But via an ASP, the up-front investment is brought down to around USD125,000, and implementation time cut down by up to 12 months, allowing the customer to leverage the application faster. The increasing complexity of applications has intensified the need for ‘outside’ expertise. ASPs ideally bring the skill sets to manage these complex applications with pre-defined deliverables.
No hidden costs:
Shane Hodge, chief operating officer, Cordoda - The cost for a company headquartered in Kuala Lumpur with five branches (Penang, Johor, Kuantan, Kuching and Kota Kinabalu) operating on its own 64kbps leased line network is around RM287,000. The one time routers cost is RM88,600 and yearly maintenance about RM18,000. This totals to RM393,600 for the first year, and RM305,000 for the following years. This is just for a simple direct connection; without equipment, helpdesk, managed service, or last mile connection.
Subscribing to Cordoda’s EBN costs RM285,000 yearly and it includes management, maintenance, equipment, 24x7 helpdesk, utilisation reports, 64kbps Net access and the diversity of a multi-telco connection.
New heights of efficiencies: Nick Jackson, general manager for Modus Media’s Asia Pacific eFulfillment Centre:- Last year, we were given the responsibility to manage the supply chain for a division of PC component retailer Micron Electronics, US. Outsourcing reduced Micron’s product lead times from more than 20 days to less than five days; total order cycle times from two days to less than 12 hours; inventory stored from 22 to six days. In addition, we compressed their production time down by 13 hours; and increased the reliability of promise availability up to more than 85 per cent, from 73 per cent.
Year by year improvements: Johan Duim, general manager for outsourcing, Atos Origin Malaysia:- Outsourcing actually provides companies greater control over their (IT-related) financial and operational costs as they know exactly what to expect. It is difficult to estimate the amount of cost savings from outsourcing an end-to-end IT need, but generally, ROI is estimated by achieving a certain percentage of increased efficiencies each year. In our case, it is a minimum of at least 10 per cent which is equivalent to salary increase alone every year. So outsourcing saves a lot in five years.
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