Sourcing Secrets

Big Data in Action - the Analytics Cure-all?

2012-07-17T17:10:00.000-07:00

Most would agree that by now, "Big Data" is a household concept in the strategic enterprise technology circuit. In this post I take an actual example of Big Data use and explore the implications of adopting and integrating it into a traditional business process. While there is a formal Gartner model defining the essential three dimensions of Big Data, for my purpose, a simple working definition might be that it is massive amounts of data, often unstructured (for example free flowing human readable text as in this blog post, as opposed to structured data in relational databases) generated either by humans or devices, that can be analyzed using advanced tools and may lead to unprecedented business insights.

Below is a demo video from IBM which delves into a specific business application of Big Data. I specially like it since it gives "just right" amount of detail (okay I'm speaking for myself here) to understand the usage. The commentary is neither at a thirty thousand foot marketing level nor so technical so as to lose the big picture.

The departmental unit in focus here is the Office of Technology Transfer, which is present at most research universities, corporate research and government research organisations (such as the National Institutes of Health OTT). The unit hangs in delicate balance at a point where incoming resources are thin while the expected output business value (from licensing and selling of IP assets) is enormous, potentially worth millions of dollars in licensing deals. Sounds like a familiar predicament? In fact, especially in universities, where the OTT is critical for creating a steady alernate revenue stream out of IP assets, the unit is frequently understaffed. The staff comprising of a mix of students and full time staff analysts are left to their own devices to perform the arduous task of sifting through massive amounts of heavy duty scholarly content strewn across the Internet hoping to make the crucial match between demand and supply that will result in a signed deal. The video illustrates what it means to apply Big Data to such a business model and how a company may use new capabilities gained from this to its advantage.

So does this mean Big Data is a panacea for all enterprise business analytics ailments?
Here are some of my takeaways from the video:

Being a marketing demo, the video expectedly touts the benefits of Big Data but does not mention anything about the costs and pitfalls. Big Data requires an upfront investment of time and money by the consumer. Some of this is direct while some may be passed on in the form of a price premium or a usage fee. As illustrated in the video, this application requires a domain vocabulary or dictionary to be present. It ranges from a simple list of English keywords and synonyms entered by OTT staff to be able to perform full fledged NER or named entity recognition (In the video example, company names which could be either come preloaded or be "discovered" by a semantic analysis engines such as IBM LanguageWare and IBM Content Analytics ) . Sometimes these terminologies and taxonomies are available for a fee from third parties - for example medical vocabulary used in a clinical diagnostic and decision support system in a hospital. However often one has to be built from scratch or enhanced for the problem domain and context.

On top of its base natural language processing or NLP capabilities, a machine learning system "learns from its mistakes" and gets better over time as the rules that analyze content and correlate with context get refined. Sometimes a corpus of such rules exist for the problem domain to produce reasonably accurate results from the get go. But in new application areas, the time and effort to build these rules must be invested afresh until the system becomes acceptably accurate. A case in point is Watson, IBM's revolutionary Jeopardy! playing machine. While the machine has defeated the human champions in the game, it's human language processing skills suitable for Jeopardy! (dealing with sarcasm, puns, and rhymes) are not sufficient by themselves to understand domain specific scholarly research text such as the application in this video.

On the positive side, this application puts to rest (at least partially) criticism of the basic Big Data approach of dealing with entire datasets (as opposed to using statistical sampling). The argument there is based on the premise that considering the entire set may cause statistically biased results, that good data does not guarantee good decisions (see HBR article) and that eight or nine figure sums are wasted on compute resources whereas acceptable results could be obtained at a fraction of the cost from smaller, "good enough" data sets. The case in the video is a classic situation where every piece of data (such as each patent disclosure, or license agreement) out there counts, and a sample set would not suffice. The case reinforces the point that as opposed to applications in scientific research and marketing, a comprehensive initial data set is a must in areas such as legal and financial fraud detection, diagnosing rare diseases and the like, where every piece of information counts. In other words, if your initial data does not have "the answer" you will certainly not find it in the end. The other issue is about the role of human judgement in decision making. Big Data analytics gives a uniquely powerful starting point in a growing sea of information inside and outside a firm and also arms researchers with advanced analytics capability they do not always have, boositing productivity in the process. That said, it is not a trivial task to determine what questions to ask your data and what subsequent questions must follow to reach actionable information. In my mind, the role of human judgement and decision making in playing that highly valuable role is not going away anytime soon.

Strategic IT Case Study: Nurturing Marketing Leads into Taller Toplines

2012-01-16T18:41:00.000-08:00

The role of IT in the Sales and Marketing process has long surpassed the days of email volleys and Excel marathons. The sales automation successor products like Siebel CRM that smooth out the marketing and sales workflows have gradually given way to the SaaS avataars like Salesforce.com (SFDC). SFDC does a great job of improving workflow collaboration through an almost fun social-media like interface (Chatter) such that no lead information falls between the cracks as the handoffs take place. However, for both the seasoned marketer or the small business entrepreneur on a shoestring budget, the ability to improve performance today rests on strategic insights into the sales and marketing effort. Salesforce's native marketing metrics and lead analytics such as ROI, channel effectiveness, conversion rate and sales cycle time merely scratch the surface of what is possible in this age of integrated offline and digital marketing.

A new crop of companies such as Eloqua and Marketo in the Sales Performance Management club are offering SaaS solutions with out-of-the-box analytics that have native compatibility with SFDC. These products give the Chief Marketing Officer critical and unprecedented X-ray vision into every segment of the pipeline providing policy based lead scoring, graduated qualification, real-time assignment and auto-escalation. They also provide a mechanism to archive leads that are not yet ripe based on customer engagement behavior and then recycle them back into the pipeline when the customer is farther along in the buying cycle. Moreover they also divulge unknown loops and dead-ends in the lead qualification pipeline that must be avoided. When addressed duly, these techniques can increase the company topline and eek out more juice out of the sales and marketing spend as measured by the cost of customer acquisition (CAC). The marketing team can finally come out of the age black-box metrics and have a compelling conversation with the CEO backed by fine grained facts and improved capabilities.

Recorded at Dreamforce seminar - this presentation by the CMO of one such provider - Marketo - takes a behind the scene tour of how its done. If you are a seasoned sales and marketing manager but new to modern-day marketing management, you will be amazed how deep this rabbit hole runs.

Can Google SaaS replace Enterprise IT?

2012-01-05T00:07:00.000-08:00

Not in the foreseeable future, right? Specially when you consider 97% percent of Google's '09 revenues came out of advertising. The remaining 3% non-ad revenues ("Other" business including Enterprise) were predicted to stay below a paltry 6% through 2012 (Gartner Research). Add to that, the fact that this Gartner Symposium interview with Google's then CEO Eric Schmidt is about two years old. Now, do you think what follows might change your mind? Guess what - you may be in for a surprise.

I took some time to break down the interview and look for supporting evidence in 2012:

In the 2009 video, Schmidt painted a compelling picture of his vision of a SaaS-led future of enterprise IT. Today, in 2012, much of that has become reality in the form of new Google products, platforms and partnerships. The "Other" business revenue being probed by Gartner has risen to ~4% based on Google's analyst presentation for Q3 '11. Of course, Schmidt argues that income statement based interpretations underestimate management priority since Google approaches the business in a consumer driven, holistic way. He claims the Enterprise as their next big "billion dollar business". It is evident from Google's focused marketing efforts in the various Enterprise segments that they are indeed serious. The growing enterprise customer base further reinforces the case, but more on that later. Let's dig deeper to see what has changed at Google, and in the external environment, that could make them the SaaS vendor of choice and a disruptive force for Enterprise IT. And before we proceed, note that the examples are illustrative only, I am not in any way affiliated with Google and am not pitching Google products.

Some of the key questions Schmidt addresses include: Can and should a CIO consider replacing the primary email system with enterprise Gmail? What about calendaring and document management via Google Calendar and Google Docs? Schmidt discusses the simple $50/user/year price point that immediately simplifies a slew of licensing, contract and vendor management decisions. How do the total costs compare? A little research yields Google's nifty online calculator to help compare sample dollar savings for your company over an MS Exchange implementation. The projected savings are substantial on a per employee basis. What if you are already using a SaaS solution? You may be lucky. For instance Google Apps + Salesforce.com can be integrated! On the other hand, if you are a small business owner starting from scratch, is it possible to run your entire IT on Google? Not merely collaboration tools, but core business functions like finance and accounting, project management, sales and marketing? The answer is a firm yes. Google Apps for Business today offers a suite of core products supplemented by Google Apps Marketplace - a growing source with over 300 applications to choose from. As an entrepreneur, you could leapfrog directly into the future having enterprise grade software delivered over an internet connection. You do not have to deal with complexities of IT management such as capital expenses, licensing, maintenance and upgrades, disaster recovery, security and personnel. All this comes wrapped in enterprise grade SLAs and tiered tech support from Google. The icing on the cake is the built-in ability to deliver on mobile platforms such as Android and the comfort of knowing your IT can grow in scale and sophistication as your business grows. If you are a government agency, you might already have some early movers to learn from. NOAA recently moved 25,000 of its employees to Google Apps for Government, becoming the largest Federal Agency to go Google. Finally, the tide seems to be turning on nagging SaaS adoption roadblocks such as data lock-in being addressed by data liberation framework, cross enterprise integration and interoperability being guaranteed and technology pieces of regulatory compliance (HIPAA, SOX) such as data privacy and message security addressed by Google partners (Postini).

Some predictions were perhaps tad ahead of time even today in 2012: but think "iPad" instead of "netbook" and the prospect of cutting end user device and support costs "by factor of 5"with the browser based Chrome O/S appears in tune with the desktop virtualisation offerings by many providers today. While some ideas (such as Google Wave collaboration) are no longer relevant in the specific shape and form discussed, that is only to be expected of rational predictions of the future.

All in all, this interview lays out a credible blue-print of a growing role of SaaS in enterprise IT that has already started playing out. Not convinced yet? Google's four million business customers think otherwise.

Surviving Amazon cloudbursts - Netflix's Little Secret

2011-06-25T02:03:00.000-07:00

Amazon was in the news of late for the wrong reasons again. In April this year, the Amazon web services (AWS) hosted off their Northern Virgina data center started experiencing major connectivity and latency issues. This escalated into a full blown outage lasting 24 hours and took down hundreds of AWS clients' services including those of Foursquare, Reddit and Wildfire. The event received mainstream media coverage in CNN, The New York Times and Washington Post. Not only was it an embarrassment for Amazon, but it also raised nagging doubts in the minds of the fence-sitters on the cloud question. Wasn't - reliability through redundancy a key promise of the Cloud? What happened to all that?

What got merely a passing mention in that story, was the fact that Amazon's key customer Netflix was not affected by the outage at all. Now - the customer with the biggest exposure does not feel a thing? How does that happen? Did they get special treatment or somehow got lucky ?

Turns out it was neither. In fact, there is a whole sub-story in there that got discussed in primarily technical circuits - and that tell us a thing or two about the best practices of a cloud sourcing strategy.

Before we delve into that, for the record, here is Amazon's "official" report on the event. Unsurprisingly, it is mixed with a lot of marketing sugar coating which makes it difficult to understand what the core issue was. There are also several technical post-mortems like the one the CNN article refers to. But from a sourcing strategy standpoint, Netflix's Techblog post on the event hits the sweet spot. Here are some takeaways from it:

1. Hope for the best (but ~~prepare~~ design for the worst) - building Russian dolls of redundancy: Netflix did not simply lift and shift its pre-AWS data center onto Amazon's infrastructure but actually re-designed it ground up for the Cloud. In doing so, outages of this nature were anticipated and critical design controls were built in to prepare for them on a regular basis that helped save their day. Some of these incremental lessons were listed in one of their earlier posts from 2010. One such principle is aptly called the "Rambo architecture" which Netflix describes as follows: "Each system has to be able to succeed, no matter what, even all on its own". They spread out their systems evenly across all Amazon's availability zones (AZ), all zones are active at all times (as opposed to having idle zones in a master/slave configuration) and finally each one has N+1 redundancy. Also they always chose reserved instances for the whole contract period (as opposed to on-demand ones) when provisioning new capacity, thus guaranteeing availability for their exclusive use. In effect, they created redundancies within default redundancies of the cloud until they were satisfied. Of course, it was more expensive than it could have been, but in their own words it was "money well spent since it makes our systems more resilient to failures".

2. The art of culling - It doesn't have to be all or nothing: Netflix consciously picked specific AWS services and used their own substitutes for ones they were not satisfied with. For instance, they chose to avoid Amazon's EBS (elastic block storage) dependencies since they found its performance was an issue. This also turned out to be the biggest factor working in their favor because the first point of failure at Amazon started with the EBS system choking out. However Netflix was indirectly (though marginally) affected by it since Amazon uses the EBS backed load balancers (ELB) which they used for first tier of load balancing. Now there of course is a possibility that this was purely co-incidental. The failure could have hinged upon any of the other services they use (such as ELB, S3 or Cassandra). But that is not the point. What matters is that they actually benchmarked Amazon services against alternatives to determine what elements should be outsourced and what should not.

3. Monkey Business - preempt failure scenarios: Netflix's Chaos Monkey is probably a glorified "ps -ef <randomized process id here> | kill -9 "... command (that would be an "End Task" on Windows) albeit on a cloud scale. But the concept behind it is as imaginative as the name itself. The only way to be sure that failure contingencies actually work is to simulate failure constantly and randomly. They had not prepared for the rare event of an entire AZ failure - which they now want to simulate with the Chaos Gorilla. In fact I would recommend they let loose a Chaos Yeti to test out whole service provider failures (yes they need to have multiple providers first).

4. When the going gets tough, (...): Once Netflix figured that Amazon was not going to recover past their peak traffic time of day, they started to manually reconfigure the ELB load balancers to avoid nodes within the affected AZ. This could have been automated to work seamlessly once it detected a threshold level of degradation inside an AZ. But ELB policies were not designed to handle this. So they did the next best thing - get with the service engineers, roll up their sleeves, and start a manual reconfiguration of the ELB endpoints to boycott the failing AZ. They eventually want to make zone fail over and recovery a one-click automated affair.

So that was four different things. What is Netflix's one little secret? I think the single core idea that differentiates Netflix was doing its own due diligence to develop its sourcing strategy and staying fully committed to it and relentlessly engaged thereafter to improve it. Some of this can be gleaned from their earlier blog post on why Netflix chose Amazon. It is very clear that Netflix has not merely hoped that the cloud will work as per specifications due to contractual controls but it has accepted the nascent nature of the business and taken the bull by its horns. The company has identified and bolstered its strengths (strategic service design) and inherent weaknesses (predicting demand). It has decided to outsource "the undifferentiated heavy lifting" while retaining a very capable IT architecture team in-house that has helped set itself apart from the crowd. This is a great example of selective outsourcing for what is traditionally thought of as a all or nothing service. The case above demonstrates that it can be done and when done well brings in great benefits.

Now can (and should) every company outsource on the cloud with such deep foresight and ingenuity? I don't believe there is a single answer. Its a question of the risk-reward trade offs each company chooses to make, given their specific situation and calls for a highly customized self-assessment.

Cloud Economics - when demand takes a "random walk"

2011-05-19T21:29:00.000-07:00

My previous post was a special case comparison of Amazon's reserved IaaS versus a privately owned data center where server utilization is fixed at 100%. This is a simple comparison super easy to comprehend but also unrealistic because no business has a steady demand all the time. While researching a more generic model I came across a working paper on the economics of cloud under pretty much all conceivable type of demand situations ranging from a linear growth/decline, sawtooth, exponential and even a stochastic "Random Walk".

The paper at first glance appeared so mathematically rigorous and intense with its use of integral calculus and Monte Carlo simulations (what Joe gracefully calls "simple maths and calculus" in the video below), that I felt compelled to go back and research the author. The author is Joe Weinman who currently leads the communications, media, and entertainment segment for Hewlett-Packard's Worldwide Industry Solutions having moved recently from being the "cloud face" of AT&T's business development initiatives. He is also a prolific inventor (14 patents), frequent global keynote speaker and also author of the pithy "10 laws of cloud computing" on his blog cloudonomics .

Here is a short interview from his AT&T days where he explains why the cloud is not a panacea but a niche solution and his view that Hybrid clouds are likely to be the end state as the market matures.

Quite interesting from a sourcing standpoint are the insights derived from his working paper, some of which co-incide with my special case scenario from my previous post. Hit the jump for these insights:

and I quote from the paper:

" ..

For flat demand, on-demand provisioning offers no benefit.
If demand can be forecasted accurately further out than it takes time to provision, on-demand provisioning also is unnecessary.
If on-demand is not an option, and the cost of unserved demand is greater than the cost of resources, it is better to be ―safe than sorry by building in excess capacity ...."

Simple and intuitive so far, and here is where it gets a little involved:

"...However, when there is variability coupled with unpredictability, the following rules hold:

For linearly growing or declining demand, a reduction in time (monitoring cycle or resource provisioning) offers a proportional reduction in cost.
For exponential demand, the loss associated with even fixed interval provisioning grows exponentially, so on-demand provisioning is essential.
If the demand in each time interval is drawn from a random distribution, on demand is far superior to the expected loss from the best fixed capacity strategy.
If demand varies as in a Random Walk, time compression offers sub-linear benefits, for example, a two-fold reduction in cost requires a four-fold reduction in time.

Here is the paper for those who are interested. For the less mathematically inclined, you've been warned! Time is Money: The Value of "On-Demand" (PDF)

Infrastructure as a Service : Costlier than you think?

2011-05-05T22:30:00.000-07:00

As the name suggests, Infrastructure as a service (IaaS) is raw computing resources (CPU, stoage etc.) delivered online in the form of virtual server instances that can be turned on and off within minutes at the beck and call of the enterprise customer. No provisioning, no datacenter overheads, no playing catch-up with h/w technology and most importantly - no paying for what you don’t need. In days where CapEx is a forbidden word, this feels like the CIOs dream come true. The three largest cloud service providers today are Amazon, Microsoft and Google closely followed by the IBM, Cisco, Rackspace hosting, GoGrid etc. in the IaaS space.

Here is a CIO Magazine interview with the David Smith, CIO and CTO at Fujitsu with his views on IaaS:

So IaaS seems to be the silver bullet for hardware sourcing. But is he telling you everything?

The question that he gets asked near the end of the interview is a very important one. You start with zero upfront cost and unprecedented elasticity. But do you end up paying more in the end? I did some research to find a base cost model and the cost stacks up like this:

IaaS Costs :

I took the Amazon EC2 as a representative cloud service for comparison. Based on this calculator at Amazon, 1 “extra-large” elastic server (15 GB, 4X2 EC2 virtual cores, 1.7 TB storage) – running windows, @100% utilization costs $713/month for on demand instance and $213/month for a reserved instance. So you pay about $8556 or $2556 / server/year for each server type respectively.

Data Center Costs:

On the other hand, if you bought a higher configuration rack-able server like the IBM x3550 M3 (Intel® Xeon™ Processor X5650 6C / 2.66GHz , 24-192 GB Memory and 8TB storage) it would run about $5900. Of course that's not all. According to this study, the total cost of ownership of operating a data center (allocated costs of real estate, power, management, heating etc. minus the server cost) is $12,000 per rack per year. Assuming a modest 25 servers per rack (though it could ideally hold 42 1U servers) that works out to about $480 allocated overhead cost per server, . So all-in, the cost per server per year would be about $6380.

Conclusion:
The operating expense of a 100% utilized Amazon cloud based server (either on-demand or reserved) would overtake the all-in TCO of a fully owned server in a data center rack in a mere 9 months or 2.5 years respectively. This does not include financial benefits of owning assets like depreciation tax shield and salvage value, which, even assuming a typical cost of capital, will make it more attractive to own a server.

Of course there are other factors like security, reliability and switching-cost to consider, especially given Amazon’s recent headline making for the wrong reasons. But one thing is certain, if you are a business which has a steady computing demand, and hopes to be in business for 2.5 years or more, you are better off in a private data center rather than a public IaaS.

IT Sourcing from the Cloud

2011-05-01T17:09:00.000-07:00

What can I say about sourcing from the cloud that has not been said already? Cloud Computing appears to need no introduction. But appearances, as they say, can be deceptive. This over-the-top video of Oracle CEO Larry Ellison lamenting about the amount of “vapor ware” surrounding “cloud”, pretty much sums up the designer confusion that looms large over the enterprise IT horizon. (Caveat: unless you are overly charmed by Larry’s style, you’ll get the idea about halfway through)

I do not know why Mr. Ellison goes cloud-bashing but NO, cloud computing is not old wine in a new bottle just because centralized mainframe computing and then computers hooked to the internet have been around for ever (well almost). Yes, it borrows from all of those core technologies but the business model has not been in existience in this shape and form before as Mr. Ellison seems to suggest. In fact, it is amazing that supposedly the next big thing in commercial computing is at once the most talked about and least understood.

So what is it really and what does have to do with an IT sourcing person looking to gain cost and strategic advantage?

Cloud computing is a form of remote computing served over (usually) the internet where the heavy lifting of computational work and/or data strorage is done on a “cloud” of usually commodity computers as opposed to a single or few powerful local (usually in-house) servers. Why is it called the “cloud”? I have two theories, one is that it sounds less arcane than “Grid Computing” or “Utility computing” (which have come to mean the same things) and second, is probably due to the way the service is being offered today by current cloud based providers. A subscribed B2B customer is not expected to know where the service is coming from. It could be coming seamlessley from a set of different physical locations (whether a server, data center, or geographic region) at a given point in time.

The cost advantages as explained in the video stem from two economic factors which also set cloud computing apart from just any form of remote computer services :

1) multi-tenancy which leads to economies of scale at hardware level and near-zero marginal cost for software and

2) the ability to offset demand spikes of some customers against troughs of others given a critical mass.

To the individual business customer, these translate to financial benefits of zero startup costs, pay-as-you-use operations cost, and reduced opportunity cost lost to unused capacity. Operationally the cloud establishes a level playing field for smaller businesses making zero lead time for provisioning possible and providing the abiity to externalize a lot of overheads such as logistics and manpower. More importantly, it offers strategic business functionality that was available only to the big player before, on-demand and with continuous flexibility to adapt to change.

That said, there is no free lunch, and the cloud too has its consequences, financial, operational and strategic. I hope to be able to do a smackdown in a later post. But first, to understand the full range of sourcing possibilities that cloud computing brings about let us take a deeper dive to understand the nuances of the three basic flavors of cloud computing:

1. Software as a Service (SaaS),

2. Platform as a Servce (PaaS) and

3. Infrastructure as a Service (IaaS)

I will discuss these and more in my next post.

Sourcing IT Through Online Private Markets

2011-04-22T16:51:00.000-07:00

GE CIO Gary Reiner is responsible
for GE's massive sourcing efforts:
CNN Money Interview

In the previous posts we discussed conventional outsourcing and the various flavors of Captive Sourcing and their pros and cons. One of the nifty ways to straddle the best of both worlds is to use a private market.

A private market is essentially a preferred vendor pool where the vendors are invited to bid competitively for the buyer’s business, usually in the form of an online reverse auction. While more commonly used for commodities buying, electroninc reverse auctions in private markets can be used for many types sourcing. In the IT services outsourcing world, it has been used for buying services very effectively by none other than General Electric since the mid-90s right up to this day. Sometime back, CNN Money published this interview with the then GE CIO Gary Reiner on this topic. The interview gives valuable insight into GE's use of IT in the online reverse auction or eAuctions and private markets. Interestingly the CIO was also responsible for GE's overall for buy side strategy for services including IT. Hit the jump to read more.

How does this work?

The online IT reverse auctions starts with a Request for Proposal (RFP) and supporting documents such as a business requirements and functional specification documents are placed on the eAuction web portal. The RFP is owned by an IT Manager working for the business unit which is sponsoring the software project. The auction owner has the choice of sending out electronic invites to participants from a list of preferred vendors and also sets up a date and time when the auction will be held. The auction itself has two flavors - open and sealed bids. Sealed bids are those where the competing vendors know they are not the lowest but cannot see the lowest bid value, while in open bids they can actually see the amount and adjust the next iteration accordingly. The electronic auction itself takes place at a fixed time window. Like regular forward auctions, it starts slow and becomes an edge-of-the-seat experience for the participants as the deadline draws near and the flurry of activity (lower and lower bids being placed) increases until the time draws to a close and they are notified if they are the "lowest bidder" or not. This is followed by submission of an electronic Proposal document (response to an RFP) on the same web portal. This could be either in a next day or sometimes a week from the point when the RFP became available, depending on the project size and complexity.

As the interview with Reiner suggests, all other things being equal, the only differentiator becomes the price. They key though is that in order to ensure a level playing field for themselves (and even differentiate their offer) the vendors try hard to make sure that their proposals are exhasutive and competitive.

Many large buyers, like GE, use proprietary IT software and online intranet portals, but many internet based auction sites are available. There are also specialized ones such is MarketDojo, which target private markets only.

Online auctions – just like eBay, right?

Wrong. An eBay type auction is an example of a “shallow portal” where the buyer and seller can engage in a one-time transaction of a well-known commodity without knowing each other. Creating a private market on the other hand needs a lot of pre-work and due diligence and mutual value discovery and creation on both sides of the transaction to build the deep linkages into the participating organizations that help transform a highly customized service offering like IT ADM to a near commodity product level.

Deep Linking into the Market

If you noticed in the activities before, the eAuction is by run by the software, and owned by the IT Manager linked to a business division, not the sourcing/procurement manager. The pre-work, which I like to call the deep-linking is where the strategic sourcing function comes in. Taking the GE IT sourcing example further, the company has perfected this art with a slew of governing mechanisms and tools. Its prefered IT vendor pool (known as GDC vendors) include Tier 1 Indian companies like TCS, Wipro, Birlasoft, erstwhile Satyam (now Mahindra Satyam) etc. Long term relationship agreements are formalized through multi-year relationship governing contracts known as the Master Services Agreement (MSA). These contracts set up mutually agreed terms and operational metrics that help create the ground rules as a pre-requisite to be able to participate in the auctions. One of these could be that the vendor is certified to be at a certain level of maturity (such as SEI-CMM) as an organization.

IT Service Management practices under ITIL v3

A key component of the MSA is the SLM (Service Level Management) framework which comprises of SLAs (Service Level Agreement) such as time to respond to and resolve production issues, OLAs (Operational Level agreements) and SPMs or Service Performance Metrics (such as offshore leverage) that all vendors must abide by and be measured against. Many vendors will often use IT Service Management (ITSM) standards such as ITIL (Information Technology Infrastructure Library) as an guideline to develop the process rigor. Furthermore, there are also standards defining everything from the software design and development methodlolgy used such as IBM's RUP or Agile Alliance's Agile, technology stack specifications, coding standards, project management and reporting methodology, to physical and network security/regulatory specs the exclusive-use global delivery centers (GDCs) must be built to. These GDCs are often in India but could also be in onshore North America (usually for clients such as Boeing having special regulatory needs such as an ITAR compliance), China or nearshore locations such as Mexico (for timezone or language specific needs). There are also non-contractual preventive checks and balances mechanisms – for example, a multi-step step Tollgate Review process starting at a buyer owned architecture review board that approves project design stage or a quality control step conducted by a competing vendor prior to production deployment. In short, the best tools and techniques ranging from standardization to conflict of interest are leveraged to remove ambiguity, protect interests and deliver a high quality consistent service experience.

Advantages over sole sourcing/captive units:

The advantage to the buyer is the ablity to simulate price competition as in an open market. Besides, being a closed set of players it is a much more predictable environment that begins to approach the reliability and transparency and controllability of an in-house IT without the buyer having to take on a non-core function.

The main, if not only, advantage to the seller is the predictability of assured repeat business year after year (the Master Services Contracts are usually multi-year and a gateway to a few hundred million dollars of assured business). In fact, Jack Welch, the ex-CEO of GE in his autobiography “Jack: Straight from the Gut” brags about the fact (or arguably the fiction) that a similar large GE sourcing contract with Wipro propelled the company chairman Azim Premji into the list of the richest men in the world.

Needless to say that with a client like GE it would also be a seller’s advantage to have a great logo on the customer list, and the benefits of thought leadership that follows from the association. For example, TCS internalized Six Sigma in a major way within its GE accounts which benefited its employees, its own internal processes and even spawned a revenue stream eventually within its process consulting function now known as lean Six Sigma. There could be similar benefits derived from private market associations with large buyers (for example Toyota and its suppliers). In case of Wipro, it also resulted in an unexpected windfall in the form of Premji finding Wipro's next CEO in Vivek Paul at a GE business, who would go on to take Wipro to new heights.

Caveats:

As hinted in the interview, reverse auction based private market model is not without its critics. The key drawback is that it engages the suppliers in a fierce price war which eventually erodes their margins to the lowest possible levels to stay in the game, or they risk losing their share of the pie to the rivals. The pricing pressure is acute and often due to scope ambiguity/estimation errors and/or poor change management practices on fixed price contracts, the vendor actually ends up losing money on a project.

In fact Infosys, the second largest player today among the Indian software service providers, famously quit the GE GDC vendor business model in the 90s, even though it comprised of a quarter or more of its business at that time (read the story here). Infosys felt it unfairly commoditized their services and prevented premium positioning that they aspired for.

The caveat on the buyer side is simple – you cannot sustain this unless you have a great post sourcing architecture and relationship management practices in place. You do not have to be a behemoth like GE, with an $4B IT budget that approaches the size of a fortune $500 company revenue. However, you have to have a critical volume of your vendors’ business to have this play out on your terms.

As Reiner mentions in the interview, ideally no one wants to be on the sell side of an eAuction and tries to differentiate their offering so that it cannot be commoditized. But even so, this sourcing model can be a win-win relationship – and as far as GE and its preferred vendors are concerned, is alive and well till today

Captive Sourcing : Can you have your cake and eat it too?

2011-04-17T12:10:00.000-07:00

Data Source: WSJ.com article

For some CIOs/sourcing decision makers the risks of traditional outsourcing outweigh the rewards. They are either too wary of changing the status quo (having an in-house IT) and giving up the proven way of doing business, or have already tried outsourcing and feel that it promises more than it delivers. This is where captive sourcing comes in.

Captive sourcing, or having a fully owned subsidiary where your outsourcing vendor would operate, seems to be the silver bullet that provides the cost advantages without sacrificing control. Many firms have tried captive outsourcing. Have they succeeded? Hit the jump to find out.

Many companies such as Citibank, BNY Mellon, Motorola and Texas Instruments have/had established their own IT/ITES operations in foreign countries, specially India. This is perceived as a way to reap the benefits of low cost operations (labor arbitrage) and yet having the tight integration and controllership as an in-house operation.

Why do some firms seeking to outsource go the captive route?

As a highly placed official in BNY Mellon said to me recently, the costs of using an offshore IT vendor is not really as low as it “seems at first”, (she was likely referring to the pure offshore billing rate). Another procurement manager at a New York based global leader in management consulting said he was concerned about the escalating “Total Cost of Ownership”. It is true that the traditional IT vendors use a mix of cheaper offshore and more expensive onshore (usually on-site) personnel (a key operating ratio known as the “offshore leverage” which usually ranges from 50% to 90%) that leads to an adjusted blended rate much higher than the pure offshore rates. How high? Well it could range from 40% to 100% higher than the pure offshore billing rate depending on the leverage factor and the actual billing rates in question. The providers obviously feel it is necessary to maintain a smooth operation. There are also phenomena such as job rotation, transition, shifting junior/senior ratios etc. some of which are incidental and some by design that impact the fully loaded billing rate one way or the other and make matters more complex. It is safe to presume that the firms that open foreign captive units feel that they can do a better/cheaper job than the local players.

Where do they go wrong?

To begin with, offshore captive units are not easy to set up with no prior expertise and no brand image in the space. In fact, some firms use a BOT (build-operate-transfer) type contracts to hire a local vendor to set it up, operate for a certain duration and transfer ownership back to them). However sustaining a captive unit is a challenge for a foreign firm with no credibility in the in the operating country. So when a JP Morgan opens an IT shop in India, they usually have to provide higher local salaries than the local big players (such as the Tata Consultancy Services, Infosys and Wipro in India), and often a much less attractive career path. By design, there is little or no possibility for the employees of stints abroad, first hand client interactions that enrich their business and social skills. Also in an effort to do one thing very well, they have limited or no freedom to move between technology areas, work for different clients within the industry and even across industries over time. In the absence of these “perks”, the only retaining factor for the employee becomes the salary. And with many “me too” captive wannabes, there is no dearth of employers offering a slightly higher salary to lure them away. This usually leads to either escalating labor costs (a higher effective billing rate that they were trying to beat in the first place) or a high turnover/ attrition situation which soon spirals out of control from an operational standpoint .

Amazon Book Review

Dr. Ilan Oshri explores captive outsourcing in his new book “Offshoring Strategies: Evolving Captive Center Models”. According to him, captive operations end up in one of these states:

they outsource part of their services to a local vendor (Hybrid)
attract external clients in addition to their parent (Shared)
divest to a local vendor or spinoff (example Citigroup selloff of its BPO for over $500 million to TCS in 2008), or
are terminated

The diagram at the beginning of this post is from a study published in May 2008 in WSJ.com by Dr. Ilan Oshri, Julia Kotlarsky and Chun-Ming Liew which provides this interesting finding. Of 150 of the largest global companies studied, 80 have, or had, captive centers in India. Of those 80 companies, 30% changed their strategy for managing their captive centers in the past six years, some more than once. He goes on to observe that of those 80 companies 12.5% went to a hybrid mode (that is performs core business processes for the parent and outsources non-core work locally), 11% attracted external clients, 6.3% divested to local vendors and another 8.8% terminated operations.

So we see, captive sourcing by itself is no silver bullet. When done in a hurry and with the short term focus on direct labor costs, can cause more problems than it solves and even leave a big hole in the corporate pocket. However there is yet another sourcing strategy that takes a best of both worlds approach. We will explore this in a later post.

What exactly is outsourced IT? Its many flavors.

2011-04-07T20:51:00.000-07:00

What do businesses really mean when they “outsource IT”? The video interiew below provides a quick overview of the elements of outsourcing in the context of a small business.

A business can outsource any part of IT that is not considered a core competence or a value adding activity in the long run following the usual “Buy Vs. Make” decision points in strategic sourcing. In an IT / ITES (IT Enabled services) context what does this mean and how do these firms engage? Hit the jump to see.

Needless to say outsourcing exists in many flavors. Business Process Outsourcing or BPO, also loosely clubbed with IT Enabled Services, is one such which can range from voice based (such as a customer support call center) to non-voice based / transactional services (example Finance functions such as Payroll/Invoice processing), HR (recruitment search) to Research. This blog is focused on IT outsourcing alone. However many of the concepts apply to BPO and other forms of outsourcing as well. If you are interested in BPO, specifically how it is impacting global livelihoods and cultures, you can find an interesting first-hand video report by NY Times columnist and Pulitzer Prize winning author Tom Friedman (of “The World is Flat” fame) here.

Staff Augmentation: The hiring enterprise (the buyer, such as a MetLife, Bank of America or GE or a small or medium size business) usually already has a fully functional (and sometimes fairly large) internal IT department. They sign a contract with a provider (a vendor or seller - for example a systems Integrator like Accenture or Infosys) to be able to temporarily hire and then release personnel (with suitable skills) from and to a very large pool of employees on the payroll of the seller as required by project initiation and termination schedules at the buyers end. In an ADM context an example of this would be a Java programmer, an Oracle database administrator, quality analyst and somewhat more rarely an application architect or a project manager being hired for a few months or even years, at a preferred location.

This is where most first time outsourcers start since it is the easiest to implement. The responsibility demarcations are easy to understand, the buyer retains management control and risks of the projects, supervises the personnel at a task level (also known as out-tasking) while reaping the basic benefits of outsourcing primarily lower cost, specialist focus and high flexibility (more on these in a later post). The key performance metric of a supplying vendor is the threefold - the ability to provide high quality personnel with low turnaround and competitive hourly billing rate. The billing is on a T&M (time and material) basis.

Fixed Bid/ Fixed Price: When the buyer has a large development/Implementation Project (for example an enterprise wide ERP implementation), with a unique end point and clearly defined scope, fixed price is usually the way to go. A request for proposal, (RFP) with the scope of work is defined and published. The vendor responds with a proposal having a fixed quote and milestones leading to the end deliverable. Here the project (not only the personnel) is owned by the vendor. The project risk is borne significantly by the contractor. Mature businesses and vendors engage in this type of contracts.

Managed Services: Usually long term ongoing projects (e.g. application maintenance and production support on the software side or server administration hardware side) driven by clearly understood outcomes and goals (e.g. server uptime, or time to resolve user reported critical issues on a production application). Contracts are often fixed price for the stated duration, characterized by agreed SLAs (service level agreements), monetary incentives and penalties. The outsourcing basis here is not personnel and their skills but the outcome of their efforts as it relates to the goals of the buyer.

Hybrid: As outsourcing as buyers ad sellers of outsourcing services matured and the practice evolved, an increasing number of contracts picked up more than one of the above flavors. For example, a chunk of ADM work on managed services mode with parallel new development projects contracted out on fixed price basis for a two year contract period

While the above are the basic models of traditional IT outsourcing, there are thankfully some ways to have your cake and eat it too. They are called the Captive Sourcing and Build Operate Transfer models. Watch out for the next post to find out about more about these and some of the major players in this market.

Welcome to Sourcing Secrets.

2011-04-04T20:56:00.000-07:00

This site is about one thing: Learning how to make Information Technology work for your business to take it to the next level, or the next ten levels. Whatever industry your are in today, you are probably already familiar with the love-hate relationship of business and IT. In fact, enterprise IT which used to be the domain of CEOs, CIOs and large corporations in the 70's spilled over to the small and medium businesses by the 80's and '90s, has become a fixture of tiny businesses and even start ups today thanks to a phenomenon called technology / IT outsourcing services.

“IT outsourcing” has many definitions but it really is an evolving concept. It meant various things from having a hired intern over the summer, experienced freelancers (and elancers) and "staff augmentation" contractors brought into internal IT departments ("insourced") as contingent workers. It eventually came to mean signing multi-year deals worth tens of millions of dollars with a single technology service provider, usually half a world away, the value range being between "out tasking" and "managed services". Now more than ever, it tends to imply you may be “renting” software (and hardware) like a utility that streams into your laptop’s browser from – you guessed it – "The Cloud”. The enterprise IT outsourcing paradigm has transformed itself while changing the way business is done. And just when it seemd to have levelled out, it appears poised for an encore. In fact IT outsourcing on more than one level is a journey rather than a destination, and we hope to savour all these sights and sounds on our way.

If you are an entrepreneur, or a strategist thinking of outsourcing IT, a business manager trying to optimize outsourced IT or an industry affiliate who wants to share your story of success or failure with outsourced IT, this place is for you. This is intended to be a watering hole for peer-to-peer learning with some insider insights from real life engagements over a decade thrown in by "yours truly".

Thanks for dropping by, and thanks for reading. But if you enjoy it the best thing to do is to join the conversation and spread the word.