Peter Allen over at TPI argues that vendors need to know where they stand on the sourcing continuum (What type of a provider am I ?) and buyers need to know what type of sourcing they need (Should I go for a transformational partner or stick with a commodity player).
"It’s important for outsourcing buyers to know what sort of relationship they need, and equally important for service providers to know how they will be slotted into the hierarchy within the service portfolio.
If you want a strategic partner, don’t select a provider that has built a business on being a leader in a commodity category. Similarly, don’t hire a transformational expert if all you really want from the relationship is cost-benchmarked services delivered just like many other providers. "
Very true. The "Big five" started with solid relationships with the business, primarily around finance, auditing and business process. This allowed solid board level relationships and well as a good understanding of industry business processes and pain points. They branded themselves as transformation partners and charged clients hundreds of dollars an hour for providing 'thought leadership'.
The Indian giants started out as pure body shops. Learning to effectively 'package' resumes on the front end and while doing that, drove decent operating margins through operational efficiencies. The Y2K opportunity was the poster boy of this model at it's best. Vendors grew like weeds and life was good. The norm was that the big five would come in and produce a word document that would lead to downstream implementation business that would be cherry picked and handed out either to the big five - the turn key, high end stuff or to the traditional offshore players- the repeatable, commodity work.
This state represented the three sourcing flavours very distinctly with firms occupying one of the three tiers that Peter brings up. With a high volume, high margin business and a booming Indian stock market, traditional IT players started investing in areas outside their comfort zone of commodity technologies. Companies got verticalized, technology practices lead by centres of excellence got formed, project management capabilities got matured and the list goes on and suddenly, the Big five's started getting their business models exposed. Clients started realizing that there was a value gap. They were leaving money on the table and a lot of work being done by highly experienced onshore Big Five consultants could be done offshore.
The Big Five reacted by aggressively building offshore capabilities - even at the cost of commoditizing their existing business with all the political ramifications. They had no other option. This lead to accelerating commoditization of the backend, while at the same time shifting the battle to the front end. Traditional offshore players reacted by strengthening their front end, sometimes organically, but mostly inorganically. You can see that playing out currently.
What does all this mean and where will it leave us ?
The dividing lines are clearly merging. The best of traditional offshoring players and the best of the multinationals will form a unified high end Tier-1 sourcing layer. These vendors that will have the capability to conceptualize quality business solutions and execute them virtually and globally in a truly 'flat' sense with the ability to exploit local geographic strengths while enjoying global scale. They will straddle IT and business seamlessly and across industries and will be able to offset margin pressures with a combination of high end value and unique flat execution efficiencies.
What of the rest ? They will either need to find niches in which to survive or will get acquired. With factors like the long term appreciation of the rupee, escalating infrastructure and wage costs, the so called tier-3 and tier-4 vendors will find the going tough. They will not be able to play the cost game in the commodity space and neither will they be able to retain the kind of talent needed to play the high end game. We could see some of these players moving towards a localized onshore and near shore model, cherry picking leftovers from the tier-1 players. Others could consolidate and merge between themselves in an attempt to squeeze maximum scale in a commodity business. This is likely in areas like testing where there is a case for independent validation and given the pace of growth in the testing market, an attractive scale proposition.IT strategy Outsourcing
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'Consulting'. Sorry, did I type in an expletive? 
I have met more than a few smart and sane people, highly educated and mostly technology savvy, who would puke at the word. Emotions encountered range from a dismissive 'consultants are just gas' ridicule to a more left brained dissection of the lack of value in consulting. At the other end of the spectrum are die hard consultants who laugh equally hard at "execution" and often scoff at the lack of thought leadership in the folks who execute. The truth is probably somewhere in the middle. The last decade or so has seen tumultuous change in the industry. While the IBM's and the Accenture's of the world have focused on re-engineering their back end towards global delivery, India based vendors have focused on getting their front end up to speed. This has lead in turn to multiple flavors of 'consulting' with different organization structures to support and enable. Some companies have gone ahead with creating a separate organization while others have chosen to create consulting divisions within themselves. While there are pros and cons to both approaches, there are two important questions that come to mind while deciding on the organization structure:
-What is your core business and where do you see it going in the future?
-How do you think consulting can help you in getting there?
There are two schools of thought when it comes to these two questions. a). Offshoring is the core business, but this is getting increasingly commoditized. The only way to counter this is by investing in branding and by changing the go to market strategy for my offshoring solutions. Consulting can help change customer perception and give me the relationships that I need to drive and shape offshoring demand at the top management level. b). Offshoring is the core business, and the backend is getting increasingly commoditized. The way to counter this is by differentiating using innovation in the backend and by using consulting to drive a level of backend efficiency that my competitors cannot match. Consulting can also be used to drive the same efficiencies in the customer's IT organization that the vendor has managed to achieve.
Companies that have sought to use consulting to innovate at the backend or help clients drive IT efficiencies have adopted what I would call a "salt and pepper" strategy. A Salt and pepper strategy seeks to use consulting to augment the existing bread and butter application development and maintenance business. Consultants would get embedded into development teams and would participate in upstream activities in the development cycle; activities like requirements gathering and user experience design where a consulting approach would add value. Also certain aspects of the classic IT offshore services mix, like quality assurance have always been traditional strengths. As the industry has matured, better and more sophisticated techniques have emerged to strengthen and differentiate the core offering. Agile consulting is one such example. Vinnie brings out process consulting on both horizontal and vertical lines. Clients are showing a desire to embrace the best of these techniques to improve their own IT shops, spewing consulting opportunities around operational efficiencies and delivery processes. Sadagopan brings out the TCS point of view -"We are strong in assurance services, quality consulting, and in many other areas. We see where and when operational efficiencies come in."
Firms that have chosen to use consulting to further branding and relationships have gone for what I would call a loss leader approach. Consulting is used to expand relationship reach horizontally, beyond the IT organization and into the business side and also vertically, from the middle and senior IT management into the CIO level. The consulting business itself is not expected to produce the kind of profits that offshoring produces, but is expected to change the brand identity of the business from 'offshoring partner' to 'influencer / thought leader' and help sell the core business of offshoring at higher levels in the organization. With globalization and offshoring becoming a business driver in it's own right (as opposed to just an IT imperative), offshoring is becoming a more integral part of the corporate strategy and firms need guidance to get there. A loss leader approach also seeks to provide this level of business consulting expertise. The message seems to be 'I have a successful global IT delivery model, I can help you get to a successful Global business delivery model'. Such an approach also seeks to be a killer of the traditional business consulting model where $3000/day consultants rule the roost.
The core question of whether to keep consulting in house or as a separate business would depend largely on the extent of market and delivery synergies. The loss leader strategy would have relatively minimal synergies on both the market and the delivery side and would call for a separate organization, while the salt and pepper strategy would entail a strong dovetailing of consulting with the core business of offshoring and would demand a single organization.
Indian Business IT strategy
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Prashanth brings out rather well the disconnect between IT and Business. He says "Today across the whole IT Ecosystem the focus seems to be always about the technology/ code/version/contractors never are the conversations or focus really about the business and its needs /objectives priorities. ". The problem is in part because of the very nature of the contrasting expectations from IT. On one hand, business expects an efficient IT shop that can be run on a shoestring budget and on the other hand IT is expected to provide a means to competitive advantage. Navneet suggests the usage of sophisticated tools like Analytic Hierarchy Process and Balanced scorecard to bridge the gap. Offshoring the tactical 'run the business' stuff can actually help focus your internal IT staff on the more strategic mandate of changing the business. Taken to an extreme, IT's role gets transformed into being a 'consultant' to the business with the IT 'work' getting outsourced. You can even outsource the management of the outsourcing leaving just IT strategy, architecture and a few other must haves in house.
IT strategy Outsourcing
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Faisal Hoque turns IT-Business alignment on it's head when he says "Alignment is the lowest and most passive stage; at the alignment stage, IT plays a support role; IT is always trying to catch up with what the business wants to do. Synchronization is the next stage. IT plays more of an active role by influencing how the business should operate: how the company goes to market, manages its supply chain or improves efficiency, or introduces a new product. The highest stage of maturity is convergence. Here IT and business are the same; there's no distinction between the two." He goes on to add that "The most critical thing we've learned in creating these three categories is that alignment is a reflection of management maturity."
I don't quite agree that alignment in itself is limiting or fundamentally flawed or that convergence is the absolute nirvana. Ultimately, whatever be the relationship it needs to maximize or help shareholder value. Businesses first need to define the ideal relationship between IT and business given the unique context of the environment in which they operate. How does one determine this ideal ? To frame the problem more closely let us narrow the context. For argument sake, assume that the biggest value driver in a given business (say the Soft drinks business) happens to be branding.
Note: We define 'biggest value driver' to be the value driver that delivers the highest shareholder value for a dollar spent on that value driver.
We all agree that ad campaigns are a big and successful branding driver in the soft drinks business. Anyone who disagrees only needs to watch TV for a day or better still, check out Coca Cola's ad spend for the year 2000. In case you are lazy or like this article too much (he he )to click out it was $2 billion.
Advertising campaigns : One of the ways IT can be used to support ad campaigns is through campaign management software. Here's one definition I managed to dig out: "A type of marketing automation software that optimizes the process for organizations to develop and deploy multiple-channel marketing campaigns to target groups or individuals and track the effect of those campaigns, by customer segment, over time." IT is optimizing business processes, tracking and monitoring the results. Seems like IT is adding value by supporting the business, 'aligning' rather than 'converging'. The value adding branding processes are clearly distinct from IT itself. I do not mean that it is impossible to have an IT solution that 'converges' with branding business processes, but clearly the right approach is contextual.
If we step back and look at the bigger picture of IT investments in general, they are of three types a). Keep the fires burning type maintenance work b). Keep the IT aligned with changing business needs -enhancements etc c). Transformational initiatives that are strategic and designed to take the business to a different plane altogether. If convergence has a chance it is only in bucket (c) and we know bucket (c) type work has a high failure rate.
I also believe that alignment > synchronization > convergence is a maturity continuum of increasing difficulty. Many organizations spend a good portion of their budgets chasing alignment and fall woefully short. What chance does convergence have then ? Talk of flying when you can't even crawl. Convergence can wait. We have a long way to go before we can converge! Innovation IT strategy
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I chanced on this podcast where Tom Casey, Booz Allen Hamilton vice president lays out his thoughts on IT integration and on why so many companies get it wrong. I could not find a transcript of the cast, so here is a summary for you:
Senior management's perfunctory attitude to IT integration is a major cause for poor integration.
Poor IT integration not just prevents the merger from realizing benefits but also adds costs due to duplication of systems and customer interfaces.
The fact that IT integration investments happen post merger dampens enthusiasm for them as the "mood" is against spending.
40% of synergy capture depends on IT
IT decisions can be delayed (and so end up getting postponed) and the team evaluating the merger does not typically consider IT ramifications in depth.
Top three errors in IT integration according to Mr.Casey:
"Band aid" approach with a focus on interim solutions.
Adopting the dominant partner systems instead of doing an objective analysis.
Underestimation of complexity in middle and back office integration especially in IT intensive industries like financial services. IT Integration IT strategy
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