1 Thesis paper Requirements of the German Mittelstand in outsourcing provider selection An analysis by Pierre Audoin Consultants (PAC) on the German mid-market and Wipro s role in this market January 2013
2 Requirements of the German Mittelstand in outsourcing provider selection 2 Published by Pierre Audoin Consultants (PAC) GmbH Holzstr. 26, Munich, Germany Contact: Karsten Leclerque (+49  ,
3 Requirements of the German Mittelstand in outsourcing provider selection 3 Contents 1. Introduction 4 2. Challenges of the German Mittelstand 6 3. Which provider fits best? 7 4. Recommendations for outsourcing customers 9 5. Analysis of Wipro 11
4 Requirements of the German Mittelstand in outsourcing provider selection 4 1. INTRODUCTION The mid-market is considered as the backbone of the German economy, in terms of revenues, employment, etc. Especially in the manufacturing sector, there are many hidden champions that are positioned as market leaders in their business segments often at a global level. And also when it comes to IT outsourcing in the past rather a large enterprise topic the German Mittelstand has been steadily gaining in importance. Already today, companies with fewer than 5,000 employees account for more than 50% of the total German outsourcing market, and the trend is still upwards. While the large enterprise segment has reached certain maturity when it comes to outsourcing, PAC sees an increasing demand from mid-market companies. The reasons are manifold. All user surveys confirm that cost cutting remains the numberone reason for outsourcing considerations but seldom the only one. It is followed by the concentration on core competencies, optimization, consolidation and/or modernization needs of infrastructure and application landscapes, quality assurance (availability, performance, compliance, business continuity, etc), the ongoing internationalization process of German companies, demand for flexibilization especially facing the ongoing uncertain economic situation as well as increasing skill shortage. Given the meanwhile achieved maturity of the IT outsourcing concept, customers can realize ever more real benefits through outsourcing, mainly due to a higher degree of standardization, professionalism and attractive offerings on the provider side. But despite all standardization, automation and the omnipresent cloud trend, outsourcing remains a people business. Given the criticality of IT for most business processes, the external provider must be a strategic long-term partner rather than a mere component supplier who assumes responsibility and actively creates value for the customer. This is especially true when it comes to transferring a significant part of the company s IT landscape often the heart of a company to an external provider. And within such a strategic partnership, close collaboration and communication between the parties is of outstanding importance. Insufficient communication belongs to the most prevalent reasons for failed outsourcing contracts.
5 Requirements of the German Mittelstand in outsourcing provider selection 5 The selection of the appropriate partner, not only on the basis of technological skills but, even more important, also considering the right cultural fit, is thus one of the main factors for a successful outsourcing project. And medium-sized companies have particular requirements with respect to the selection of their outsourcing partner. What these are and which aspects should be considered is the subject of this document.
6 Requirements of the German Mittelstand in outsourcing provider selection 6 2. CHALLENGES OF THE GERMAN MITTELSTAND When asked for major business challenges, the answers of mid-market companies do not vary significantly from those of large enterprises. Cost reduction and efficiency increase are regularly considered as number-one business challenge in user surveys, hand in hand with increasing competition. The steady adaptation to changing customer requirements and market trends is most often stated as number two, followed by sales- and customer acquisition-related issues and the introduction of innovation. Also the ongoing globalization, especially with regard to the further exploitation of international markets is considered a major challenge by an increasing number of medium-sized companies. When it comes to IT-related challenges, all customer interviews and surveys show a clear priority of medium-sized German companies: Very often there are modernization & consolidation needs regarding infrastructures and applications, going hand in hand with too high a complexity of the IT landscape and thus high operations costs and partly quality issues. There is also strong demand for more flexibility. Not only of the IT itself, but also regarding the flexibilization of production and collaboration processes as well as the support of business changes like internationalization or M&A through IT. One difference between large and medium-sized companies is obviously the availability of resources and capabilities to deal with these challenges. Often medium-sized companies do not have sufficient internal IT resources and business focus to keep up with technological development and innovation, e.g. in areas like mobility or cloud computing. What is more, medium-sized companies have to concentrate their resources on their core business a major reason for IT outsourcing considerations. Outsourcing does not only promise cost reduction. An external supplier may bring in proven methodologies, processes and global delivery capabilities for the optimization of the ongoing operations, but can also help to keep up with innovation and thus to increase the future readiness of the company. In addition, medium-sized companies are often keen on exploiting the cost advantages of offshoring services but do not have the necessary experience, so that they prefer the cooperation with a proven partner.
7 Requirements of the German Mittelstand in outsourcing provider selection 7 3. WHICH PROVIDER FITS BEST? The outsourcing provider landscape in Germany is as large as heterogeneous. Customers of all sizes and industries can find a suitable provider from the small company to the renowned medium-sized world market leader to the big global concern. However, not every provider is every customer s first choice and the requirements of smaller customers normally differ from those of larger ones, and also depend on internal capabilities, experience and strategic orientation. When comparing (in an abstracted view) the specific advantages of an internal IT department with those of a large, global outsourcing provider and a small, local supplier from the perspective of a medium-sized account, it becomes clear that there is not the one ideal type of provider: Internal IT department Very large, global provider Small, purely local provider Communication at eye level, ease of collaboration, customer centricity of the provider Knowledge about customer-specific requirements Importance of the customer for the provider ( one of many?) Importance of the German market for the provider ( ) Flexibility Price structure (economies of scale, optimized delivery, etc.) Global delivery (mix of offshore, nearshore and onsite resources) Internationality, global reach Innovation, future-readiness Ability to grow with the customer (in terms of business size and geographically) Comprehensive portfolio/ one-stop offering, (e.g., regarding service towers, technologies) = strong advantage = advantage ( ) = advantage for providers with German roots
8 Requirements of the German Mittelstand in outsourcing provider selection 8 Each kind of provider brings specific advantages to the table. And of course, there are providers that are positioned between the aforementioned segments, such as captive IT subsidiaries with third-market business, medium-sized global IT players, etc. In addition, there are various further aspects to be considered, such as the location of the provider s data centers, services resources, etc. The final decision depends on the individual requirements and preferences of the customer, e.g., whether efficiency is in the foreground or customer proximity, standardization or flexibility, etc. Especially very large corporations have partly been following a multi-vendor strategy in the past years in order to benefit from the specific USPs of several best-of-breed suppliers. In the meantime, however, clients are looking to simplify their external supplier relationships through vendor consolidation and gain greater value from preferred partners.
9 Requirements of the German Mittelstand in outsourcing provider selection 9 4. RECOMMENDATIONS FOR OUTSOURCING CUSTOMERS Customers aiming to outsource parts of their IT to an external supplier are advised to ask themselves the following questions in order to gain clarity about their own requirements and to select the appropriate outsourcing partner: Does the provider s portfolio cover all relevant services? Do they have sufficient knowledge, experience, and resources with respect to the related infrastructure and applications? Also regarding transition and management? Do they have the basic certifications, e.g. regarding service and quality management, security and compliance standards? What about technology supplier certifications (e.g., SAP or hardware manufacturers)? Does the provider have the necessary resources and skills for consulting and transformation projects e.g., in case I would like to undertake modernization or consolidation projects, or to move towards a cloud approach at a later stage? May I expect a pro-active behavior from the provider? In discussions with longterm outsourcing customers, often a lack of pro-activity during the contract duration is criticized. Too often, outsourcing providers are concentrating on the next new customer, on the next new deal as soon as a contract is closed. Do they have the required industry and process knowledge? Can the provider submit any credentials, e.g. with respect to the industry or company size? How important am I as a customer for the potential provider? Do I have to fear to become one of many among the mass of a large supplier's customers? Or can I rely on their ability and willingness to flexibly take into account my specific situation and demand, from the sales phase to the ongoing delivery? Will the provider be willing to align their services with my requirements and providing me with the service, quality, but also flexibility that I expect? Customer and provider being at eye level is a decisive factor, even if this does not automatically mean that for medium-sized companies only medium-sized providers are suitable. Can the provider map my geographical/ international presence with their delivery structures and their support, including languages?
10 Requirements of the German Mittelstand in outsourcing provider selection 10 Is the provider international enough to support my continuous growth? Is the provider willing to take over employees and to commit to their long-term integration? Do they offer cost-efficient production structures, such as shared services or service personnel in low-cost regions, such as Eastern Europe or India? Do they, at the same time, have the necessary local resources? Do I prefer native speakers for negotiations and onsite support? Does the provider offer the pricing and billing models I prefer be it predictable, flexible or outcome-based? Do they generally have the necessary innovative strength to also meet my requirements in the future? Can I rely on a certain stability during the contract term? For instance, what about the financial situation of a particular provider? Does this provider rely on a few major clients? How likely is a takeover? Which strategic importance does the outsourcing business area have for this provider? How important is the German market? In view of high fluctuation, do I have to expect frequently changing contacts at my provider? Last, even if a careful selection of the provider took place and if there is a trustful relationship customers must ensure that they maintain their sovereignty about the IT strategy and the services contract in order not to lose control and become too dependent on an external supplier.
11 Requirements of the German Mittelstand in outsourcing provider selection ANALYSIS OF WIPRO Wipro is positioned as a global corporation, with a solid reputation in its key businesses and deep ties with major world companies as well as medium-sized customers. It offers a comprehensive IT services portfolio, including infrastructure and application management as well as consulting and systems integration. In the past years the company has been moving away from commodity labor arbitrage-based offshore services towards higher-value services and from a "managed IT-focused" to a more "business outcome-focused" approach. For this purpose, Wipro has been, among other things, developing its consulting and industry domain expertise, while enhancing its client-facing presence through offices in the UK, Germany, France, Singapore, the Middle East, and the U.S. At a 2012 analyst event, Wipro provided insight into its strategy. Helping customers use technology for business results has been defined as the company s strategic goal. This strategy comprises the following major targets: 1. Increase revenue: help deliver differentiation at the front for customers Client-centric go-to-market structure Integrated consulting capability Advanced technology focus 2. Reduce operating costs: help deliver standardization at the core for customers Build strong process assets Automated and non-linear models Technology accelerators at the core Wipro has also been seeking to build on its onshore presence in Germany and other European countries, with the aim to offer a balanced mix of offshore, nearshore and onsite capacities. Since 2010, when the provider took over the operation and management of Citibank s data center in Meerbusch, a suburb of Düsseldorf, Wipro has additionally owned local data center resources in Germany an important aspect for many German customers. The center was Wipro s first data center facility in Europe and has enabled the company to offer a full portfolio of infrastructure management solutions to its regional clients.
12 Requirements of the German Mittelstand in outsourcing provider selection 12 Just recently Wipro announced that the company had signed a large multi-year contract with a medium-sized German energy company as their Global Prime Partner in its transformational program. The provider will take over the customer s complete infrastructure and will run managed services for service desk, data center operations, end-user services and network operations. Wipro will provide a messaging solution from the Meerbusch data center and will also establish German-speaking service desk operations at the center for the customer. In addition, Wipro will be responsible for standardizing core processes through technology, offering the customer a reduction in infrastructure costs in the short term and significant improvement in services in the long term. Telefónica Deutschland has recently commended its best suppliers out of its more than 2,000 suppliers and awarded five companies, among them Wipro, with the best performance and commitment in 2012 the title "Supplier of the Year". The companies' efforts were appraised based on a variety of key performance indicators, including performance, competence, quality, service, flexibility and costs. Wipro has been renowned for its excellence in software testing. To summarize, there are not too many outsourcing providers in Germany that bring a similar combination of Wipro s specific characteristics to the table: Wipro has a declared focus on medium-sized customers, which is underlined by a flexible and customer-centric approach a particularly important aspect when it comes to medium-sized customers. Several of Wipro s clients confirmed to PAC that Wipro had appeared as a very flexible partner who gave proactive advice and who was particularly strong in the transition phase of an engagement. At the same time Wipro has the necessary global presence to fulfill the requirements of global customers, and also to support customers with their further internationalization. Wipro s own data center in Germany is an important asset, as many German customers prefer local data center resources. The German market is of high importance for the company s growth strategy so that German customers and not only the DAX 30 companies may expect very high attention.
13 Requirements of the German Mittelstand in outsourcing provider selection 13 Wipro has a very broad and comprehensive services portfolio, ranging from decentralized (workplace) and centralized (data center) infrastructures to applications, and from consulting & systems integration to managed services and outsourcing. The company has proven offshoring methodology, processes and resources, combined with a global delivery mix of off-, near, and onshoring resources. Willingness to integrate staff: many established providers have been increasingly reluctant towards employee take-over in the course of outsourcing contracts. Wipro s strategy clearly comprises the further strengthening of its presence on the local market, including the establishment of local, Germanspeaking staff. Thus, the company should be more open to take over employees and to commit to their long-term integration.
14 About Wipro Technologies Wipro Technologies, the global IT business of Wipro Ltd (NYSE: WIT) is a leading Information Technology, Consulting & Outsourcing company, that delivers solutions to enable its clients do business better. Wipro Technologies delivers winning business outcomes through its deep industry experience and a 360 degree view of Business Through Technology helping clients create successful and adaptive businesses. A company recognized for its comprehensive portfolio of services, a practitioner s approach to delivering innovation and an organization wide commitment to sustainability, Wipro Technologies has 135,000 employees and clients across 54 countries. About Pierre Audoin Consultants From strategy to execution, PAC delivers focused and objective responses to the growth challenges of Information and Communication Technology (ICT) players. Founded in 1976, PAC is a privately held research & consulting firm for the software and ICT services market. PAC helps ICT vendors to optimize their strategies by providing quantitative and qualitative market analysis as well as operational and strategic consulting. We advise CIOs and financial investors in evaluating ICT vendors and solutions and support their investment decisions. Public institutions and organizations also rely on our key analyses to develop and shape their ICT policies. For more information, please visit