IT capabilities used to be a strategic differentiator-IT provided companies with new and unique ways to process business transactions and information–and created unique organizational capabilities. The advent of powerful , flexible and yet affordable systems, has made it possible for even the smallest organization to acquire the same capabilities that only large companies possessed only a few years ago.
IT has moved from being a differentiator to being a necessary part of doing business-commoditization of IT. Instead of the challenge of acquiring new capabilities, organizations are now faced with the need to manage complex systems and keep up with change. Technology has introduced an era of “hyper change”-a time of rapid and increasing rate of change. Organizations need to have the ability to change their infrastructure and resources rapidly in order to keep up with the changing business environment which demands more and more IT innovation. However, most of the IT Budget is spent on “Non Discretionary” items like application maintenance, infrastructure maintenance and operations-leaving less than required Budget for IT Innovations.
Businesses are using offshore outsourcing to focus more on IT Innovations by cutting costs, optimal usage of internal resources, and efficiency improvements using matured processes. However many of offshore outsourcing engagements have gone wrong due to inadequate planning and improper management. Offshore Outsourcing is not an easy process, however it can be relatively simplified by knowing, “What to Outsource , How to Outsource and How much to Outsource” before beginning an offshore outsourcing engagement.
A Portfolio Analysis (PA) approach to plan for Offshore Outsourcing of Application Maintenance & Development activities should be the first step in planning for Offshore Outsourcing. This analysis is much more than analyzing the labor arbitrage. A detailed multidimensional analysis of the applications provides a clear understanding of the type of the application, its suitability to be outsourced offshore and transformational opportunities for efficiency improvements. An effective & efficient Application Portfolio Analysis followed by establishing the Offshore Organization, Process and Infrastructure are key factors for the success of an Offshore Outsourcing engagement.
Achieving Revenue growth through IT Innovation and Reduction in Operation Costs are the key success factors for most of the Business
Today the key priorities for the CEO’s and the CIO’s are:
- To Achieve Greater Strategic Agility
- Innovate Business Model and Process
- Improve Productivity & Reduce Cost
- “Do More for Less!!!” -with the existing Budget, Resource,Technology and Process Constraints
“87% of CEOs believe fundamental change is required in next two years to drive innovation”–2006 IBM Global CEO Survey.
Today, for Business to grow, demands more and more strategic agility and productivity which can be achieved only through IT Innovation.
But about 78% of the IT budget is spent on sustaining and running the existing systems leaving very little room for developing new capabilities, which is key to the success of today’s business. Forrester study shows that about 53% of the IT budget is spent on salaries.
At a time when IT innovation is demanding an increase in IT budget, the budget itself is not increasing. Most of the CIO’s are constrained by “tighter IT budget” and “cost savings”. The only way to create room for developing new capabilities through IT innovation and achieving cost savings are:
- Cut Costs in other IT spending areas (while maintaining the same level of service) and realign these savings for IT Innovations.
- Increase productivity gains & operational efficiencies by transformation of the IT services & processes
More and More Organizations are turning to Offshore Outsourcing as answer to challenges.
Offshore Outsourcing has become mainstream and its advantages have been widely published. A growing number of businesses are taking advantage of Offshore Outsourcing to reduce costs, gain operational efficiencies through better processes and increased speed to market and effectively leverage their expensive IT resources and IT innovation activities. Offshore Outsourcing is very important for SMBs to be competitive in this market. With their limited IT budgets, focus on IT Innovation is mainly achieved through offshore outsourcing. Apart from cost savings, access to specialty skills, agile platform, faster turnaround time and flexibility in staffing during peak & lean periods are some of the other key advantages realized during offshore outsourcing.
But we still need to answer “What” “How Much” and “How” to Offshore and these are discussed in the following pages.
What and How Much to Outsource Offshore
The first step in the offshore enablement process is to define “What” and “How much” -to outsource offshore–the Due Diligence Phase. The two major activities in this phase are Portfolio Analysis (PA) and transition modeling. Portfolio Analysis is a unique, short-term, high-value assessment to lower development & maintenance costs, reduce risks and increase quality of IT service.
Due Diligence Phase
Maturity Modeling is used to assess the risks associated with offshoring an application.The more matured the application, lesser the risk associated with offshoring. Applications are categorized in three major categories: Commodity Applications, Core Applications and Business Differentiator Applications based on the Complexity and Criticality of the applications. Maturity analysis is then performed for each application in the portfolio using multiple dimensions e.g.Volatility, Criticality, Complexity etc.
Value Index is an indicator of “Add On Value Benefits” that are significant and could make a significant difference to the customer. Value Index is measured against the current state of the applications, systems and processes. Value Analysis is also a multi dimensional analysis that considers system level norms and application level norms.
Savings Modeling provides an early insight into the cost savings potential for various applications because of offshoring. The first step in Savings Modeling is to perform Transition Modeling followed by Cost Modeling.
Transition modeling is used to comprehend the optimal time and resource distribution needed during offshoring based on the following parameters:
- Onsite/Offshore Resource Percentage
- Base Resource Level
- Steady State Resource
- Ramp Down Percentage
- Staggering Months
- Transition Phase Duration
At the end of Transition Modeling, the resource distribution model during Transition Stage and in the steady state will be defined. An example of resource distribution is provided below for illustration purpose:
Cost Modeling provides an early insight to client on potential cost savings due to offshoring at application level. Transition Model is the key input for Cost Modeling.
Cost Modeling is performed Based on actual cost parameters:
|Resource Data||Cost Data|
|Steady State Onsite Resources||Client Resource Cost|
|Steady State Offshore Resources and Resource Types||ODC Resource Cost|
|No of Client Resources in Steady Sate||Inflation|
A final implementation road map on a tiered approach is derived using inputs from suitability analysis and transition & cost models. The associated risks and mitigations are also identified. The following diagram shows an example of application transition plans and tiers.
At this point, the Applications are classified based on Suitability/Portfolio Analysis and the Offshore Transition Plan is ready.
The next Phase is the Transition.The two major activities in the Transition Phase are:
- Defining the Service Level Agreements (SLA)
- Establishing ODC Organization, Process and Infrastructure
Defining the Service Level Agreements (SLA)
SLA defines the support functions that the Vendor Team will commit to, throughout the engagement; assigns priorities to these functions; and establishes baseline service standards and commitments. SLA is the reporting vehicle for the performance measurement and provides the opportunity to identify service-level improvements throughout the engagement.
The SLA should be viewed as a dynamic document and should be periodically reviewed and changed when the following events occur:
- The environment has changed
- Client’s expectations and/or needs have changed
- Workloads have changed
- Better metrics and measurement tools and processes are evolved
Establishing ODC Organization, Process and Infrastructure
One of the Key Factors for successful offshore operations is to define the ODC Organization Structure, Process and Infrastructure.
- ODC Program Management Office
- Offshore Team Structure, Roles and Responsibilities Definition
- Onsite Team Structure
- Onsite & Offshore Collaboration Model
- Software Development Process, Enabling tools and infrastructure
- SQA Process, Best Practices, Review Checklist
- Requirements Management Process
- Architecture and Design Process and Guidelines
- Change Management process
- Configuration Management process
- Communication Process
- Collaborative Project and Portfolio Management Infrastructure
- Communication Infrastructure
- Change Management Infrastructure
- Configuration Management Infrastructure
- License Management Infrastructure
- Test Infrastructure
This document describes the motivation for offshore application development and maintenance, also describes at a high level, “What” and “How Much” to offshore?” and then describes how to establish an offshore development center.
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