ITES: Business Models

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Information about ITES: Business Models

Published on April 19, 2009

Author: amitanshu



Discussion Outline

Discussion Outline

The Market Structure for IT-Enabled Services • The market structure for IT-enabled services outsourcing is characterized by four dominant models:  Outsourcing to foreign provider with no national presence  Outsourcing to foreign provider via national office  Outsourcing to foreign provider via an independent broker  Outsourcing to the wholly-owned foreign subsidiary of a national company

The list of services sourced globally is expanding rapidly… Information Technology (IT) Business Process Outsourcing (BPO) Application Development Human Resources Application Support & Finance and Accounting Maintenance Infrastructure Services Back Office Administration Engineering/ Design Services Payment Processing System Integration & Consulting CRM Tech Support Knowledge Process Outsourcing

Discussion Outline

BUSSINESS MODELES Business Models Strategic Alliance/Joint Captive Models Outsource Model Venture Models Pure Captive Model Joint Venture (JV) Pure Outsource • An internal cost center or a 100% • Joint Venture with equity participation • Use of a India-based provider to subsidiary company set-up to from customer and vendor. Customer offshore business processes or IT execute offshore business retains control due to investments in services processes and/or IT services entity. • Amex, Dell, Standard Chartered, • British Telecom - Mahindra Managed Outsource HSBC, Ford, Sun • Full-/part-time resources on the ground in India to facilitate transition, relationship mgmt and transfer of BOT and Inverted BOT organization and domain knowledge Captive Partnership Model • Where the Indian Provider sets up to third party providers • Strategic alliance with Indian facility and provides implementation provider for implementation support to start with support services such as • Customer can buy out at a infrastructure set-up recruitment predetermined stage and training • Reverse scenario has also been • EDS-TCS, BA-NIIT seen in the market • Aviva-WNS/EXL,24/7, AIG- Polaris

Discussion Outline

CAPTIVE MODEL  The firm wants to exercise control over operation.  The organization believes it can accomplish a lower-cost model on its own than by sourcing to a third-party.  It has security and IP concerns.  It cannot find an existing third-party service provider to fulfill its service requirements. An offshore captive center offers complete control over offshore operations and may boost savings. But it's not right for every company …….

ADVANTAGES OF CAPTIVE MODEL  They attract top local talent for industry-specific skills.  They present an ability to transfer more complex and IP- related tasks than under a third-party model.  Direct control over the operation lets one develop the culture as he see fit.  Reducing time to market: New product launch.

But captive centers bring their own challenges as well . . . .  Organizational challenges: Offshore captives challenge the staffing, style, and formal and informal information systems of the client organization.  Process challenges: The client organization must pay special attention to optimizing infrastructure and technology at the captive center.  Financial challenges: Firms need to manage cross-border cash flows and ensure that cost advantages are real and being preserved over time.  Cultural challenges: Cultural differences between a client organization and its offshore captive center can create challenges just as cultural differences between the client organization and a third-party provider can.

Captive model (example) • EXULT:  A part of part of Hewitt Associates.  Built a captive in Mumbai, in 2002.  It calculated compensation ranges, took taxes into account, and signed regulatory, customs, and legal documents  Press releases were sent out and ads were placed to hire people.  Intensive training was given to new hires.  A 320-person captive BPO center in Mumbai that yielded savings of more than 40 percent over onshore facilities by its second year of operation.

Discussion Outline

Joint Ventures Q: Why Joint Ventures? Ans: As there are good business and accounting reasons to create a joint venture (JV) with a company that has complementary capabilities and resources, such as distribution channels, technology, or finance, joint ventures are becoming an increasingly common way for companies to form strategic alliances. In a joint venture, two or more quot;parentquot; companies agree to share capital, technology, human resources, risks and rewards in a formation of a new entity under shared control……

business benefits  Combining complementary R&D or technologies.  Efficient commercialization of a technology or business concept.  Developing or acquiring marketing or distribution expertise.  Sharing of scientists or professionals with unique skills.  Financial support, or sharing of economic risk.  Acceleration of revenue growth.  Ability to increase profit margins.  New product development.

DISADVANTAGES of joint ventures  As with all types of farm business arrangements, there is the potential for disagreements - good communication techniques must be practiced.  A joint venture could potentially be interpreted as a partnership with the associated negative income tax and liability implications.  Each party does not have the freedom of independence in action and decision making as in a sole proprietorship.  JV with nonprofessional partners will harm the reputation.

Joint venture (example) • Tech Mahindra – British Telecom deal:  Tech-Mahindra was earlier called Mahindra-British Telecom (MBT), and it was a joint venture between British Telecom and Mahindra & Mahindra. MBT was renamed Tech- Mahindra before it went public in 2006.  British Telecom has a 36% stake in Tech Mahindra. Mahindra group holds 51% in the company, while the remaining is with public.  Tech Mahindra has signed a five-year outsourcing deal with British Telecom (BT) that is expected to generate revenues of over $1 billion.

Joint venture (example) • Tech Mahindra – British Telecom deal:  Expected to generate revenues of over $1 billion.  This is the largest contract bagged by any software services firm in India.  TM will support BT’s planned growth of managed services to business customers around the globe.  It also provide services related to BT’s internal systems, processes and reusable platforms.  BT is already the largest customer for Tech Mahindra and contributes over 69% of its total revenues.

Discussion Outline

Build-Operate-Transfer (BOT): Definition BOT means that the client has a right to own the facility, while the third-party vendor builds the facility, hires the employees, gets the operation running for a certain period of time (usually a period of 3- 5 years) and hand over the operations to the client after the said period. During the contract period, the vendor and the client work closely with a senior client representative monitoring the operations. At the time of the transition, the vendor is suitably compensated. The BOT model gives an opportunity and liberty to Customers (offshore) to get offshore Center (OC) build and operated as per their specific needs …..

Build-Operate-Transfer (BOT): Definition BOT: BUILD   Set-up the facility and infrastructure, staff the development center, and establish knowledge transfer OPERATE   Manage the offshore organization: Program Management, Development, QA, maintenance, enhancements, and product support TRANSFER   Register a new offshore subsidiary for the customer, transfer assets, and handover operations

Benefits  Opportunity to capture market share rapidly or address a crying need in a short period of time  Advantage of not getting distracted while setting up a new venture  Being able to continue to focus on the organization’s core competency  Opportunity of accessing best in class skill-sets  Conservation of capital expenditure  Cost effective outsourcing during the initial period of build out and operating  Reduced operating risk and knowledge retention when related to sensitive processes  Ability to launch a complete end-to-end solution in short duration.

Disadvantages of BOT • BOT is not a easy method and requires high capability of promoters. • Not suitable for smaller projects. • The success of BOT project depends upon successful raising of necessary finance. • Transaction costs are high, they amount to 5-10% of total project cost • BOT projects are successful only when substantial revenues are generated during the operation phase.

BOT (example) • POLARIS & AIG :  American International Group Offshore Systems Services, Inc (AIG) had formed a joint venture with the Chennai-based Polaris Software Lab Ltd.  Polaris developed a self-sustaining software development centre in India for AIG.  Under the agreement, the existing infrastructure — comprising a dedicated centre in Chennai with around 100 engineers —spun off into a separate company where American International Group Offshore Systems Services (a part of the AIG group) is a dominant shareholder.

BOT (example) • POLARIS & AIG :  In terms of the business plan, the JV ramped up the scale of operations from 100 employees to 1,000 employees in around three years.  The JV company would look at offering services for other insurance companies as well.  TCS, one of AIG’s vendors, has a dedicated software development centre for AIG in Chennai.  The joint venture offers a variety of IT services, primarily looking at the development and maintenance of application software.

Discussion Outline

Outsourcing  Outsourcing involves the transfer of the management and/or day-to-day execution of an entire business function to an external service provider.  The client organization and the supplier enter into a contractual agreement that defines the transferred services.  Under the agreement the supplier acquires the means of production in the form of a transfer of people, assets and other resources from the client. Contracting and delegation of non-core activities to specialized third parties. Such as back-office processes (Accounting, HR, etc.) and front-office services like call centers, customer support, or help desk….

Reasons for outsourcing  Cost savings  Reduce time to market  Cost restructuring.  Risk management  Improve quality  Time zone  Knowledge  Customer Pressure  Contract  Focus and core competency  Operational expertise  Capacity management  Staffing issues  Catalyst for change

Criticisms of outsourcing • Lose of control • Quality problems • Slow response time • Can't understand foreign accents • Slow resolution times • Can't produce desired results • Reduced sales • Irritated customers • Irritated employees, unions, people within community

Outsourcing (example) • Wipro – Aircel ltd.  Wipro Ltd has entered into a 9 year, $600-million (Rs2,358 crore) outsourcing contract to manage Aircel Ltd’s IT infrastructure in 10 January 2008.  Wipro has taken on its rolls 100 employees of Aircel  The company expects to have a team of about 400 people working on the Aircel project over the next 12-24 months.  Wipro will help Aircel deploy applications such as retail billing and revenue assurance and integrate and manage them.

Outsourcing (example) • Wipro – Aircel ltd.  The new architecture will enable Aircel to launch the next generation of services such as 3G, WiMax and mobile TV.

Discussion Outline THANK YOU !!!

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