Wednesday, April 16, 2008

Multi-Sourcing - Some Common-sense Do's

posted by ShyK at 23:12

Industry Analysts have of late (for the last 1-2 years) been harping of the growing trend of Organizations outsourcing to multiple vendors. Whether this is genuinely a deliberately thought out strategy leading to such trends remains a moot point. Perhaps organizations are forced to multi-source because their existing vendors are unable to provide specific skills / services or worse unable to scale up with them as they grow.

Without getting into that debate, let me address some of the common sense / operational actions that would need to be taken if you were multi-sourcing. They are common-sense yes, but they are also the kind of things that get easily lost when people only talk strategy and forget execution.

  1. Limit the vendor panel for each function (IT, ITES, Engineering Services) to 2 or 3 Vendors. Vendors will invest in you as a customer only if they see sufficient business coming from you. A typical company with US Fortune rank of around 500 will spend around US$ 50 MM a year on IT including capital expenses - probably only half of that on IT services. A service provider with less than 50% wallet share of services is unlikely to pay any serious attention to developing partnerships.
  2. Try and find vendors with different strengths. Different technology areas, different geographies served or different delivery location (near-shore / offshore). It wouldn't make too much sense to have two similar vendors in the panel.
  3. Give vendors preferred status / first right on projects that are below a threshold value in their areas of expertise. Undertake reverse auction / multi-vendor bidding only for the larger projects or where expertise may not have been established. If at all possible commit a certain value of business to each vendor.
  4. Identify a contract manager who owns all contracts and thus ensures consistency across vendors. Identify a relationship manager / sponsor for each vendor. The sponsor / relationship manager should in addition to managing vendor also internally sell the vendor. The sponsor should help vendors reach out the project managers in the organization both to sell and to resolve issues.
  5. Create a knowledge sharing portal / forum. Vendor employees should be able to post questions / best-practices and other employees can perhaps respond or learn or reuse. This will only work if Vendor IPR's are respected and vendors get some compensation where components created by them are reused.
  6. Plan annual summits / workshops where all vendors participate and discuss roadmaps , budgets, skills & best practices.
  7. Involve a third-party compliance / auditor / bench-marking firm to monitor the vendors. Be transparent about the process and results.
  8. If you run large programs which involve multiple vendors - ensure you have Program Managers who understand the implications of managing work-packet dependencies and can ensure effective communication. They will need to be supported by Project Management Office to keep a tab on everything that is happening

Come to think of it, most of this will apply to most organizations who outsource - given that, unfortunately, there are very few organizations who have actually been able to consolidate all their requirements with a single partner provider.

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Tuesday, April 08, 2008

Tax Impact on India Heritage IT / ITES Provider Revenues

posted by ShyK at 22:47

Over the last couple of years, there has been a considerable brouhaha about the Indian Government doing away with the tax SOPs for the IT & ITES industry. But. the actual impact on of the STPI scheme going away is about 7% of revenue though the worst case scenario calculation tends to put it around 13-15%. Here's how.

Give or take a few % points, for every $1 earned by India Heritage players they spend about 30 cents on wages and 25 cents on infrastructure & other fixed costs thus getting an EBIDTA of about 45 cents or there about. Currently there is a Minimum Alternate Tax of 11% applicable on these earnings – so about 5 cents go towards tax and accounting for the other expenses the operating margin is about 23 cents (23%).

The change in STPI scheme means two things as far as I can understand. There could be some 11% tax applicable on some of the non-wage costs. In the worst case scenario this means that Indian Heritage players would spend an extra 3 cents on the 25 cents towards on Infra & other fixed costs. More importantly the companies need to pay 35% tax on their profit from export revenues. Using the reduced EBIDTA of 42 cents as a basis (for worst case scenario) that is an additional 10 cents paid in taxes. So in the worst case scenario the operating margin is reduced to 10 cents (23-3-10) - a reduction of 13%.

In reality, this impact is expected to be the much lower 6-7% given that even now, the companies service India market, deliver from SEZs (tax holiday for 10 yr beyond inception) etc. There are multiple ways to look at even this impact.

For one, the reduced operating margin of 16-17% for Indian Heritage players would still be about twice the margin of the established global players. So while the share-holders may not like it, they still can swallow the hit.

On the other hand Indian Heritage players, still operate at lower blended average hourly rates than most Global players. Even if they bump up the rates by 6-7%, the blended rates of Indian players would continue to be lower than the blended rates of the global players.

Furthermore, traditionally Indian players have focused relatively less on reusability and automation than Global players. The margin pressures both in terms of taxes and wage inflation is driving and will continue to drive Indian players to rely less on tapping the vast pool of inexpensive programmers / operators and start automating / reusing components to a greater extent.

Finally, the Indian Government may relent and extend the tax scheme as others have pointed out. Or maybe they will implement the suggestion made during the Nasscom leader-ship summit by one very vocal proponent of Indian BPO industry – take away the STPI benefits from the Indian IT providers / revenue but continue providing this benefit to the Indian ITES industry / revenue. After-all the Indian IT industry has existed for 30 odd years while the ITES industry is still a baby at 10 odd years.

This post inspired by Phil Fersht's write-up on How severely will the expiration of India's STPI tax scheme impact the Indian outsourcing industry?

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Tuesday, March 25, 2008

India Television Channel Subscription Model

posted by ShyK at 00:26

I subscribe to Tata Sky for television channels at home. My bouquet of channels unfortunately does not include the channel(s) which would show the India-SA cricket matches and Tata Sky sent me an alert today reminding me that I need to pay up to watch the matches getting me all hassled.

Now, some amount or other would apply whichever DTH or Cable provider I used. And, the amount involved is really minuscule – a paltry INR 199 per television per annum (US$ 5) on top of the approx INR 450 (US$12) per month that I spend on subscription for two televisions. The amount looks ridiculous when I compare it to an approx US$ 80 per month that I would pay for comparable set of channels in the USA – and the up-to US$ 5 per game that I would end up paying for pay-per-view in the USA. So, why has this 50 cents a month for a bouquet of channels got my tail up?

Well, I have a problem with the fact that this particular channel is advertisement supported. So much so, that quiet often you end up missing a part of the actual game because advertisement is being aired. I fail to understand the need to pay additional money on top of the basic rental that I anyway pay, to view a channel which is probably earning huge revenues on advertisement. That I think is just one of the many issues that TRAI and the Information & Broadcasting ministry needs to tackle / address.

In my view, we in India, need regulations around

  1. Pricing per Channel – Perhaps the government could classify channels into two types
    • Paid Channels – These should be restricted from showing any product / services advertising and the sole revenue source for these channels would be subscription fees. India’s 1.2 Billion populations means that even if just 0.1% actually paid subscription fees for these channels, that would still be 10% of the customers that Dish TV has in USA.
    • Free to Air Channels – The Cable or DTH provider must show set number of these channels at no cost beyond a basic monthly subscription fee. There is already a law requiring certain channels to be carried but that law is limited to the state sponsored Doordarshan Channel
    • Something In Between – Given that India with a notional GDP of US$ 2,000 may not be ready to yet pay US$5 per view – maybe there should be some channels which have a nominal fee. Given that India has more than 2.5 MM DTH subscribers and probably more cable subscribers than that in Mumbai city alone – I think this could also form a substantial revenue chunk. While this is what exists today – its important to govern this with laws limiting content to advertisement ratio and perhaps on laws around having advertisements scrolling on the screen while the content is on.
  2. Delivery Mode – Encrypted vs. Un-Encrypted. The Encrypted channel should require explicit subscription sign-offs and could thus be allowed to depict content that could be offensive to some but desirable to others. It should also be possible to allow advertisements for alcoholic / tobacco and other adult oriented products on these channels – a much better approach than the surrogate advertisements currently allowed.
  3. Content Advisory – All channels should be required to carry a content rating on the screen all the time. In fact this is what happened when Star TV first started broadcasting in India. Over the years, as other channels have mushroomed the practice has vanished. As a pre-requisite, its essential to create what is perhaps a given in most countries but lacking in India. We need a proper content rating mechanism (G, PG, 15, 18, R etc) instead of the current U / UA / A. That should off course be supported with additional detailed content advisory (Language, Violence, Nudity).

None of this is probably very difficult to implement. Guess I should continue dreaming that it would happen sometime soon.

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Wednesday, March 19, 2008

Human Resource Outsourcing - Road to Success

posted by ShyK at 21:16

HRO has seen its fare share of ups and downs. Here are my thoughts on why HRO may need some time before it becomes mainstream

Most global organizations tend to have 'utilities' rather than applications to service their HR processing needs outside of major countries (US, UK et al). Not only there is no existing global system, but also the systems that exist are not up-to-date, given that HR tends to be fairly low on priority for technology upgrade budgets. This seems to preclude a lift, shift & fix approach to HRO unlike FAO. Most organizations seek either a concurrent lift & fix approach or a 'Fix & lift' approach. The former has its challenges & risks resulting in expectation mismatches and the later requires upfront investments which customers expect providers to subsidize.

Given that a simultaneous IT & Process transformation will always have a far longer pay-back period than a mere process transitionl one way to make it more palatable is by addressing the low hanging fruits. This can either be done by taking a phased approach. One way is to do a more or less As-Is 'shifting' operations for certain countries while 'fixing' those at others. The other ways is to shift processes such as Work Force Administration support or Recruitment process support early on, since they can do with somewhat lesser or older technology.

That view is somewhat contradictory to the fact that payroll processing and benefits administration (primarily for US & UK markets) outsourcing has taken a lead and is more or less stable. I believe that this has been driven by upfront technology investments by the providers. This has its own payback related challenges for vendors. The only way for a quick payback in such cases is to scale up fast - winning and delivering a high number of customers. It seems that providers are finding it relatively easier to win customers but difficult to deliver to them - especially from low cost locations. The problem is the lack of availability of knowledgeable associates. The scarcity of resources has meant a huge churn of associates and hence an inability to deliver consistently & effectively.

Vendors thus need innovative models to recover their investments. Speculation abounds that in the case of payroll processing the profitability results are driven more by the cash management rather than by the transaction processing fees.

Furthermore, there is a lack of a single effective integrated platform. There is at least one ERP in the market which allows multi-tenant model and multiple providers are trying to build their platform offering around it. However, while most ERPs no doubt have all relevant functionality, each HR sub-process- whether its performance management, compensation management or resourcing - has its own 'best-of-breed' application. Customers & Vendors quite often complicate issues by trying to build a mash-up application.

All in all - I think HRO would be more successful if it continues to take baby steps for some more time before it attempts giant leaps. While customers should engage providers to deliver the whole span of HRO sub-processes, they need to break it down to process and geography specific SoWs and milestones to effectively pace the outsourcing.

This post inspired by Phil Fersht's write-up on Can HRO rediscover its froth despite a 97% success rate?

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Monday, March 17, 2008

Building a Partnership with the ITES Provider

posted by ShyK at 21:32

Building a partnership with a service provider requires extensive investments of time and management / planning effort on the customers part.

It is no doubt possible for a buyer to continue demonstrating success in a model where the buyer is responsible for strategic & tactical management while provider is responsible for operations. While not the most healthy relationship - it is sustainable, or at least sustainable until external forces do not cause either the buyer or provider to change their business model.

A more healthy relationship is a partnership approach, but this requires nurturing. It might however, be possible to couple the goals of the service provider with that of the buyer with somewhat lesser investment.

Most mature buyers today hold annual IT planning summits where all their service providers are invited. The unit CIOs present their IT roadmap (and budgets) and the providers showcase capabilities and share best-practices. Among other things, this allows the buyers to benefit from the providers learning best practices from each other. Additionally, the providers make suggestions to improve the IT roadmap as they bid for components there-of.

Unfortunately, given the longer term engagements in ITES / BPO - these annual summits by buyers may not apply. This actually moves the responsibly of conducting such summits to the service providers. No doubt the service providers have their own mechanisms to internalize and cross-share with other customers, the best practices that they discover with one customer. However, its possible to gain additional buy in to implement such best practices if the provider conducts a summit for all customers and perhaps for prospects.

While the service provider contributes in terms of bringing in best practices - its for the buyer to share his plans & problem statements with the provider.

It is the responsibility of the Contract Manager or the Sourcing Manager to mandate half-yearly / annual business review meetings requiring participation from the buyer CxO and the provider leadership & consulting team. It should be possible in such meetings to share strategic issues & imperatives - with the provider sharing their experience of resolving such issues.

A few such business review meetings later -- there is automatically sufficient trust established at the management level to work in a win-win partnership mode rather than a provider-vendor mode.

This post inspired by Phil Fersht's write-up on Is your outsourcing vendor really your partner?

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