Let’s start with a question. What are the CFO’s / CIOs looking to get from IT outsourcing in the future?
If we hired a leading consulting company to help solve the question, the likely outcome is “Well, it depends”. But not really!
Bear with me as I flash back to my own personal life, to put things in perspective. After spending several years in Academia, I started my IT career in the early 90’s in Bangalore with a local subsidiary of Data General. Yes, a well “settled” Computer Science lecturer, turned into a IT professional overnight, thanks to the word “Offshoring“ – the latest buzz word in the town, until then known primarily for its pubs, weather and the embracing locals. Least was forecast on what was going to happen next – both to the city and to my own personal life. The city, as we have come to know, quickly mushroomed into a giant IT hub with talent pouring in from all parts of the country. Corporations that couldn’t find enough real estate in Silicon Valley, flocked to Bangalore in bunch formation. The Japanese, Europeans, Australians all followed suit. On the other side, my own life changed for good, as I met my future bride, who was one among the many that migrated from another sleepy state capital in the North, to work in the new flashy “outsourcing” business. And yes, all of this was happening pre-#Y2K, pre-#Sep11, and of course, pre-#FinancialCrash. The only recent global historical event that happened prior to this IT outsourcing revolution, is the fall of Berlin Wall at the end of Cold War, which as historians would opine, perhaps, forced India to open its doors for foreign investment.
So, what started the outsourcing industry? Notwithstanding the new found respect as a IT professional, I recall my conversations with several executives, specifically in, GE, Motorola & Nortel – most of whom happened to be expats sent to manage India operations by their respective companies – to understand what led them to outsource engineering and IT work. Interestingly, none of them mentioned “transformation”, but most mentioned another new buzz word – “cost arbitrage”! My boss at work later explained how it worked. It was simple enough. The company was paid $125 a day for an engineer in Bangalore – a gross saving of over 5 times for the client. It worked win – win!
So, what has changed? Is delivering cost benefits not a priority for the modern CFOs and CIOs anymore? Well, let’s look at what happened to Bangalore first – It is now home to over 10M people (4M in 1990), of which 1M directly work in the IT and IT enabled services industries. More importantly, outsourcing is not any more a new flashy business, but something that is very integral to the city’s survival. Equally interesting is the dependency of the western corporations on their operations in Bangalore – either outsourced to a partner or in their own captive centers. It is natural to have a strong argument that due to this symbiotic relationship between Bangalore and the vast global client base that it serves, the future for both of them is secured in eternity. But only until the foundations of the “outsourcing” industry are questioned by those that find opportunities in status quo and be disruptive with a transcending goal to find the next new world.
What or who is the next Uber for the IT outsourcing industry? Is there one? Well, the answer is simple for those that believe in Heraclitus, the Greek mythologist – the only thing that is constant is Change and IT outsourcing is not an exception. Others may choose to live in denial, but should brace themselves for eventual extinction.
The modern CFOs and CIOs are increasingly playing roles that are lot more challenging and non-traditional as compared to their predecessors. They are at the forefront of defining their companies’ business priorities and not just supporting them from the back end. Just a decade ago, I was presenting to the CFO of a top 3 pharmacy company in the US for a $500M+ large ITO and BPO outsourcing contract. As one would recall, the US economy was barely getting by and there was tremendous pressure on corporations to cut cost and down size their operations. So, the goal was simple – “take over the mess and deliver it for less”. Provide $50M in savings over 5 years and everyone is happy. There were no debates or discussions on how this outsourcing contract would help transform the company nor did it involve representation from business units in making the IT outsourcing decision. As a matter of fact, in this specific incident, the CIO was brought in only at the last hour as the CFO drove this “cost cutting” exercise all by himself.
And the net result? The leading “first generation” IT service providers capitalized on such opportunities and grew by leaps and bounds. Their revenues doubled every year as they hired more and more employees (Bangalore’s population grew by approx. 250% between 1990 and 2015). The term “first generation”, here is loosely used to represent the traditional service providers who have become the biggest IT players merely by their size. On the other hand, barring a handful of corporations that have put in place strong measurement and governance systems in place, most other corporations have failed to predict and quantify business benefits of their outsourcing initiatives in the long run. For them, it is almost like riding a tiger. The only way to escape is to get off its back. Research shows, 16% of the corporations that outsourced their IT operations over the last 15 years, are seriously contemplating of bringing work in-house as they fail to achieve their stated objectives. While 16% may represent the minority, the majority of the rest are constantly facing significant challenges to meet their goals. Half of those companies are citing lack of proactive service delivery by their outsourcing partners as the primary reason. Corporations are also facing equal challenges with their own captive centers in offshore locations as another research shows that companies are increasingly engaging third party service providers in managing their captives. Such captives have doubled in numbers since 2008.
As a leading indicator for the future of outsourcing industry, it is interesting to note that the outsourcing contracts are gradually diminishing in their contract value. In fact, when I worked as an outsourcing sales executive with the world’s largest IT service provider, where I spent nearly a decade in leading complex sales pursuits, I have personally seen the size of the deal and the duration of the contract nose dive quite dramatically over that 10 year period. The days are gone when CFOs and CIOs were signing 7 year IT contracts worth 100s of millions of dollars. Additionally, the long term contracts signed just a few years ago, are mostly being re-negotiated on a constant basis. Simply because the rate of change happening both in the technology industry and in the business verticals is outpacing the ability of the large “first generation” IT service providers to address evolving needs of their clients.
While these may be early signs of a greater shift in the outsourcing industry, very few IT service providers have embarked on a disruptive path to re-assert their value proposition. As research shows, the line is blurring dramatically between IT and business – not just because the roles of CFO and CIO have evolved, but driven largely by the nature of demands from the factors outside the enterprise. It is expected that 50% reduction in workforce is likely to happen over the next 3 years in the IT enabled back-office operations globally as businesses are being increasingly “digitized”. Simultaneously, the same study shows, there will be a 5 fold increase in the need of “digital labor “, a combination of IT and business skills. Based on several conversations I have had with business leaders, CFOs and CIOs, there are a number of initiatives identified to adapt their enterprises to this new world. This includes re-evaluating their business landscape, IT capabilities, outsourcing strategies, etc., and eventually evolve into a “as-a-service” enterprise that is large, constantly growing and yet remain nimble.
So, this begs the question – What is the role of the future IT service provider? As corporations re-invent themselves and become leaders among their peers in the new Digital World, there is a greater need for companies to partner with IT service providers that are built differently, can think differently and deliver differently. As Amazon revolutionized ecommerce, Facebook reinvented social network, Uber transformed cab rides around the globe, it is equally important to acknowledge the traditional companies molting to become digital companies. An example is how Domino’s Pizza turned around itself as the country’s 3rd largest e-tailor with a technology initiative that started in 2009 with just 30 IT professionals. And it is interesting that none of these companies outsourced in the traditional way to traditional IT service providers (“first generation”). The service providers of the future must question their current offerings, be willing to cannibalize their revenue streams and needless to add, more importantly, be aggressively client focused in their actions.
Outsourcing in the future is not about just cost savings, it is not just about helping clients to transform, and it’s not just about helping them grow. But all of the above, in a fast paced manner. As political boundaries give way to global economic expansions (e.g. Uber, Facebook, Google), IT companies must be able and willing to provide services where needed, when needed and how needed. Delivering to monolithic, 800 page contract document, will soon be a thing of the past. Instead, outsourcing companies must come together on a demand basis, deliver in real time and repeat themselves all over. This is where the large IT service providers (“first generation”, again!) are likely to face challenges with their significant investments in the traditional offshore centric model.
Let me now introduce Virtusa and why the term “Preemptive outsourcing” is the new mantra. As many of its clients that rely on Virtusa for their outsourcing needs, will readily admit that the company was born with an “Uber” brain. With very deep engineering heritage, every employee is focused on “IT debt elimination” and not cost arbitrage – that is the productivity is measured by not how many technical issues were fixed, but measured by how many technical issues were not needed to be fixed. In other words, Virtusa is all about gamifying the work environment to reward preemptive thinking. The company takes pride that we earn bulk of our revenues in helping clients avoid business disruption and accelerate their business growth – a sharp contract to the majority of service providers who claim to win long term outsourcing contracts to manage client’s IT environments by fixing issues that could be avoided in the first place. It is not uncommon to hear service providers say “we are obligated to deliver to the contract terms”. Sadly, as research shows, most CFOs and CIOs agree, that’s all the vendor focus on – just delivering to the contract. Seldom do they bring proactive, let alone preemptive, thinking to the table.
To circle back to the original question, with complex business dynamics that change on a daily basis if not more frequently, the CFOs and CIOs deserve better. They need service providers with preemptive thinking abilities in their DNA, willing to put client first and cannibalize their revenue stream to build a much stronger future.
And as far – Bangalore, I have no doubt that the city, built on a vibrant culture that embraces changes, will eventually become the Digital Backyard of the world. I can easily imagine another young IT professional wandering the streets wondering why companies are starting to replace their traditional IT staff with the new digital labor. Well, welcome to the world of “Preemptive Outsourcing”!