APPLICATION PORTFOLIO ANALYSIS FOR OFFSHORING A Portfolio Analysis Approach to Plan for Offshore Outsourcing of IT Application Development & Maintenance Activities - Raghuvir Kamath, PMP
Key to the success of offshoring is to know What to Offshore, How to Offshore & How much to Offshore Executive Summary Revenue Growth has been the constant focus of businesses and IT has to support this with process & product innovations. 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 Offshore, How to Offshore and How much to Offshore before beginning an offshore outsourcing engagement. Typically, SMBs (small-to-midsize businesses) have been found to be lacking in planning for offshore outsourcing engagements. A Portfolio Analysis 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 on the type of the application, its offshorability (suitability to be offshored) and transformational opportunities for efficiency improvements. An effective & efficient Application Portfolio Analysis is the first step in ensuring a smooth success of an Offshore Outsourcing engagement. Revenue Growth & IT Innovation One of the major strategic objectives for executives these days is to focus on growing revenue rather than cutting costs. Growth requires close alignment between IT priorities & Business goals - in short, IT is expected to actively involve in corporate innovation efforts aimed at introducing new products or services. IT Innovations requires budget. However IT Budgets of many businesses especially that of SMBs do not support a lot of IT Innovation. As per one study, only 5.4 % of the IT Budget is spent on process & product innovation. This means less money for IT innovation & lesser alignment with business goals -- which in turn affects the revenue growth. Adequate increases in IT Budget are rarity these days. In the current scenario, the only way to increase the effort level in IT Innovation activities are - a) Cut Costs in other IT spending areas (while maintaining the same level of service) and realign these savings for IT Innovations b) Increase productivity gains & operational efficiencies by transformation of the IT services & processes SMBs should target to combine the above two mantras to increase their focus on IT Innovations.
Where is the IT Budget Spent? Organizations spend nearly 80% of their IT Budget in managing existing applications and software infrastructure. Most of this expenditure is Non-Discretionary and recurring in nature. It goes without saying that businesses are focusing on minimizing their Non- Discretionary costs on items like maintenance & operations and increase their spending on Discretionary items leading to IT innovations. Increasing focus on Offshore Outsourcing Offshore Outsourcing has become mainstream and the advantages of Offshore Outsourcing have being widely published. A growing number of businesses are taking advantage of Offshore Outsourcing to reduce costs, gain operational efficiencies through better processes, increased speed to market and are effectively leveraging their expensive IT resources on 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 the 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. Many SMBs are using portals like elance, rentacoder, odesk to offshore their IT work to individual coders in India, China, Russia etc. This approach is a good model for very small businesses (small real estate agents, small law firms) because of the cost savings & minimal management overhead. Some of the services like updating a website, creating a small website etc can be handled effectively in this model. However for bigger businesses, this model is hardly efficient and at times has proven to be counter productive. The operational efficiencies & productivity gains realized by using process oriented offshore partners far offsets the short term cost savings gained by using individual coders from different countries. The process improvements & quality deliverables realized while dealing with good offshore vendors lays a very good foundation for SMBs to prepare for their future growth. Planning for Offshore Outsourcing Initiating & managing an Offshore Outsourcing engagement is not an easy task. Pitfalls are plenty and ever present. Inadequate planning, lack of communication & vision alignment, no prior knowledge on outsourcing, cultural differences and poor management results in serious consequences. It is very common to find large businesses spending considerable amount of time in planning & managing the Offshore Outsourcing engagement. Large businesses have vendor management team to identify & negotiate with the right offshore vendors, lawyers to review contracts, experienced business-technology professionals & managers to manage these outsourcing engagements. SMBs cannot afford to spend the
same level of effort in planning & managing an Offshore Outsourcing contract. Its simple - they do not have the required resources and it is just not feasible. So what is the first planning activity for the SMBs before starting an offshore outsourcing engagement? Application Portfolio Analysis for Offshoring The key to successfully enter into an Offshore Outsourcing engagement is to understand what to offshore, how to offshore & how much to offshore. A detailed Application Portfolio Analysis for offshoring will answer these questions and more. Hiring an outside consulting company to conduct the Application Portfolio Analysis can be very effective and cost efficient. The goal of any Application Portfolio Analysis for Offshoring should be to - a) Conduct quantitative assessments of each application to identify the Type of the application. b) Identify the various constraints, risks, business requirements & opportunities which are unique to each individual business. c) Conduct Multidimensional-Quantitative analysis to identify avenues to maximize the effort on high priority, high value new development projects -- while maintaining the existing applications within the specified IT Budget. d) Conduct Benefit-Impact Analysis & Sensitivity Analysis to determine the best offshore model for a particular business (given its unique requirements, constraints & risks). Various offshoring model includes - 1) Offshore Outsourcing Single Vendor/Multiple vendor Approach 2) Offshore Outtasking 3) Setting up Dedicated Offshore Service Centers 4) Collaborative Offshoring e) Identify the level of transformation of the existing applications in an Offshore Outsourcing engagement. f) Build a detailed offshore roadmap by creating a business case showcasing the suitability of various applications for offshoring, identifying the applications for offshoring, identifying the best offshoring model, potential difficulties in transition, transformation opportunities & potential staffing plan and cost savings for the next 3 years. What To, How To & How Much to Offshore Not all applications are viable for offshoring and certain applications have greater benefits of offshoring than others. One of the significant outputs of portfolio analysis is to determine the applications which are best suited for offshore outsourcing. Every business has various unique constraints, risks, business requirements & opportunities which have to be considered while determining What-To offshore. There are three types of IT applications in any SMBs portfolio of IT applications. These types are dependent on the Competitive Advantages the application brings to the business and the Complexity & Criticality in developing and maintaining these applications. 1) Commodity Applications - These applications provide low competitive advantage to the business and are of low to medium in criticality & complexity.
2) Core Applications These applications are considered core for the business. These applications are required for the day to day operations of the business and impact the competitive advantage. These are usually medium to high in complexity & criticality. 3) Differentiator Applications These applications are the differentiators for the businesses. These applications provide high competitive advantage and are crucial for future growth of the business. These high IP applications are closely aligned with the business goals and normally have high value to the business. Apart from greater criticality & complexity, these applications tend to be very volatile due to the impact of changing business goals & scenarios. The first step in any Portfolio Analysis is to identify the types of each application. The focus of IT Innovations i.e. the new Differentiator applications which are planned to be built/enhanced are also considered during analysis. Illustration Competitive Advantage Factor App 8 App 9 Business Differentiator Apps App 11 Core Apps App1 App 6 App 3 App12 Commodity Apps App 4 App 7 App 5 Factor of Complexity & Criticality Most businesses end up allocating a significant portion of their IT staff (and in turn their IT Budget) on maintenance & enhancement of these applications. Only a small portion of their IT staff is dedicated on developing new applications which provides a competitive edge to the business by closely aligning with the changing priorities & business goals.
Studying the expenditure of budget allocated to Maintenance & Enhancements (M & E) of existing applications & development of new applications is the next step in portfolio analysis. Illustration Cost Distribution - Without Offshoring M&E Commodity 18% 8% 2% New Dev Commodity M&E Core 20% 12% 40% New Dev Core M&E Differentiator New Dev Differentiator Typically, businesses spend nearly 40% of their maintenance & development budget (budget allocated for maintenance & enhancement of existing systems & development of new applications) on maintaining their core systems. Less than 20 % of their maintenance & development budget is spent on developing new Differentiator applications. Various constraints, risks and opportunities which are unique to a given business should be identified and analyzed. A Multidimensional quantitative analysis will then identify the avenues to maximize the effort spent on high priority, high value Differentiator projects, while maintaining & enhancing the existing applications -- all within the specified IT Budget. Several different criteria like Complexity, Criticality, Volatility, Complexity, Potential Transformational opportunities should be identified and analyzed while determining the applications best suited for offshoring. The optimum resource requirement is also determined considering the above mentioned criteria. Benefit-Impact Analysis and Sensitivity Analysis are than conducted on various potential offshore models to identify the results of using different offshoring model. Application Portfolio Analysis also quantifies the transformation capabilities that are realized by partnering with the right offshore vendor. Transformation has direct impact on operational efficiencies and should be one of the major goals for offshore outsourcing. SMBs will gain crucial insights into extent of transformation possible in terms of Workload Management, Build & Release procedures, formal SLA Adherence, Problem Management etc. This crucial information is effectively used during contract negotiation with offshore vendors and while managing the offshore outsourcing engagement. The results from this analysis are analyzed against the goals (increase in budget allocations for IT Innovation, Cost Reduction, Process Improvements, Increasing operational efficiencies etc) for offshore outsourcing. The ideal offshore model is then selected with a potential offshore roadmap for building the business case for offshore outsourcing.
Illustration Cost Distribution - With Offshoring 33% 5%1% 29% M&E Commodity New Dev Commodity M&E Core New Dev Core M&E Differentiator 14% 18% New Dev Differentiator Application Portfolio Analysis for Offshoring proposes the most suitable offshore model to reduce the maintenance & enhancement costs of Commodity & Core applications while increasing the focus on new development of Differentiator & Core applications. It is possible to increase the budget allocation for developing new differentiator applications by atleast 15% and that of Core applications by atleast 5% (increase in budget allocations). All this is achieved with the same IT Budget and with the same or better maintenance and enhancement services on existing applications. This additional budget on development of Differentiator & Core applications is a result of cost savings generated by offshoring the maintenance & enhancement activities and realigning internal resources to work on developing new Differentiator & Core applications. Application Portfolio Analysis for Offshoring can also be used to conduct detailed analysis on the True Cost Savings achieved by offshoring. A True Cost Saving analysis considers all the costs, both Direct Costs (like Annual Contract fee with Offshore Vendor) and the Indirect Costs (Expenses which are hidden like Contract Management Cost, Additional Communication Cost, Additional Management time cost etc ) associated with offshoring. It is possible to achieve atleast 30% in cost savings by using offshore vendors to collaborate with your existing IT staff to work as one team, in maintaining and developing applications. Illustration Cost Savings Using Offshore Outsourcing $5,000,000 $4,000,000 $3,000,000 Cost $2,000,000 $1,000,000 $0 -$1,000,000 Transition YEAR1 YEAR2 YEAR3 Phases Projected Costs with Current Staffing Model Projected Costs with Offshore Outsourcing Total Savings
Who should go for it? Application Portfolio Analysis for Offshoring should be practical and should include multidimensional-quantitative analysis. This analysis provides a lot of value to SMBs by helping them determine What To - - How To - - How Much To offshore. With effective usage of Application Portfolio Analysis, SMBs will gain enough insight into making the right decisions on offshore outsourcing and plan effectively for offshore outsourcing engagement Application Portfolio Analysis for offshoring is highly recommended for SMBs who have more than 10 resources (employees/contractors) working in their IT division and have atleast 4 applications in their portfolio. Since Application Portfolio Analysis for offshoring is not a matured process, services of Offshore Outsourcing consulting firms practicing application portfolio analysis may be the best bet for SMBs. This would ensure that the analysis is conducted in an efficient and cost effective manner. Application Portfolio analysis is also recommended for SMBs who have already embraced offshore outsourcing. It makes lot of business sense to evaluate the effectiveness of the current offshore outsourcing engagement through the eyes of a knowledgeable outsourcing consulting firm. It also helps to determine other important factors like the potential opportunities to further cost reductions and gain additional operational efficiencies by using a different offshoring model, the transformational capabilities using a different vendor etc. The right outsourcing advisory firm will complete the portfolio analysis for offshoring in 5 days to 3 weeks depending on the size of the business (no of applications in the portfolio) and the availability of key resources during the analysis phase. Information gathering will be mainly through questionnaires and conference calls. Offshore Analysis tools will be used to conduct quantitative multidimensional analysis for portfolio analysis. This efficient way of conducting the analysis results in significantly less costs and makes it easily affordable by the SMBs. The Application Portfolio Approach for analyzing offshoring is gaining prominence as one of the leading techniques to plan for offshore outsourcing. After all every business would like to know What-To How-To & How Much-To Offshore. About the Author Raghuvir G Kamath is an Associate Program Manager with Software Services, Tavant Technologies. Raghuvir has more than 8 years of experience across Management & IT Consulting. His focus areas include Application Portfolio Analysis for Offshore Outsourcing, Offshore Outsourcing for SMBs & Program Management for Offshore Outsourcing engagements. Prior to joining Tavant, Raghuvir worked with IBM Global Services in their AMS practice. Raghuvir can be reached at Raghuvir.Kamath@tavant.com