Tag: IT service providers

Will Satyam’s Itch “TWITCH” the “WITCH”? | Sherpas in Blue Shirts

In September 2008, Satyam, then the sixth largest India-based IT services company, received the coveted “Golden Peacock Global Award for Excellence in Corporate Governance” award. Then, just four short months after this recognition, one of the biggest cases of fraud in the Indian IT service industry came to light, with the firm’s Chairman B. Ramalinga Raju admitting to financial fraud to the tune of ~US$1.5 billion.

The industry was shaken. The company’s stock and fortunes crashed.

Satyam’s much-needed rescue support came from the Indian government and the new Satyam Board, which consisted of numerous stalwarts from the Indian industry. This provided the required handholding to avoid a complete collapse, protect the interest of its employees and clients, and uphold the image of the Indian IT industry. Consequently, a sense of stability was achieved in April 2009 when Tech Mahindra won the bid to acquire a majority stake in Satyam (which was later renamed to Mahindra Satyam).

Since then, the company went through struggles, twists and turns, and finally reached a steady stage under the Mahindra umbrella. Following is an analysis of company’s financials and its stock price movement during its turbulent times and through its last financial year:

Satyam blog exhibit 1

The formal merger of Mahindra Satyam with Tech Mahindra in June 2013 made “Satyam” brand history. The combined entity, retaining the name Tech Mahindra, regained ground to again become the sixth largest Indian IT-based service provider, intensifying competition for the industry-wide known WITCH (Wipro, Infosys, TCS, Cognizant, and HCL) group, and turning it into the TWITCH group (with Tech Mahindra being the new addition!). This turn of events strengthens Everest Group’s hypothesis about the possible formation of new groups in the industry (for details, refer to our blog “The Changing Pecking Order and Emerging Irrelevance of the WITCH Group Term”

The new Tech Mahindra, with US$2.7 billion revenue, has laid down an ambitious roadmap to be achieved by 2015, where each digit of this year denotes a meaning:

2015

The aspiration

The realism

2015

Reach US$5 billion revenue by 2015

  • The growth rates in the current economic environment are likely to vary in the range of 5-15 percent. Thus, a target of US$5 billion in revenue, implying a CAGR of 36 percent, is unlikely to be achieved without an inorganic route
  • Tech Mahindra is backed by Mahindra Group which has acquisitions in its DNA; therefore, a possible buyout cannot be ruled out

2015

Zero differential between its bottom line and the EBITDA of the fastest growing rival

  • While this is good to appease the stock markets, it appears to conflict with the company’s growth aspiration. An organization chasing huge top line growth should not be constrained with profitability targets in the short term as it must invest in its business

2015

Being number one as the best employer and amongst the best-known companies for corporate social responsibility

  • The company can become the best employer when its employees are happy. This ties back to the type and amount of work and talent available in the company, and is thus intricately linked to its growth
  • With the Tech Mahindra Foundation – the company’s dedicated CSR arm – we expect it to achieve some level of success in its corporate social responsibility initiatives

2015

Five focus areas – telecom; manufacturing; mobility analytics, cloud security and banking; network services; and banking, financial services and insurance

  • Tech Mahindra needs to leverage its telecom legacy to differentiate itself from other India-based service providers. It should also exploit the vast potential in telecom cloud delivery models
  • All service providers are focusing on the mobility, analytics, and the cloud stack. Tech Mahindra needs to figure out how will it stand out and differentiate vis-à-vis the competition. It may also want to look at industries, such as healthcare, that are going through significant transformation and creating opportunities for the service providers
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Do you believe that Tech Mahindra has the mettle to reshape the contours of the India-based technology provider landscape?

The Blind Side Blitz: How Business Users Impact Next-Generation IT Spend | Gaining Altitude in the Cloud

Seemingly out of nowhere, users hit enterprise IT spend on its blind side. Like a blitzing 265-pound football linebacker that the quarterback doesn’t see running up behind him to tackle him, business units and end users blitzed past the IT group and rapidly adopted cloud, mobile and other next-generation IT solutions wherever and whenever they could. Like the quarterback, enterprise management had a blind side and didn’t see or block the sudden force of the “consumerization of IT” coming to barrel through the sanctioned processes of purchasing IT. This blind side play changed the IT game in a profound way and has massive implications for all players.

In football, unblocked linebackers coming up on the blind side don’t just happen; several factors are necessary to create the right conditions for this disrupting phenomenon. The same is true for the recent blitz impacting enterprise IT spend.

Over the last few years, enterprises reacted to adverse and unpredictable economic conditions by reducing overhead wherever possible. This significantly constrained CIO budgets, forcing many IT departments to decrease their expenses year on year. The tactic reduced the IT group’s ability to drive change in the business and slowed the ability to respond to business needs.

Finally balance sheets improved and companies emerged from the belt-tightening period. Eager for growth, they now look favorably on business projects with strong ROI. However, IT is still slow to address new business needs, including the IT components of these initiatives. At the same time, business leaders and end users are exposed to, indeed inundated with, a new range of easy-to-access affordable, offerings that are readily available through channels other than their enterprise IT department. Voila — the right conditions for the blitz.

Implications 

Let’s first consider the implications for the business stakeholders leading the blitz. Their new buying freedom combined with the easily accessible IT components creates refreshing and sorely needed agility and flexibility. Projects that, in the past, would have advanced slowly now race ahead at an ever-increasing pace.

Instead of detailed requirement documents and unending interdisciplinary team meetings, they can conceive, launch and evaluate pilots with minimal capital and time, allowing the business to experience the technology before making significant commitments. Business stakeholders’ perspective is that management’s forgiveness is easier than gaining up-front buying permission, and IT can work after deployment to address compliance issues.

Enterprise IT groups can’t deny the new reality and must lead, follow or get out of the way of the momentum and power of user-based IT buying. They cannot stand against the strong business cases for these business-driven initiatives. Many CIOs look the other way or add a team member to the program and claim victory.

Nevertheless, CIOs and top management eventually must address the complexity these solutions will add to the enterprise. We can only hope they start preparing for it more quickly than happened with the massive disruption caused by distributed computing, which took enterprise IT a decade to untangle.

The business users’ IT spending blitz also hit the blind side of IT providers, and the implications for providers are as significant as they are for consuming enterprises. Many traditional providers of IT and IT services are troubled by the fact that they are not reaping the significant growth opportunities resulting from the new spending on cloud, mobile and other next-gen IT products that other vendors are enjoying. Why not?

New game plan for IT providers 

The enterprise IT market is obviously alive and well. But there are now two distinctly different markets for next-generation IT, so IT providers must change their marketing and sales tactics.

The first market segment accounts for 75 percent of the total spend and has all the traditional ROI buying characteristics. Value is tied to objectives such as as reducing enterprise cost.

To increase their share of the second segment (currently 25 percent of next-gen IT spend), enterprise IT providers must understand that the buyers’ perception of value has changed.

Although value is still wrapped in ROI, an important new criterion is whether the solution will meet the ROI objectives in a timely manner. In addition, the business stakeholder’s confidence in the solution’s success is more important than competitive pricing. These two characteristics drive business buyers to opt for pilots to learn more about the solution before they extend their commitment.

Clearly the ROI drivers differ for buyers in these two market segments. Therefore, IT providers seeking high growth must develop different marketing messages, pricing and delivery models for each segment.

Furthermore, as both segments often exist within an enterprise, it is unlikely that the same sales personnel can successfully sell to both markets.

IT providers that want to quickly move to capture the new opportunities in next-generation IT spend will be more successful if they fully understand buyers’ changed perception of value and approach the market in this fashion.

Can Outcome-based Pricing Replace “Till SLAs Do Us Part?” | Sherpas in Blue Shirts

ITO deals in which service providers’ compensation is linked directly to the business outcomes they achieve for the clients have started gaining prominence. While the idea has been around for some time, and indeed should be part of a gradual evolution process from pure FTE or T&M models through to gainsharing arrangements, we’ve observed with interest both parties’ strategic interests (see image below) converging through shared business outcomes on several mega deals.

ITO Deal Demand and Supply Forces

A number of clients have recently asked for our advice and insights on the upsides and downsides of outcome-based pricing models. Following are the factors we told them they must carefully consider before asking their providers to make the change:

  1. Trust:  Ask yourself, “Do I really trust my partner?” Use your common-sense. Outcome-based models are often used in combination with a base T&M model in situations involving complicated deployment of new technology, where both parties share the risk.  However, not everything goes smoothly in such situations, so don’t fall over yourself to shout “Penalty!” You might need to arrive at a negotiated outcome once your partner admits to an honest, unforeseen mistake. In other words, incentivise your provider to make it right, rather than masking the flaw and investing in a sub-optimal environment for the duration of the contract. The latter is the road to poor relationship health, contract disputes, and a frustrating end-user experience.
  2. Corollary to the Trust Principle, be prepared to Cede control: If the implementation partner is responsible for improved business outcomes, the team needs to have control over the business process and the underlying stack, including platforms, management, and reporting tools, and quite simply…the way you do business. You can play the powerful investor, but let your partner be the empowered CEO. Share your powers.
  3. Identify scope accurately: Building on the above point, the scope is often beyond the obvious. Mere implementation of an ERP system won’t raise productivity or prevent revenue leakage if the overlying process is inefficient. State the scope in line with your desired outcome. For example, scope is not, “implement ERP”; it’s “raise productivity by XX% by implementing ERP and optimizing the accompanying process.”
  4. Know the price of improved outcomes: Most providers won’t tell you they build a risk premium into their base fees on outcome-based models. In other words, while you are encouraging your partners to take on more risks, they want to cap the downside. Remember that they don’t want to, and sometime can’t, back out of a contract. Thus, if the desired outcome cannot be reached, they would have spent significant time and effort without recompense. So, you must carefully evaluate the business case for an outcome-based model. Is the scope large enough? Are the benefits of transformation deep enough?
  5. Make it stick: Arguably, this is the most challenging part, as it’s  often difficult to establish causality between the provider’s performance and business outcomes, making “Cede control” (point #2 above) even more important. In addition, governance models must be suitably evolved and often supported by sophisticated management tools and chargeback mechanisms. Keep in mind that these come with a cost and, consequently, must be built into your ROI model.

At the end of the day, an outcome-based model is a bit like marriage – it represents the triumph of hope over experience. So be clear about why you are getting into it, choose your partner carefully, share space, and who knows – you could live happily ever after!

The Infrastructure Outsourcing Market in 2012: On the Cusp of Transformation? | Gaining Altitude in the Cloud

Earlier this year, Everest Group conducted its annual study of high-value Infrastructure Outsourcing (IO)  deals to gain insight into how a range of parameters correlate with deal activity in the IO market. The study, which is part of our Infrastructure Outsourcing Market Update 2012 report, analyzed 164 IO deals across a combination of 17 MNCs, Tier-1 offshore and Tier-2 offshore providers.

Infrastructure Outsourcing 2012 – Key Findings:

  • Buyers: Buyers across geographies found increased value in offshore providers’ remote infrastructure management outsourcing (RIMO) model due to its flexibility. Faced with the high costs associated with IO, buyers appeared very tactical in their approach. Analysis of the basket of IO spend showed clear signs of carefully planned allocation across traditional IO, RIMO and cloud-based services
  • Service providers: Though MNCs remain by far the leaders in the IO market, offshore providers appeared to be steadily gaining ground in sales strategy as well as deal wins. We also observed similarities between MNCs and offshore providers on a number of parameters such as buyer segments, deal size and geographies
  • Cloud-based services: As transformation of infrastructure is the major driver of cloud adoption across enterprises, we devoted an entire section in the study to cloud adoption in IO. Not surprisingly, cloud is helping buyers create a flexible and scalable infrastructure environment, with Infrastructure-as-a-Service (IaaS) solutions leading cloud adoption

Infrastructure outsourcing: On the cusp of transformation?

Overall, the IO market appears to be on the cusp of transformational change. IO seems to be showing the way not only in cloud adoption but also in how IT delivery and pricing models are transforming. The growth of IaaS says a lot about the IO’s impetus for buyers and providers alike.

To find out more about these trends, our analyses of and insights on the infrastructure outsourcing market, check out the Infrastructure Outsourcing Market Update 2012 report (a preview deck is available).

Cloud Computing in ITO – Everybody Wins, but Who Gets to Win More? | Gaining Altitude in the Cloud

Less than three years back, there was widespread excitement (and alarm and despondency) in many quarters about the impact of cloud computing on traditional IT outsourcing providers.

Cloud computing was predicted, though not by us, to greatly disadvantage the incumbent players, but as of today, such a prediction is difficult to stand by (just take a look at TCS’s and Accenture’s results since then). Sure, public cloud providers continue to grow rapidly, and the traditional license model is increasingly giving way to the pay-as-you-go paradigm. Yet most leading providers of outsourced IT services seem to be adapting well through a combined strategy of alliances, acquisitions, and in-house cloud solutions. Cloud computing appears to be increasingly well integrated as part of the delivery model for most traditional ITO providers. Consider the following statistics from our recently released report, Enterprise Cloud Adoption: Role of Cloud in Global Services:

  • In the second half of 2011, approximately eight percent of all ITO/BPO deals serviced by traditional outsourcers (excluding SaaS product companies, and public cloud and hosting providers) included cloud delivery models or platforms within their scope. This is up from four percent in the first half of 2011.
  • The average total contract value (TCV) of 2011 global services deals with cloud delivery in scope  was US$168 million, compared to US$95 million for deals without cloud in scope.
  • Cloud deals seem to be more transformational in nature, almost at the cutting edge of ITO capabilities if you will. 53 percent of all ITO deals with cloud delivery in scope involved significant infrastructure transformation of test, development, and production environments. Clearly, traditional ITO providers view cloud computing as an important solution component for large, transformational deals.
  • Cloud computing seems to be helping service providers get access to markets that were previously unprofitable or too complicated to serve. Approximately 38 percent of all global services contracts with cloud in scope were awarded by enterprises with less than US$500 million in revenues. And government and non-profit sectors together account for 20 percent of all global services deals with cloud delivery in scope.

Clearly, there’s a big pot of gold somewhere amidst all these clouds, but what’s interesting to note is that few service providers  have all of what it’s going to take to win all of it:

  • Design and Consulting – Service providers, such as Accenture, with a consulting legacy and orientation are going to have an advantage when it comes to advising clients on how to build their cloud solution from scratch.
  • Host and Implement – Players like IBM and HP with  a deep legacy of asset-based infrastructure transformation will have an advantage in providing these services
  • Management and Professional Services – Offshore players such as TCS, with their global delivery models, have an advantage in offering the “cloud management” role

The problem is that these activities are seldom commissioned in isolation. This is not something where a best-of-breed approach always works, despite buyers being wary of lock-in risks. The opportunities are tightly coupled, and service providers need intelligence on the characteristics of relevant opportunities as they are torn between focusing on what they have, and plugging the gaps through alliances and acquisitions.

The fact of the matter is that there will be winners and losers, and the market today is too dynamic to predict who will play which part. It will be interesting to see if there are ground-breaking disruptions (e.g., a major public cloud provider making a headline acquisition of a giant system integrator, thereby making its move in the private cloud market, potentially disintermediating a lot of other system integrators, and at one stroke making a deep thrust in the enterprise market) as the stakes get higher. Or an asset-light provider marking a strategic u-turn by investing in physical infrastructure to build its own cloud solution, complete with consulting, system integration, and management services delivered through a global platform?

To learn more about the nature of cloud-related opportunities for providers of global services, check out Enterprise Cloud Adoption: Role of Cloud in Global Services.

Indian “Strategic” Outsourcing Deals: Can the elephants dance when the music changes? | Sherpas in Blue Shirts

Time and again, we come across press releases from India’s biggest corporate houses announcing deals with large providers that are labeled “strategic” or “total outsourcing” partnerships. The hallmark of a typical strategic deal is a long-duration sole-source partnership with one large provider for infrastructure and/or applications. The provider is then made responsible for evolving a medium- to long- term technology roadmap for the buyer, and managing the execution of the roadmap through itself or other vendors.

Some of these partnerships are truly “strategic,” wherein providers genuinely share risks and rewards of the implementation, while many others are simply monikers for large, long-duration asset heavy deals with straightforward delivery objectives. Yet both cases seem to go counter to the trends in the mature sourcing markets, where buyers have long since abandoned such heavy-duty contracts.

There seems to be an interesting pattern among these buyers. They are typically telecoms or financial services companies that are trying to gain a foothold in newly deregulated or traditionally underserved markets with suddenly lowered entry barriers. These were large markets for basic, standardized products and services with low margins, where only a few would ultimately survive. In their race to be the “kings of the hill,” companies could afford to be customer-agnostic, as long as they got their basic services and sales models right. There are two important technology implications for companies in this phase:

  1. With heavy investments into sales and marketing, they start looking to other departments such as IT for investment avoidance. There is a tendency to put in place a leaner internal IT group, which is not equipped to handle a large set of provider relationships. Further, under budgetary pressures, they tend to view ideas on outsourced asset ownership and control more favorably.
  2. Facing haphazard and chaotic growth, management typically struggles to match capacity with demand. They increasingly look for partners that can bring predictability to their operations, with plug and play set-ups at service levels that are just about acceptable to end users.

Large IT providers that hear these management challenges when pitching are in a position to strike these large long-duration deals. And with well-structured contracts, the partnership may actually work very well…for at least the initial few years.

Problems in these deals start to manifest when companies are faced with two inflection point challenges:

Inflection in strategy: Sooner or later, slowing industry growth will bring the companies to re-evaluate their businesses. As already seen in the Indian telecoms industry, intense competition causes price points to steeply fall close to marginal costs, and companies then begin to shift their focus from chasing growth to profitability. This is the point at which companies typically start to pay attention to their customers and try strategies for differentiation – either through price skimming for value-added services or by offering adjacent products and services. This may involve following their profitable customers across their lifecycle at non-traditional touch points to fulfill unmet needs. At the other end, consumerization of technology will offer disruptive opportunities to reach customers and offer commoditized services at throwaway prices with minimal service costs.

To execute these strategies, companies will find they need to play in an ecosystem of alliances with partners requiring seamless transition of customer data to facilitate these decisions. Additionally, as they move towards customer-centric models, they will find a need to revisit their one-size-fits-all standard service models for technology and process infrastructure.

Inflection in technology: Buyers in strategic IT deals also implicitly assume that a seasoned IT partner will automatically bring cutting-edge innovative solutions as technology evolves. There are three important behavioral reasons for challenging this assumption:

  1. First, when there is a disruption in the underlying technology itself, it often arrives loaded with a lot of skepticism and lack of perceived commercial value right until the point it disrupts. Incumbent providers (with no better ability than buyers to foresee the end states) are likely to under-estimate comparative benefits of these disruptions in their assessments.
  2. Second, even in cases where the end states are clear, IT partners may suffer from conflicts of interest that prevent them from evaluating competing organizations or technologies for innovative solutions.
  3. Third, in the specific context of the account, the provider account organization tends to get settled into a well-oiled machine. With rising costs, it is motivated to scale down its “strategic thinking” on the account, and push more and more work under the factory mode.

No matter how “strategic” the relationship, IT partners often tend to advise or shape outcomes that are directionally well-guided by their contract clauses. When the buyer is grappling with strategic or technological inflection points that have not been foreseen at the time of contract inking, the partner is likely to default to choices that are limited by its own publicly held worldviews, capabilities and vested interests. While the choices may not necessarily be wrong, they do not benefit from a cross-pollination of ideas and approaches that the buyer would have had access to in a more open relationship. As Indian consumer markets and technologies rapidly develop, buyers may find this limitation increasingly unacceptable.

The Best of IaaS is Still in the Making | Gaining Altitude in the Cloud

Most people out there consider IaaS the “dog” of all the cloud computing layers, given its low margins, tough competition and gradual commoditization. However, one thing that is going well for IaaS is that its position as the building block of cloud computing. That makes IaaS the starting point for large enterprise’s consideration of transition to the cloud.

Now, IaaS is turning out to be a new turf war between the cable and network providers. Verizon purchased Terremark, CenturyLink picked up Savvis, Time Warner acquired Navisite, and  AT&T might be a little anxious to go shopping as well with all this commotion. That is signaling consolidation in the cloud provider space. It will be interesting to see how the cloud pioneers and startups  can continue to remain independent in the battle between the behemoths for capturing the attention of large buyers for cloud deployments. As the consolidation progresses, PaaS and SaaS providers like Google and Salesforce.com will need to find partners among the cable and network providers to be part of the discussion with the clients.

We are moving towards an oligopolistic industry in which the providers must better understand and respond to the needs of buyers in their respective industry verticals like healthcare, education etc.,  for prospects to warm up to the idea of leveraging the cloud. (For more insights, please read our recent blog, “Talking the Talk, but not Walking the Walk, in the Cloud”.) Network providers and IT service providers are going to have to urgently fill this vacuum. With many small players trying to race to the top by claiming to be everything to everyone, it’s difficult to meet the custom needs of a vertical business or entity.

What does all this mean for legacy IT service providers like HP, IBM, Cisco, and EMC? They must be happy, as they are receiving some relief around the price wars and commoditization of hardware infrastructure like servers and storage, as the telecom and cable operators will go to a familiar source for their hardware needs.

IaaS providers must be enjoying the attention they are receiving all over again, as PaaS and SaaS providers have had their fair share of the limelight.

What do you think will happen in the IaaS space?

Talking the Talk, but not Walking the Walk, in the Cloud | Gaining Altitude in the Cloud

Over the last two months, we have visited with more than 50 Fortune 500 firms to discuss their thoughts about adopting and harnessing the disruptive technologies and services that are driving the next generation of IT. Inevitably, our conversations focused on the cloud and its potential impact on the price point and flexibility of IT delivered and consumed at the enterprise level.

But most of the firms we met with expressed disappointment in the support they are currently receiving from their incumbent hardware and software providers. We heard time and again that the providers are eager to engage in conversations (often confusing and contradictory) about the power and relevance of the cloud, and each pointed to the groundbreaking products and services they have, or soon will. However, when it came to presenting an actionable roadmap to for planning and/or actually implementing production-ready solutions, the providers launched a major back-peddle. They suggested that despite the hype, the client was already close to best practice, as it was well down the road to virtualization, or that the offerings were not appropriate for firms of its size or industry. If pushed further, the providers stated that the solutions under consideration were not practical because of security and or regulatory issues.

What’s going on?

It is clear that most large enterprises are giving serious thought to actively adopting cloud-based solutions for at least some of their workloads. And fearing they will be left in the dust by the new breed of cloud-specific competitors – including Rackspace, Amazon, and Savas – the incumbents feel they must, at a minimum, engage in conversations with their clients about cloud. When pushed to deliver a public/private cloud solution, the major hardware and software providers are investing considerable time and money on solutions with unacceptable quality, performance and/or resilience. They also lack the internal expertise to implement the new solutions. Perhaps most troubling for the incumbents is that they face a huge conflict of interest as the next generation of IT solutions replaces the existing infrastructure at a fraction of the cost and, hence, dramatically cuts into the providers’ revenue.

In short, their strategy is to obfuscate, delay and criticize. And while enterprises are looking to their existing providers for leadership, and would much prefer to have one familiar throat to choke, the frustrating and confusing conversations they are having with their current incumbents is driving them further into the waiting arms of the challengers that have, solid offerings, real capabilities, and strong value propositions.

It’s Not You, It’s Not Me – Recognizing When You and Your Service Provider Have Grown Apart | Sherpas in Blue Shirts

I am an avid golfer, and it consumes more of my thought, time, and finances than I am willing to quantify. The first round of golf I ever played was during the summer between eighth and ninth grade, and I was hooked. When I started high school, I immediately joined the golf team – although I must admit I was the last man selected for The B Team, as I was absolutely terrible at the game.

On the first day of practice, I met Harry, a member of the country club at which my high school golf team was allowed to practice and play. As a passionate golfer himself, Harry volunteered as an assistant coach for the team and took me under his wing. For two years, he taught me the basics of the game based on Ben Hogan’s Five Lessons: The Modern Fundamentals of Golf. In addition to the swing, he instructed me on things like etiquette and golf course management. With his guidance, I was a bogey golfer within a year of first picking up a club.

I was reminded of Harry during a recent client engagement. This organization has a managed services agreement for IT services with a service provider that has lasted nearly a decade. During that time, the client grew quickly through organic growth and acquisition (nearly doubling in size every two years), dramatically increased its geographic footprint, and went public. By the end of the most recent outsourcing contract term, it had become one of the largest companies in its industry in the United States.

During this same time, the IT service provider remained focused on serving the client’s industry. But as few clients in the sector were as large as our mutual client, the provider found more success growing its business with small- to medium-sized firms. Many of these new accounts looked more like our mutual client a decade ago, small and private with simple IT needs more necessity than anything else.

Our mutual client, however, has grown to the point of using IT as an enabler. It is using technology to standardize processes and drive efficiencies, benefit from scale and centralized technical design, and leverage new cloud-based solutions to take advantage of new IT economics. With the service provider consistently investing in capabilities for a different type of client than this one has become, both parties need to take a step back to understand each other’s direction. There’s nothing wrong with either organization, it’s just time for a recalibration of sorts.

I probably could not have experienced the growth I had without Harry’s expertise, but at some point his focus no longer correlated with my needs and I made the tough decision to part ways. That did not make him a bad instructor or me a bad student. There were other students who could better benefit from Harry’s time, and there were other instructors from whom I could learn more.

The situation is similar for my client and its IT service provider. Identifying that the organizations have grown apart is a crucial first step in deciding how to move forward. This may be an excellent opportunity for the service provider to invest in new capabilities it can leverage for its existing client base, allowing this particular client to continue to leverage the service provider’s industry expertise. Or, the client may be better served to go through a potentially challenging transition to a service provider that is a better fit for its current needs. Understanding your IT service provider’s already-made investments and its investment plans is a good way to assess fit with your organization.

Wipro’s New HR Policy Changes Highlight Major Issues Indian Providers Better Tackle…Fast | Sherpas in Blue Shirts

This past weekend Wipro announced it was adding employee attrition and customer satisfaction to the criteria upon which its senior management will be evaluated, and the metrics will be linked to quarterly compensation. This move clearly exposes that the employee satisfaction (and hence retention) and client satisfaction issues arising from Indian IT providers’ tremendous growth and their offshore-based business model are increasing and becoming more visible. (See a related blog by my colleague Jimit Arora) And with so much at stake, they must address the problems, and they must do it now.

Why the urgency? Several reasons, given the inextricable connection between client and customer satisfaction. First, the Indian IT providers’ model of hiring low cost resources and continuing to expand the bottom of their resource pyramid has its own challenges. While they have developed sufficient standardized processes and have very solid training programs to keep churning out “good enough” people to perform client work requiring technology competence, they cannot satisfactorily add critical business value through IT if they stick with hiring associates freshly graduated from college.

Second, constant hiring takes a toll on the system in terms of cost, process flows, and efficient collaboration. Third, because many providers cannot create a career growth path for such a large volume of experienced resources, they actually cause attrition in order to hire the requisite “fresh hands” staff.

Obviously, Wipro’s addition of employee satisfaction (attrition) and client satisfaction being linked to senior management compensation comes with its share of challenges. An employee’s experience in an organization depends on a wide range of parameters including compensation (industry driven), work quality (varies based on the client engagement), feelings toward team members (reasonably independent of the quality of the boss), growth opportunities, work environment, etc. Additionally, how will client satisfaction be measured, e.g., through surveys, general interaction, volume growth, pricing improvement, etc.? Moreover, how much impact does a senior executive have on the kind of people assigned to a given project, and what if an employee is assigned to a project that he/she simply does not want to work on?

Despite these challenges, there is a silver lining in that although these providers have disrupted the IT service market, they now realize their limitations and the need to retool their model and perform more “business value” work. Clearly this change will not happen overnight and will take consistent effort and strategic execution. But it can and must happen. However, we should not expect offshore providers to mimic the resourcing pyramid of MNCs even (and when) they provide business driven higher IT value. They have changed the game of IT service and they will surely attempt to do it again in higher business value services. As the low hanging client fruit is more or less taken, the next phase of growth in the cut-throat IT services market will be led by innovation and client satisfaction. And happy provider employees are the best path for these outcomes.


See related article on IT Business Edge, Outsourcing’s Shift from Arbitrage to Innovation.

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