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Group3 Nitesh Sharma (10-PT28) Nikhil Gupta (10 -PT27) Rajat Wadhwa (10 PT35)

Contents
1. 1.1 1.2 1.3 2. Introduction to IT Outsourcing ............................................................................................................. 4 What is IT outsourcing? .................................................................................................................... 4 Background & History of outsourcing ........................................................................................... 5 Current Market and Economy scenario ........................................................................................ 6

IT Outsourcing Contracts ...................................................................................................................... 7 2.1 Trends in Outsourcing Contracts .................................................................................................. 7 Average value and duration of contracts deals .................................................................. 10

2.1.1 2.2 2.3

Issues & challenges to IT Outsourcing Contracts ........................................................................ 11 IT Outsourcing contract categories, content & guidelines ......................................................... 13

3. Conclusion .............................................................................................................................................. 16 REFERENCES ................................................................................................................................................ 19

Preface The objective of this research is to find out the current trends in India IT outsourcing industry and how it is faring to global players. Also we will understand the issues and challenges faced by the industry due to current market & economic scenario. We will list important contents of IT outsourcing contract and various stages involved in it. We will research for top 20 contracts in Outsourcing and see what the share of IT outsourcing is. Also we will like to see what is average value and duration of these contracts. Finally, we will list recommendations & considerations for the buyers and service provider to leverage on benefits of ITO. Currently, with new IT technologies, virtualization and cloud computing there are new opportunities for both buyers and service providers to leverage on.

1. Introduction to IT Outsourcing
1.1 What is IT outsourcing?

Outsourcing is an organizations decision to make use of outside resources to perform certain IT activities which traditionally were performed by its own employees or internal resources. It is generally a strategic decision by which a company identifies certain core or non-core business activities and contracts it out to other specialized service providers. This helps companies to focus on their immediate priorities and goals, while leveraging on core competency of its business partners that may help in saving costs and adding In early days of IT outsourcing, we have seen many software companies, outsourcing internal service desk or PC support functions to third party service providers. These service providers deployed on-site engineers to manage IT operations while providing efficient services and reporting. Some clear benefits for the companies outsourcing are: -Free internal resources for other high value work. -Company can focus more on its core competencies & goals. -Cost savings on employee headcount and better SLA with service providers. -Leverage on expertise of service providers and implement best practices. Recently we have seen that companys also outsourcing data center operations, hosting & management. Service providers are pushing more for remote management services with minimum onsite people. Emerging IT technologies like cloud computing (public and private clouds) and virtualization (Saas, Paas, IaaS) are further changing the landscape of IT outsourcing industry.

1.2

Background & History of outsourcing

Large part of the 20th Century, the business model followed by most of the big companies was build, own, manage & control its assets. In second half of the century, with advancement of technology and global connectivitys improving, companies start developing strategies to take advantage of the economies of scale. Large corporations saw there are local advantages in terms of availability of skilled resources, material and low costs of production which if utilized, could lead to more profitability and competitive edge over its rivals. Also it helps organizations to have structure which are more flexible and help in adapting to the changing environments. So outsourcing started in manufacturing or other big industries in 1960s in form of identifying suppliers who could supply parts or products for their manufacturing. Boeing Company which manufactures planes is one big example for the same. They manufacture & source part from more than 50 countries before the final product is assembled. Automobile industry is also another big example of the same. The benefits were instant. Until late 1980s outsourcing was not formally identified as business strategy. It was only in 1990s, management gurus wrote at lengths about its benefits and also suggested that it should be integral to any organization business strategy. Gradually from manufacturing related or product outsourcing, service outsourcing was next stage of evolution. Most of the services which are commoditized or add less value like electricity or power supply and maintenance, facility management, personnel or physical security are contracted out to the professional companies as a standard by most of the organizations. In late 20th or in first decade of 21st century we have seen with great advancement in telecommunication and IT technologies, companies have outsourced its various routine jobs or functions to organizations across the continents. India is one of the leading BPO service providers and has gained

most from this. We have IT companies like Wipro, Infosys, TCS, and HCL etc. who have grown tremendously in last 10 years or so and are now providing end to end IT service delivery to various global partners across the globe.
1.3 Current Market and Economy scenario

The market and economic scenarios give birth to new businesses and business strategies. These scenarios are dynamic in nature and the markets upswing or slide keep on changing the business landscape. The market leaders of yesterday are replaced by the new emerging players, the developed economies are gradually slowing down and emerging economies are growing at fast pace changing the economic driving forces. In early 21st century, with dotcom bubble burst and followed recession in IT industry bared the fragility in the industry and once again proved that overinflated projections and unpredictable revenue model, can lead to such collapses. As the world economies have come closer any impact in one corner of the world has its ripple effects. Since then we have seen 2-3 cycles of economic recession, recent ones driven by crisis in financial and credit services. We have seen that US and countries in Europe been impacted more, as they struggle with the GDP and low domestic consumptions. These are the countries which are also biggest drivers of outsourcing. While China has been the favorite destination for manufacturing related outsourcing, India has been favorite destination of IT & ITES related knowledge jobs. In the current economic scenario, IT outsourcing can help organizations to sail through financial and competitive challenges. It can ease of immediately cost pressures and long term ROIs will be unprecedented. However companies will have to exercise sufficient due diligence and caution to be not trapped in cost focused outsourcings rather to go for business - goal focused outsourcing. In recent times we have seen some big deals been signed by Indian IT service providers and more will follow in future has they go up the value chain of providing high-end services.

2. IT Outsourcing Contracts
2.1 Trends in Outsourcing Contracts

In recent research by Gartner on various outsourcing contract deals they found: - Not all outsourcing contract deals are made public. This is in accordance with the interest of either party or its employees. Generally, small deals go unreported and the available data may not reflect true picture of current outsourcing industry. - Table 1 below shows the 20 largest outsourcing contracts signed YTD 2008. It is reflection of global, diverse and a changing market. Table1. The 20 Largest Outsourcing Contracts Signed YTD 2008

Year Primary Signed Vendor

2008 TCS 2008 AT&T 2008 T-Systems 2008 Capita 2008 CSC 2008 Lockheed Martin 2008 EDS

Secondary Customer Name Vendor(s)

Citigroup Royal Dutch Shell Royal Dutch Shell Prudential U.K. Bombardier Transportation Transportation Security Administration Infocomm Development Authority of Singapore Royal Dutch Shell Harvard Pilgrim Health Care Federal Bureau of Investigation Flemish Government BT Unilever BT Procter & Gamble Aircel Ericsson Aviva Insurance Group (Norw ich Union) U.S. Department of State, Bureau of Consular Affairs/Passport Services Directorate Ingersoll Rand

Contract Duration Industry Value (Years) ($ Millions)

2,500 1,600 1,552 1,500 1,200 1,200 9.5 Financial services 5 Manufacturing: Process 5 Manufacturing: Process 15 Financial services 7 Transportation 8 National and international government 8 National and international government

Major Geographic Service Contract Region Type Status

Global Global Global Western Europe Global North America ITO and New BPO ITO New ITO BPO ITO BPO New New Renew New

1,000

Asia/Pacific

ITO

New

2008 EDS 2008 Perot Systems 2008 Lockheed Martin 2008 EDSTelindus 2008 Tech Mahindra 2008 HP 2008 HP 2008 BT 2008 Wipro 2008 GTL 2008 Cable & Wireless 2008 Stanley

1,000 1,000 1,000

5 ManufacturingGlobal Process 13 Healthcare Provider North America 10 National and international government 7 Local and regional government Communications 7 Manufacturing: Process 8 Communications 5 Manufacturing: Process 9 Communications 3 Communications 6 Financial services North America

ITO ITO and BPO ITO and BPO ITO ITO ITO ITO ITO ITO ITO ITO

New Extension New

Accenture

831 700 675 660 650 600 591 586

Western Europe Asia/Pacific Global Global Global Asia/Pacific Western Europe Global

Renew New Extension Extension New New New New

570

5 National and international government

North America

BPO

Extension

2008 ACS

551

10 Manufacturing: Discrete

Global

ITO

Extension

Note: 2008 contracts represent publicly reported contracts signed through October 2008. ACS = Affiliated Computer Services; TCS = Tata Consultancy Services

Source: Gartner (October 2008

Some quick observations from data above are: The deals reported above are all greater than $1 billion in total contract value), and 16 different providers were named. The average contract value for these top 20 deals was just under $1 billion ($998 million) and the average contract term is six years, nine months. -HP and EDS are two providers winning more than one deal. Three India-based providers TCS, Wipro and Tech Mahindra are in the top 20, each with one contract. - TCS signed the largest IT outsourcing deal in 2008. It will provide process outsourcing services, application development and infrastructure support to Citigroup for a period of nine and a half years in a deal valued at $2.5 billion. (TCS also acquired the Citigroup captive center as part of this contract.) Also data shows diversity across different vertical markets, including six in manufacturing (five of which are in the process manufacturing sector), four in communications, five in government, three in financial services, and one each in transportation and healthcare. Showing overall spread and impact of IT outsourcing beyond IT companies. - We also see more IT outsourcing contracts from mature markets in North America (with four) and Western Europe (with three) collectively accounted for seven deals, with the Asia/Pacific region accounting for three. The impact of globalization is clearly evident. - In terms of service focus, ITO accounts for 14 deals, BPO for three, and combined ITO and BPO for three. ITO (IT Outsourcing) is having biggest share 70% of all contracts reported being for IT infrastructure, applications and network services. This is an important trend, since it validates service provider strategies to deliver end to end service delivery and customer looking for end- to-end accountability in some situations.

2.1.1

Average value and duration of contracts deals

As per Gartner data source, after peaking at more than $350 million in 2003, average contract value (ACV) dropped off to around $200 million in 2004 and 2005. This value again surged back to around $275 million in 2006 before dropping off again in 2007. In 2008, with economic recession gripping good part of the US and European economies this ACV was at a six-year low, at $189 million. This has gone down only marginally from the 2007 figure of $204 million; nevertheless it indicates changes in deal size. This is indicative of a changing market as buyers increasingly shift to selective outsourcing and smaller deals that give greater flexibility. From 2003 through 2008, average contract length showed a fairly stable range of between five years and six years. Considering that larger deals are likelier to have deal specifics reported, the average contract length is skewed to reflect larger deals. However, outsourcings contracts renewals or new reflect long-term commitments, and this has not changed dramatically over the years even though TCV and ACV have been more volatile.

2.2

Issues & challenges to IT Outsourcing Contracts Besides macroeconomic factors let us see what are other challenges to successful IT outsource contracting. Though we all know that there are various benefits of IT Outsourcing and there are many successful relationships which are example of the same. The history is also plagued with various instances where relationships have soured and contracts have failed. One such example was contract between New Century Energy of Denver and IBM Global Services signed in 1995 where NEC outsourced virtually all its IT functions to IBM Global Services. The lack of flexibility in the contract for addressing the needs of the various business units of NEC led to the necessity to renegotiate the contract in 1999. Despite the problems with both the initial arrangement and renegotiating the contract, NEC still considered outsourcing beneficial. Anthem, a health insurer, established a five-year contract with Unisys in 1996 for various IT services, but quickly became dissatisfied with the level of service provided. After considering to bring the functions back in-house, they went out for bids on a new contract that included defined service levels and management processes, eventually awarded to Affiliated Computer Services. Adidas America had to face two of their three ASPs (application service providers) going out of business. They had to act immediately and selected a smaller firm that could respond quickly to their situation. This enabled them to not suffer any business interruptions. Case of Bezeq, an Israel based telecommunications company, outsourcing the development of its new billing system to the international software company AMS in the late 1990s. Anticipated enhanced competition due to pending deregulation in the telecommunications industry emphasized the strategic importance of this project to Bezeq. AMS was the primary vendor, but two others, as well as the IT staff of Bezeq, were involved. Due to scope definition problems and incorrect pricing in the IT outsourcing contract, it created problems between AMS and Bezeq and ultimately litigation. Bezeq realized that with fixed price contract it was not a beneficial and will result in losses. The situation was worsened with the change in corporate strategy by AMS to no longer consider large contracts with telecommunications firms as having future strategic value.

When Bezeq felt AMS failed to meet a contractual milestone, they claimed a breech and terminated the contract. The resulting legal dispute was later settled out of court. These examples above all point to the need for: Clearly defined scope of work, expectations & SLA. Adequate risk identification, planning and management. Use capital budgeting techniques to calculate NPV, IRR and have better decision making before outsourcing. Adequate change controls & data privacy measures. Flexibility between two parties to adapt and change. Understand and opt for correct pricing models. Short term focus and lack of detailed analysis before outsourcing. Outsourcing effort aligned with company strategy. Understanding legal and statuary obligations. Right vendor selection.

In the paper ahead we will further elaborate on the above. We will see the critical components that must go into the contract for both buyer and the supplier.

2.3

IT Outsourcing contract categories, content & guidelines The outsourcing contract is one of the most important documents in an outsourcing relationship. The contract, terms and the quality of the contract will largely influence the outsourcing relations, governance and overall the success of the outsourcing venture. Below are the categories under which most of the contracts between the customer and service provider generally fall in:

People intensive or labor based contracts Here the contract anticipates a general volume of work, has quality of service goals, and places constraints on the total labor anticipated for accomplishing the work within that framework. There is an hourly or monthly labor rate assigned to different skill levels. Service oriented or transaction based contracts The service provider is paid for completed transactions. Usually there are service quality goals, as well as expected transaction volume. Incentive linked or goal based contracts The customer and the service provider establish efficiency and effectiveness goals together in a way that it encourages improvements. This is accomplished as a result of transparency and accountability. When it comes to negotiating terms, the cost of service is still the most important selection factor. Pricing options were more varied. Buyers generally seek the safety of a fixed price, but service providers are increasingly moving toward output- and outcome-based pricing models in outsourcing contracts where services support a process with measurable outcomes.

Contents of an outsourcing contract are: SOW : Statement of scope of work, detailed definition and description of services and/or products to be delivered. Rights & Obligations of both the parties: each party know what it must do under the agreement and what benefits it will receive in return. Governance Model: structure, representation and reporting requirements. General terms & conditions: security, privacy and warranties. Plan and schedule: that will apply to the delivery and implementation of the products and services specified in the agreement. Control Change: procedure for the parties to control changes to the project Deliverable acceptance criteria & payment plan: customer will measure and accept the services/products delivered and how the payment(s) will then apply during performance of the contract. Termination Clause & limitation of liability: Define the procedures to resolve any disputes promptly and provide effective and commercially realistic remedies for both parties in the event of contractual default by the other. IPR & Logo: Ownership of rights, products, licenses and intellectual property.

Different stages of IT outsourcing Contract Agreement: Identifying Requirements: business case for IT outsourcing and approval from the top leadership. RFP & RFI for requirements: well defined RFP to define the requirement and capture service provider inputs will help in better screening in bid process and vendor short listing. Negotiations & vendor selection: deals signed solely based on cost are often dissatisfied with delivery, even though it is exactly what they signed up for. SOW, SLA, Schedule and Pricing model: inputs for contracts, they need to separately discussed and documented in detail. As a service provider or buyer, pricing should be negotiated in order to reflect planned growth and projected as well as un-projected peak demand. Reserve the right to renegotiate requirements and pricing if necessary. In case of off-shoring ensure you have immunity to currency fluctuations and other macroeconomic factors.

Contract Acceptance: Both service provider and buyer will get the final contract vetted from their legal and technical teams before signing the dotted line. With increased competition and complex scenarios, the decision cycle tends to get longer. It is in the best interest of the buyer to execute as quickly as possible to gain advantage of current economic scenarios. Performance of Contract: the contract execution is a critical phase of the IT outsourcing contract and it is important that both buyer and service provider periodically meet and discuss on the performance metrics. The milestones should be tracked and payments should be executed. It is during this phase the two parties have to ensure they maintain full transparency Contract renewal or closure: as the contract term nears its due date , the contract will have to be renewed or formally closed depending on the business need. The contract may be renewed with the addendum if there are not much changes in scope of work or pricing.

3. Conclusion
To summarize the IT outsourcing will continue to grow and though overall term of contracts have gone down from earlier six years and beyond to 3 5 years now. It is important for both buyers and service providers to continue to invest into the partnership and look towards mutual benefit to maximize the contractual value. India IT industry continues to expand the big 5s are capturing big long term deals. Also there strategy to acquire firms abroad and increasing near shore presence will help in attract new deals but at the same time will increase their operating cost. They need to be careful about the same.

For Buyers, it is important that they don't get caught in market hype, or make fear-based decisions. For first time users it is especially important to carefully plan and should augment right skills and people to take advantage of global sourcing models. Enough effort should go identify what should be outsourced and what to retain in-house. Initially it is best to go for short term contracts 1-3 years .Maximum focus should be on risk planning and have a sound exit strategy. While negotiating and identifying correct provider other then costs, they will evaluate a provider's capabilities, on: Organization maturity for seamless delivery and handoffs Robust IT infrastructure ensuring good network connectivity, data security, redundancy. Consistent processes in each location Consistent use of toolsets in each location Global mindset & workforce management Flexibility and adaptability Monitoring & control Reporting performance metrics

For Service providers, they have to mature their capabilities in becoming more homogeneous in the services they provide, regardless of geography. They should standardize their business approach and invest in service best practices, thus enhancing the consistency of their service delivery.

Survival of the fittest will define provider landscape as merger & acquisition activity will accelerate. Keep a presence in acquired firms to capture upcoming integration opportunities. Ramp up business and regulatory skill sets. Maintain a flexible global presence, including sufficient onshore and nearshore resources Emphasize models of reinvestment with near-term cost savings to fund transformation for future growth. Win-win contracts: terms and pricing that is fair and promises long-term sustainable value. One sided contracts that leave the provider with only marginal profit or limited revenue growth will ultimately result in service quality issues.

REFERENCES
Anderson, E., and Anderson, M. (2000). Are Your Decisions Today Creating Your Future Competitors? Avoiding the Outsourcing Trap. Cooling Zone, http://www.coolingzone.com/Guest/News/NL_DEC_2000/Pegasus/pegasus.html NetMBA (2005). http://www.netmba.com/finance/capital/budgeting/ http://gcn.com/articles/2010/08/05/7-lessons-from-outsourcing-failures.aspx http://www.gartner.com/it/page.jsp?id=856713