Features
India & the Extended IT Enterprise
Author(s):
Vineet Luthra
Vineet Luthra is a principal in the supply chain innovation practice at PRTM Management Consultants, Washington, D.C.
February 2007, Inside Supply Management® Vol. 18, No. 2, page 26
The shift toward more strategic, higher-value IT offshoring is a significant next step in the evolution of the relationship between multinationals and their suppliers.
In their quest for cost-reduction opportunities, U.S. companies have been offshoring information technology (IT) services to Indian suppliers for more than 20 years. The bulk of this business consisted of "non-strategic" services, such as software development and programming. A number of U.S.-based multinationals, such as Electronic Data Systems, Hewlett-Packard and General Electric, have already set up "captive" operations in India as part of their integrated global delivery IT organizations. During this period, Indian suppliers have built strong delivery capabilities and have become innovators in offshore delivery — which is why leading multinationals have begun to trust them with more strategic and higher-value processes and functions.
Why are the CIOs today more inclined to send their companies' strategic services off to India? There are two main reasons. First, they have the continuous challenge to reduce costs in order to stay competitive. The less strategic work has already been largely done offshore and there is not enough savings left in these areas for some multinationals. Second, Indian companies have geared up to serve the entire IT services value chain, which includes the consult, design, build, operate and maintain elements of technology.
Extending the Enterprise to Indian IT Suppliers
In the last three years, the values of IT service and software exports from India have been growing at annual rates of more than 30 percent. The industry growth is fueling the expansion of thought leadership. And Indian companies are now attracting the top talent — including the expatriate staff from leading U.S.-based competitors — to move back to India. In addition, Indian suppliers are leveraging their established relationships with multinationals to position themselves for strategic services ahead of their U.S. competitors.
Today, the Indian IT suppliers often know IT systems of the multinationals better than the internal organizations within these enterprises. This comes as no surprise, because these suppliers have largely developed the systems and are therefore best positioned to provide ongoing support services for them. This work, which involves multiyear infrastructure and system maintenance contracts, provides the foundation for more strategic services based on the suppliers' understanding of the customer systems.
The shift toward more strategic, higher-value IT offshoring is a significant next step in the evolution of the relationship between multinationals and their suppliers.
Indian companies, which started out as third-party suppliers, have over time evolved into strategic partners, and are now emerging as members of the multinationals' extended enterprise.
Going forward, the two parties will work much more closely together. CIOs and CPOs of multinational companies will need to integrate Indian suppliers more deeply into their organization, which will require greater visibility into the suppliers' operations and better collaboration during execution. In an extended enterprise model, both sides will have to change the way they organize for success. The suppliers will have to be creative in delivering their services through new mechanisms. The multinationals will have to rethink how they work with suppliers and how to enable transformation by integrating their company's resources, planning cycles, implementation support and performance measures.
Impact on Supply Management by the Multinationals
In the extended enterprise, tight collaboration of the Indian IT providers and the supply manager will require stronger commitments from both parties — contracts will be longer in duration, higher in value and more strategic in services. This will make it harder for supply management organizations in multinationals to switch suppliers and manage future costs. In addition, supply management will be limited in the number of providers that have the capability as well as number of providers they develop as extended enterprise.
How will supply management adjust to meet these changes? There are three areas where supply management in multinational companies will need to focus to address the impact. First, develop a supply management vision with leadership to develop an extended enterprise. Second, develop a sourcing strategy for buying IT services that allows for rapid execution while ensuring cost stability. Third, redesign the supplier measures similar to employee compensation models.
Supply management vision. CPOs of multinationals must take the lead in enabling the new extended enterprise model and drive thought leadership that enables successful integration of Indian IT suppliers. In order to do so, the supply management vision must include the value Indian IT suppliers can bring as an extended enterprise. In-depth understanding of supplier's current and future capabilities will be essential for supply management to support the extended enterprise — which is why some CPOs have begun to set up supply management groups in India. These supply management groups are responsible for developing and implementing sourcing strategies for IT services.
Sourcing strategies. Supply management will focus on setting up relationships that allow for the flexibility and scalability from suppliers. In the traditional strategies, supplier selection was based on project-based capabilities and pricing. In order to enable the extended enterprise, supplier selection will be based on a much broader delivery capabilities that take into account long-term offshoring plans of the organization. Pricing arrangements in the new model need to be established based on "rate-card pricing," a model that prices rates by skills and roles that will address current and future skill needs.
Performance measures. Because the CPO will be managing the suppliers as if they were a part of the multinational’s organization, the focus on a metrics system will have to shift from deliverables to performance. Traditional project-based reporting will not be sufficient to support the delivery of strategic services. This is where the supplier's contribution to annual plans needs to translate to measurable results. The CPO will hold the suppliers accountable to targets agreed with the CIO, using some form of risk-and-reward compensation. While in a traditional organization bonuses were based on annual performance measures, in the extended enterprise suppliers will share both risks and profits. Suppliers will be required to price their services through service-level-agreement-based contracts rather than traditional time-and-material contracts.
The emerging extended-enterprise model provides new opportunities to both multinationals and Indian suppliers. Multinationals will gain the ability to develop a longer-term outlook and plans of cost reduction through offshoring. Savings targets will change accordingly. Traditionally, the annual savings target was allocated by opportunities and specific projects that tied to these opportunities. In an extended enterprise, the multinationals will be able to forecast longer-term savings and motivate suppliers by allowing them more ownership in the savings through risk-sharing. In addition, the model allows multinationals to look at increasingly more advanced and strategic areas of the business to be offshored across the entire value chain with the support and leadership of supply management.
Note: Additional material below exclusive to the online version of this article.
IT Supplier Integration: A CIO Perspective
In an extended-enterprise model, both sides will have to change the way they organize for success. The suppliers will have to be creative in delivering their services through new mechanisms. The multinationals will have to rethink how they work with suppliers and how to enable transformation by integrating their company’s resources, planning cycles, implementation support and performance measures.
Organization resources. In order to realize the gains of the extended enterprise, CIOs will need to closely examine resource allocations. Technical resources that were traditionally spread across divisions and business units will have to be optimized across an added dimension — the supplier. Tighter integration of the strategy implementation plans and execution need to be seamless with these suppliers.
Planning cycles. In the new paradigm, CIOs of multinationals will create planning centers around the value chain and core processes — not traditional projects or applications. IT planning, including system roadmaps, will be embedded in business strategic and annual planning cycles. Each planning cycle will require the assessment of suppliers' capabilities to determine which parts of the value chain to offshore. This planning cycle would be conducted in close collaboration with Indian suppliers, who understand their own capabilities the best. Some of the leading companies in India are already supporting the annual planning process by driving discussions around IT strategy, footprint and roadmap planning. Executives from leading supplier companies are bringing thought leadership and innovation to develop multiyear offshoring roadmaps, just as if they were a division under the multinational's CIO.
Implementation support. In the extended enterprise, the supplier will own the delivery and implementation of the plans, and will leverage existing mature processes to create new innovative working models to facilitate future implementations. Already, Indian companies are beginning to develop the so-called "centers of excellence" in domain and technology to support implementations. In addition, implementing these plans will require global delivery centers to be more flexible and rapidly scaleable. Indian companies have built the capability to transition full business processes with complex multi-technology solutions, including core applications, supporting applications, middleware, access channel’s and integration layers. In addition, they have put in place processes to successfully ramp up required resources in a short period of time.