This chapter provides a detailed analysis of the data collected through various means.

It is divided into three sections - Data Source, Data Presentation and Analysis and Findings and Results.

4.1.

Data Source

The data used for the analysis study in this chapter are collected through various means. It includes questionnaire method and research study report '2006 Global IT Outsourcing Study' published by DiamondCluster International.

4.1.1 Questionnaire Method

4.1.1.1 Participant Profile

Questionnaire along with a cover page (refer to Appendix B) stating the purpose of the project study was emailed to IT Senior Executives of well-known organisations of different sectors in Singapore. Refer to Fig. 4.1 for sector-wise percentage distribution.

15% 15% 12% 12%

15% 15%

27% 27% 19% 19% 12% 12%

Bank Bank

Manufacturing Manufacturing

Retail Retail

Service Service

Transport Transport

Vendor Vendor

Fig. 4.1 Sector-wise participant distribution

4.1.1.2

Response Rate

The response rate for this survey method was quite low. This may be due to various reasons overlooking the questionnaire email as spam, lack of interest, willingness to participate and unable to provide the desired information. Hence, due to lack of adequate data, the details from an Outsourcing Study were considered for Analysis.

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4.1.2 2006 Global IT Outsourcing Study Report

The study report included insights from 153 buyers and 188 vendors across the globe, involved in outsourcing services from various sectors like banking, professional services, insurance, retail, service and public sectors. The IT budget of participating companies ranged between USD 5 million to USD500 million. The strength of IT department of these organisations was between 100 to 50,000.

4.2

Data Presentation and Analysis

This section presents a detailed analysis of the study with the help of graphical charts. The analysis of the data has been done with respect to certain dimensions like buyer outsourcing investment plans, rationale for outsourcing, buyer's benefits from outsourcing model, outsourcing challenges, outsourcing risks and buyer's satisfaction with outsourcing model. Viewpoints from both parties - buyer and vendor are taken into consideration while analysing the information.

4.2.1 Buyer Outsourcing Investment Plans

This dimension analyses details pertaining to buyers outsourcing spending plans.

100.00 100.00

80.00 80.00

Percentage Percentage

60.00 60.00

40.00 40.00

20.00 20.00

0.00 0.00 Onsite Onsite Outsourcing Mode Outsourcing Mode Offshore Offshore

2004 2004

2005 2005

2006 2006

Fig. 4.2 Buyer Investment trend for outsourcing (Source DiamondCluster International)

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According to buyers, there will be a continuous increase in their levels of outsourcing spending through 2006 and beyond. However on having a closer look at the data (refer Fig. 4.2), there is a cause of concern for vendors. Even though the outsourcing market is growing, but in actual sense the pace of growth has declined over the past years. In 2004, 86% of all buyers were keen to increase their level of offshore outsourcing in contrast to a slower pace than in the years past. In 2005 the number slipped to 70% and today the number is at all time low of 64%. Similarly buyers plans to increase onsite outsourcing has followed the same downward trend, falling from 64% in 2004 to just 50% now.

4.2.2 Buyer Spending Plans - Area wise

Buyer's spending is more balanced across various onsite services while offshore spending is mainly focused towards four areas - application development, application maintenance and support, database management and help desk services. Refer to Fig. 4.3 below.

Application Development Application Maintenance & Support Help Desk Database Management Web Hosting Server Management Data Centre Management Netw ork Management PC Maintenance & Support
Low ------------------------Relative Focus---------------------- High

Onsite

Offshore

Fig. 4.3 Buyer Spending Plans (Source DiamondCluster International)

Overall for both onsite and offshore modes, application development/maintenance and support are areas which have the major share of the total spending and grab the attention.
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4.2.3 Rationale for Outsourcing

The main rationale for buyers for outsourcing has been control and reduction of cost. Activities are outsourced to offshore location to serve this purpose. However, buyers of onsite outsourcing services are giving more importance to factors like managing variable capacity and freeing up internal resources for core competence operations. Hence, moving away from cost reduction as the main function. Other important factor for both onsite and offshore is access to world class skills to manage their complex functions. The rationale for offshore outsourcing is more towards handling day-to-day transactional support activities whereas the expectations from the onsite resources are to contribute to the main solution. Refer to Fig. 4.4 below.

Variable Capacity Variable Capacity Management Management Free Up Internal Free Up Internal Resources Resources Access World Class Access World Class Skills Skills Reduce or Control Reduce or Control Costs Costs Manage Complex Manage Complex Functions Functions
Low ------------------------------Relative Importance---------------------------- High

Onsite Onsite

Offshore Offshore

Fig. 4.4 Buyer Rationale (Source DiamondCluster International)

4.2.4 Buyer's benefits from Outsourcing model

For buyers using onsite services, re-allocation of resources is the primary benefit derived from outsourcing, whereas cost control and savings is the benefit for offshore outsourcing. This indicates that offshore outsourcing is perceived as a commodity and that cost savings plays a major role in making outsourcing decisions. Both for onsite and offshore, faster time to market the solution (developing/customising

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projects matching customer needs within shorter period) is also gaining importance. Refer to Fig. 4.5 below.

A A
A - Reallocation of Resources B - Cost Savings C - Faster Time to Market D - Increased Shareholder Value E - Avoided the Need to Reduce/Eliminate Current Products/Service

B B

C C

D D

E E
Low ---------------------Relative Benefit--------------------- High

Onsite

Offshore

Fig. 4.5 Outsourcing Benefits (Source DiamondCluster International)

4.2.5 Outsourcing Challenges

When addressing key relationship challenges between buyer and vendor, buyers face different challenges based on whether the vendor is onsite or offshore. In case of onsite vendor, buyers have the concerns like inadequate work estimation capabilities for given assignments (53%), delays in issue resolution during implementation (45%), poor quality assurance and control in deliveries (43%) and slippage of project deadlines. The challenge 'Inadequate skill proficiency and experience' (49%) showed an increase by 10% over last year, which means the selection process of resources by vendors needs improvement. Some other challenges faced by more than 40% buyers with onsite vendors were related to fundamental project delivery functions, such as managing project plans and schedules, monitoring and controlling the constraints and resolving outstanding issues. Buyers challenges related to offshore work have a different set of factors mainly associated with resources across the globe. A few of them are - conflicting communication styles between onsite and offshore teams (70%), high vendor attrition rate (48%), increased overhead for buyer to manage vendor teams (45%), limited visibility into day- to-day delivery status (40%), conflicting work styles and schedules and delays in issue resolution (35%). Refer to Fig. 4.6 below.
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A A B B C C

D D E E

F F G G

A - Inadequate work estimation capabilities B - Inadequate skill proficiency and experience C - Delays in issue resolution D - Slippage of project deadlines E - Poor quality assurance and control F - Limited visibility into day-to-day delivery status G - Ensuring use of best practices H - Conflicting communication styles I - Increased overhead of managing vendors J - High provider attrition K - Limited reporting capabilities L - Stability of technical infrastructure M - Minimal oversight at vendor location N - Lack of professionalism O - Conflicting working styles

H H II JJ

K K L L

M M N N

O O

Low ------------------------------------Challenge Level---------------------------------- High

Onsite Onsite

Offshore Offshore

Fig. 4.6 Buyer Challenges with Vendor (Source DiamondCluster International)

In case of onsite vendor teams, many buyers share the same opinion that inadequate work estimation capabilities, conflicting communication styles, ensuring use of best practices and poor quality assurance and control are major challenges faced. When vendors were asked their viewpoint about the challenges faced by buyers with offshore work, they cited reasons like stability of technical architecture, slippage of project deadlines, inadequate work estimation capabilities, inadequate skill proficiency and experience and conflicting communication styles. Refer to Fig. 4.7 below.

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A A B B C C D D E E F F G G H H II J J K K L L M M N N O O
Low ------------------------------------Challenge Level---------------------------------- High A - Stability of technical infrastructure B - Slippage of project deadlines C - Inadequate work estimation capabilities D - Poor quality assurance and control E - Delays in issue resolution F - Inadequate skill proficiency and experience G - Conflicting communication styles H - Conflicting working styles I - Lack of professionalism J - High provider attrition K - Limited visibility into day-to-day delivery status L - Limited reporting capabilities M - Minimal oversight at vendor location N - Increased overhead of managing vendors O - Ensuring use of best practices

Onsite Onsite

Offshore Offshore

Fig. 4.7 Vendor's View of Buyer Challenges (Source DiamondCluster International)

4.2.6 Outsourcing Risks Buyer Concerns

Every year buyers think about the potential risks that would impact their ability to make outsourcing decisions. There has been a significant change from 2005 to 2006 in which the buyer's concern has decreased in every category except for geopolitical conditions. Most buyers (70%) are very concerned about negative geopolitical conditions (such as legislations related to immigration etc.). The uncertain times force the buyers to think more strategically and weigh risks against gain when choosing how and where work should be done. The concerns regarding other issues have declined especially employee backlash which was a concern in

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2005. Also buyers are concerned about negative customer reaction and publicity concerning outsourcing plans thereby increasing the tendency towards employee backlash. Refer to Fig. 4.8 below.

Geopolitical Conditions Geopolitical Conditions Employee Backlash Employee Backlash Customer Reaction Customer Reaction Negative Publicity Negative Publicity Legislation Legislation Severance Costs Severance Costs Political Pressure Political Pressure Market Reaction Market Reaction Union Pressure Union Pressure Competitor Criticism Competitor Criticism
Low -----------------------------Level of Concern----------------------------- High

2005 2005

2006 2006

Fig. 4.8 Buyer Concerns (Source DiamondCluster International)

4.2.7 Outsourcing Risks Vendor Concerns

The concerns for vendors in contrast to the buyers have increased over the last year. The topmost concern of most vendors is criticism from competitors who wish to come ahead by pulling them down. As the rate of IT outsourcing is slowing down and the buyers are becoming more cautious and selective about renewal of existing and new outsourcing agreements, the competition in the market is getting more and tougher. Anti-outsourcing legislation is another concern that vendors face now than in the past. However, vendors are less concerned about geopolitical conditions as those concerns seem to have declined from 2004 to 2006. This is in contrast to the buyers mainly because the vendors have been outsourcing over the years all over the world and have better appreciation of geopolitical instability than buyers with comparatively lesser experience. Refer to Fig. 4.9 below.

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Competitor Criticism Competitor Criticism Legislation Legislation Employee Backlash Employee Backlash Customer Reaction Customer Reaction Severance Costs Severance Costs Market Reaction Market Reaction Political Pressure Political Pressure Negative Publicity Negative Publicity Geopolitical Conditions Geopolitical Conditions Union Pressure Union Pressure
Low -----------------------------Level of Concern----------------------------- High

2005 2005

2006 2006

Fig. 4.9 Vendor Concerns (Source DiamondCluster International)

4.2.8 Top Outsourcing Risk factors Buyer viewpoint

Increased management complexity is the main risk factor faced by buyers when outsourcing for both onsite and offshore mode of implementation. The next one closely behind is the risk of reduced effectiveness of offshore services. The risks for buyers of offshore outsourcing include timely completion of assigned activities in efficient manner, controlling resources, quality of output and confidentiality of their corporate information. In case of onsite outsourcing, after increased management complexity, there is a growing concern about uncertain financial payback. The buyers are also apprehensive about effectiveness of their traditional onsite outsourcing arrangements, quality of output and control of resources. Refer to Fig. 4.10 below.

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Management Complexity Management Complexity Financial Payback Financial Payback Quality of Output Quality of Output Control of Resources Control of Resources Reduced Effectiveness Reduced Effectiveness Information Confidentiality Information Confidentiality Proximity to Staff Proximity to Staff
Low ----------------------------Level of Concern---------------------------- High

Onsite Onsite

Offshore Offshore

Fig. 4.10 Buyer Viewpoint: Top Risk factors (Source DiamondCluster International)

4.2.9 Top Outsourcing Risk factors Vendor viewpoint

Like the buyers, even vendors stated management complexity as their top most risk factor while outsourcing the job in onsite or offshore mode. Control of resources is the second most important concern. Refer to Fig. 4.11.

Control of Resources Control of Resources Management Complexity Management Complexity Proximity to Staff Proximity to Staff Reduced Effectiveness Reduced Effectiveness Information Confidentiality Information Confidentiality Quality of Output Quality of Output Financial Payback Financial Payback
Low ----------------------------Level of Concern---------------------------- High

Onsite Onsite

Offshore Offshore

Fig. 4.11 Vendor Viewpoint: Top Risk factors (Source DiamondCluster International)

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4.2.10 Buyer's Satisfaction with Outsourcing model

The percentage of buyers satisfied with their overall IT outsourcing decisions is 80%, which is quite high.15% of buyers reported dissatisfaction and remaining 5% responded as neutral. The satisfaction level has not changed in the past 12 months; however dissatisfaction figures has increased from 11% to 15% (neutrals tilted towards dissatisfied group) .s to be coming up again. Dissatisfaction was high in 2002 with 23% participants reporting dissatisfied with their efforts. It dropped to 10% in 2004 but has reached 15% today. In a separate study 79% buyers reported not satisfied with their outsourcing efforts, 31% said they were satisfied with both their onsite and offshore efforts and no buyers said they were dissatisfied with both their onsite and offshore efforts of outsourcing. Satisfaction with onsite outsourcing has come down. It has dropped to 56% from a high of 81% in 2005. Refer to Fig. 4.12 and Fig. 4.13 below.
100 100 80 80 Percentage Percentage 60 60 40 40 20 20 0 0 2002 2002 Satisfied Satisfied Neutral Neutral 2004 2004 Period Period Dissatisfied Dissatisfied 2005 2005 2006 2006

Fig. 4.12 Buyer Satisfaction - Onsite model (Source DiamondCluster International)

6% 6%

4% 2% 4% 2% 29% 29%

59% 59%
Exceeded Exceeded Met All Met All Met Some Met Some Met None Met None Other Other

Fig. 4.13 Meeting Buyer Expectation - Onsite model (Source DiamondCluster International)

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This year 71% buyers reported satisfaction with their offshore providers. In 2005 the satisfaction rate was 62%. This was mainly due to several trends concerning the buyer at that time such as - high turnover rates among provider personnel, unable to differentiate good vendors from bad vendors, learning on the job. These risks still worry the buyers, however the satisfaction rate for offshore vendors is going up indicates that they are doing a good job of managing buyer perceptions and concerns. Refer to Fig. 4.14 and 4.15 below.
100 100 80 80

Percentage Percentage

60 60 40 40 20 20 0 0 2002 2002 Satisfied Satisfied Neutral Neutral 2004 2004 2005 2005 2006 2006

Period Period
Dissatisfied Dissatisfied

Fig. 4.14 Buyer Satisfaction - Offshore model (Source DiamondCluster International)

2% 2%

7% 7%

2% 2%

47% 47% 42% 42%

Exceeded Exceeded

Met All Met All

Met Some Met Some

Met None Met None

Other Other

Fig. 4.15 Meeting Buyer Expectation - Offshore model (Source DiamondCluster International)

4.3

Findings and Results

In a nutshell, outsourcing is here to stay. Although, past few years have indicated a downward trend in growth, the future looks bright. Both buyers and vendors are maturing with time and are taking sensible decisions with respect to their interests.
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Buyer is detailing their requirements and is clearly distinguishing them between core and non-core functions. As per conditions (depending upon the outcome of the resource audit) functions are outsourced in either onsite or offshore mode. Offshore mode is opted mainly to reduce and control the operational costs associated with development and maintenance activities. Day-to-day transactions are outsourced to vendors who have facilities in other countries operating at a lower cost. Onsite mode is preferred in cases where the buyer's focus is on managing variable resource capacity and freeing up of internal resources for core competences. The boom years of IT outsourcing have come and gone. Buyers are more selective and strategic in the way they approach outsourcing and hence the pace of growth is slow. Also many buyers are reaching mid-to-end stages of 5-10 years of outsourcing relationships that were established long back. They were too concerned with renegotiations, extensions, and terminations to focus upon new outsourcing opportunities. Many buyers also feel that they already outsourced part of their opportunities and want to take their time when evaluating more outsourcing endeavours. Buyers are overall satisfied with the services they are availing through outsourcing onsite and offshore mode. Nevertheless, there are areas for improvements for both. The satisfaction level for offshore is much higher than its peer. The analysis of the strategic resource area - People, concludes that benefits and rationale behind outsourcing is variable capacity management of resources, freeing up of critical internal resource, access to a pool of world class skills, reduction in overhead cost and reallocation of resources. The concerns associated are employee backlash and pressures from local unions and political groups/lobbies. Challenges faced for this resource area are inadequate proficiency and experience, effective communication and high attrition. From strategic resource area Information's perspective, the rationale for outsourcing is to let experts manage complex functions with their efficient best practices. However, the challenges are poor quality assurance & control processes, ensuring use of best practices and lack of professionalism. The risk involved is reduced effectiveness and sharing of information confidentiality. For Finance strategic resource area, the risks associated is financial payback of the investments. The rationale are reduced and controlled costs and increased shareholder value.
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Outsourcing model can leverage upon on the strategic resource area Technology. The emerging technologies are forcing buyers to upgrade and innovate their existing systems in turn giving more opportunities for vendors to support their needs. New collaborative techniques have made distant group team work possible and effective.

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