IN OR OUT? THE SHAPE OF IT OUTSOURCING IN 2015 FEATURING UNIQUE ANALYSES FROM THE HARVEY NASH CIO SURVEY NASHTECH GLOBAL CIO REPORT, VOL. 1
INTRODUCTION Welcome to the first in a series of CIO and outsourcing focused reports by NashTech. In a decade of massive technological disruption and global economic turbulence there has never been a more exciting, or a more challenging, time to be a CIO. Now at the forefront of delivering innovation and business growth, the role has changed drastically since Harvey Nash Group began its CIO Survey, which now has more than 3,000 senior IT leaders participating. We mined this deep archive of research and insight to determine the trends that influenced outsourcing in 2014. Here you can see our key findings at a glance, and in the following pages we provide evidentiary charts and extensive data on CIO outsourcing plans that we encourage you to use in your own decision making for 2015. KEY FINDINGS FROM OUR REPORT CIO intention to outsource has grown by 16 per cent since the depths of the recession in 2008. A third of CIOs will increase offshore investment in the next 12 months. CIOs have evolved their post-recession approach to offshoring, demanding more responsiveness and access to new technology skills, as well as cost savings. CIOs who outsource tend to be more global in outlook, work for larger organisations and are paid more. For 65 per cent of CIOs, their remuneration is directly linked to the successful delivery of offshore projects. However, project expectations are not being met for a third of all CIOs; offshore providers need to up their game. CIOs will continue to invest in outsourcing if their offshore providers are able to improve IT responsiveness, provide access to new technology skills AND deliver cost savings. 2
1. CIO OUTSOURCING INTENT REBOUNDS CIOs continued to outsource during the Great Recession, but at lower levels. As the economy improves we are now seeing a pickup in outsourcing once again. Immediately prior to the recession more than half of all CIOs year planned to increase outsourcing investment. From 2008-2010 when the global recession was at its most severe there was a sharp contraction in CIOs planning to increase spend on outsourcing. Yet during the worst of the recession (2009) still a third of all CIOs planned to increase investment in outsourcing most likely to take advantage of cost-saving opportunities. Since 2009, CIO demand for outsourcing has rebounded by a significant 16 per cent. Figure 1. CIO demand for outsourcing continues to grow 45% 48% 53% 53% 33% 36% 45% 45% 43% 49% Outsourcing to increase 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Percentage CIOs planning to increase outsourcing spend Source: 2014 Harvey Nash CIO Survey IT budgets increased at greater pace in 2014 as did outsourcing intent. Nearly half of the CIOs surveyed by Harvey Nash reported budget increases for outsourced activity. Looking to 2015, outsourcing demand is expected to grow. However, as can be seen in Figure 2, CIO demand for offshore-based outsourcing services has been slowing somewhat since 2011 and fell dramatically by 10 per cent into 2014. What remains are more than a third of CIOs (34 per cent) who will increase offshore investment in the next 12 months. Figure 2. A third of CIOs will increase investment in offshore projects 45% 31% 48% 43% 53% 53% 49% 41% 36% 33% 28% 31% 45% 50% 45% 45% 43% 44% 49% 34% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Outsourcing to increase Offshoring to increase Percentage CIOs planning to increase outsoucing/offshoring spend Source: 2014 Harvey Nash CIO Survey 3
During the recession and early recovery period, cost reduction was often the only offshoring priority for CIOs. However, the importance of gaining access to new skills and improving IT responsiveness to growth opportunities has become more important, especially for small and mid-sized business CIOs. Offshore providers that prioritise cost over quality appear to be less in favour; CIOs continue to demand cost competitiveness, but increasingly focus on enhancing IT responsiveness to business growth and accessing new technology skills. Figure 3. Outsourcing deliverables adapt to economic turbulence SMALL MID LARGE Cost reduction 2.85 2.97 3.30 Accessing skills 2.94 2.82 2.58 Responsiveness 2.87 2.88 2.61 Access to technology 2.30 2.35 2.16 Score indicates average importance of each factor on a scale of 1 to 5 IT budget < $50M small, $50M-$500M medium, > $500M large Source: 2011 Harvey Nash CIO Survey 4
2. THE DNA OF CIOS WHO OUTSOURCE Not all CIOs think alike, but what type of CIO is likely to think outsourcing? Using the in-depth data of the Harvey Nash CIO Survey we look at characteristics that set CIOs who outsource apart from their peers WHO DO THEY REPORT TO? When looking at the entire CIO population 32% report to the CEO, 19% to the CFO, 11% to the COO and 24% to some kind of higher-level IT head (for instance a group/ global CIO). These reporting line proportions do not change significantly when you isolate CIOs looking to increase or decrease their outsourcing spend, in other words the reporting line appears unrelated to tendency to outsource. What does appear to change is whether the CIO is a member of the operational board. CIOs who look to increase outsourcing spend are 15% more likely to sit on the board than those looking to decrease spend, suggesting that outsourcing is seen as a strategic issue that needs the attention of the top team. % of CIOs on operational board Planning to increase outsource spend 54% Planning to keep spend the same 53% Planning to reduce spend 47% WHAT ARE THEIR BUSINESS CHALLENGES? If in the past outsourcing has been seen as a way of saving money or cost cutting, the CIO Survey data casts a new light on the role of outsourcing. Regardless of whether the overall aim of the CEO is for IT to make or save money for the company, the tendency to increase outsource spend is broadly equal (49% and 50% respectively). We also asked CIOs what the main priorities of the board were. There was little difference between those CIOs who outsourced and those who didn t; their top priorities (operational efficiencies, improving business processes and delivering stable IT) were the same. This data suggests that CIOs increasingly look at outsourcing as a tool to support a wide variety of business initiatives, not just ones concerning cost. What does change, however, is what they outsource. Make money CEOs see software development as their main outsourcing focus; save money CEOs focus on data and infrastructure. Top three functions to outsource depending This visibility aspect of outsourcing also affects other areas for the CIO. CIOs who outsource more than a quarter of their IT budget are more likely to have their personal bonus linked to KPIs (61% vs 54%), suggesting that outsourcing can make it easier to measure the performance of both IT function and IT leader. CEO with make money agenda Software development (58%) Data centres (53%) Software maintenance (48%) CEO with save money agenda Data centres (51%) Software development (51%) IT infrastructure (51%) 5
WHAT INDUSTRY ARE THEY IN? We looked at which industries are most likely to outsource. At the top of the table tend to sit largerscale organisations with a wide user base, for instance governmental institutions and utilities. However, there remain plenty of smaller organisations actively working with outsourcers, and increasingly companies with smaller IT budgets use outsourcing to add further resource to their team; over half of CIOs with budgets of $1-$10m spend at least one-quarter of the budget on outsourcing. CIOs who have outsourced >10% of IT budget Q4: Education 40.01% Q4: Utilities 37.94% Q4: Broadcast/Media 37.66% Q4: Government 36.47% Q4: Energy 35.89% Q4: Technology/Telecoms 32.30% Q4: Financial Services 31.45% Q4: Business/Professional Services 31.15% Q4: Transport/Logistics 30.93% Q4: Manufacturing 30.53% Q4: Retail/Leisure 29.28% Q4: Construction/Engineering 28.77% Q4: Advertising/PR 27.27% Q4: Healthcare 27.15% Q4: Charity/Non-Profit 27.08% Q4: Pharmaceuticals 25.00% HOW DO THEY MANAGE THEIR TEAMS AND RESOURCES? CIOs who outsource tend to have a more flexible view of all their resources across the IT organisation. For instance they are also much more likely to look to increase flexible labour in their team. This flexible approach doesn t just stop at people; outsourcing CIOs are significantly more likely to encourage the use of Cloud technologies. Plans for outsource spend Plans to increase flexible labour Increase 56% 70% Same 32% 60% Decrease 22% 57% IN SUMMARY Encourages use of Cloud Whilst it might be impossible to pick out an outsourcing CIO from their peers just by the look of him or her, there are subtle differences. They are more likely to have a seat at the top table, as well as being personally held to account for their deliverables. They see their IT estate as a more flexible resource and scale their organisation up (and down) accordingly. Above all they, and their boss (who is most likely the CEO), see outsourcing as a tool that helps the company beyond just cost control, including helping it drive new sources of revenue. 6
3. CIO PERFORMANCE REMUNERATION IS LINKED TO OFFSHORE PROJECT SUCCESS In 2014 almost two-thirds of CIOs (65 per cent) were measured on the successful delivery of projects, including offshore projects far more than on supporting business innovation or other types of performance feedback. With CIO performance pay and bonuses heavily linked to the successful delivery of offshore projects, CIOs have a very personal incentive to ensure offshore partners meet expectations. Figure 4. CIOs require successful delivery of projects to secure their personal performance measurements However, too many offshore partners are not meeting the project delivery expectations of CIOs, and are therefore putting the CIOs reputations at risk. Small business CIO dissatisfaction jumped 8 per cent between 2011 and 2012, mid-sized CIO dissatisfaction rose by 4 per cent, and by 2012 almost four in ten CIOs from large organisations reported that their expectations were not being met. However, in 2013 improvements were made, and CIOs responded more favourably. Figure 5. Offshore project expectations not being met consistently for a third of all CIOs 35% 65% Satisfied Not satisfied 65% 49% 30% 29% 27% 18% Successful delivery of projects Support for business innovation Informal feedback KPIs for service delivery (e.g. up-time) Cost (of IT) per head Formal feedback (e.g. surveys) Source: 2014 Harvey Nash CIO Survey Source: 2013 Harvey Nash CIO Survey. % CIOs where offshoring expectations not fully met As evidenced in this report, a significant proportion of CIOs planned to increase their outsourcing investment, but it is clear that offshore partners have to up their game in order to deliver on CIO expectations of cost saving, improved IT responsiveness and access to new technology skills. 7
WHAT MAKES OUTSOURCING WORK? Outsourcing for today s CIO is clearly here to stay. Yet just as clearly it means navigating a shifting sands landscape of business imperatives, outsourcing vs. offshoring and rising demand vs. dissatisfaction. All of which begs the question: what really makes outsourcing work? We mined our archives of CIO and outsourcing clients feedback for the answers. "I went over to see how they were getting on and they said not very well but they had a very clear plan as to what needed to happen to improve things. That s what I like about working with the offshore team; they tell me how it is, but always have a very clear analysis of why there are problems and how to address them." COO, IMX Software "The strong work ethic and the culture of making things happen within budget were very obvious. The written English in all documentation was excellent and we mitigated any problems by having a UK engagement manager." CIO, Park Group Plc (Working) culture Some of the biggest frustrations, delays and spiralling costs have stemmed from a clash in working cultures where notions of time (not time zones) and accountability are mismatched. Success stories have a common theme of outsourcing partners with a genuine and demonstrable commitment to finding solutions for their clients and able to integrate with their working practices. An outsourcing provider unafraid to disagree with you from a basis of expertise and thorough assessment is more likely to become a partner in your solution. This means problem solving and pushing for optimum results beyond the initial scope and throughout development and implementation. Both sides are open and honest, which removes the them and us distinctions. We are one team building bridges and dealing with issues quickly and effectively to drive results. Head of IT, Vielife Transparency Cloudy or complex business structures, hidden costs and tip-of-the-iceberg status updates have long made transparency the bogeyman of outsourcing. Yet maintaining a clear, up-to-date view of successfully outsourced services is equally important, preventing you disconnecting with important functions and becoming mired in outdated legacy systems. Regular, straightforward reporting, and beyond this, a working practice of open communication, is a key requirement in any outsourcing partner. Go beyond their industry certifications and be comfortable that they can offer established business procedures, structure and pedigree. 8
[We had] a major issue with skills set availability [In NashTech Vietnam] There are many hundreds of developers they use a proven development methodology working conditions are similarly state-of-the-art. That has helped us to accelerate our ecommerce capability and delivery. CIO, Park Group Plc Stability and talent The irony of problems with churn and attrition rates in some popular outsourcing locations is that, as we have seen, outsourcing CIOs seek access to skills as well as savings. Yet in these locations, the diminishing pool of such skills is what drives rapid staff turnover, spiralling salary costs, on-going project disruption and variable output quality. Where outsourcing works, you will find a much higher, recognisable and more sophisticated emphasis on in-house talent development. The result is significantly greater retention and more highly skilled personnel that can meet your outsourcing expectations for quality and value if not exceed them! We over-designed [our] platform and asked the offshore team to build it without giving sufficiently detailed specifications the upshot was time and cost expectation gaps together we worked out how to get back on track the ODC now carries out a mix of work beyond what I thought was possible. Chief Technology Officer, Communisis Investing in set-up Previously an unsung hero, outsourcing has matured as approaches have evolved beyond the dash for savings, and ever-more CIOs recognise the value of early and on-going investment in a relationship. Quite simply, you get out what you put in. A true outsourcing partner will provide multiple opportunities for you to understand their operation, team and how they will integrate with your business. Bringing your teams together early and consistently will maximise the strength of both, not only improving output but also ensuring it is as required, not interpreted. Additionally, neither outsourcing nor offshoring is a one-size-fits-all model. Clearly defining your picture of success will ensure a well-governed solution that genuinely fits your organisation, be it wholly offshore or an onshore blend. Software really is a commodity, so if your process is robust there is no reason not to bundle the development work up and give it to someone else to do. But for it to work you need the right level of interaction between the UK and your offshore team we ve invested a lot of time and money in making the relationship work despite this the ODC is still much cheaper than delivering the work purely from the UK. Group IT Director, Weatherbys 9
CASE STUDY GLOBAL BEARINGS MANUFACTURER NSK OFFSHORES THE REVAMP OF ITS EUROPEAN ERP SYSTEM WITH NASHTECH An Ambitious Process Tony Doran, European Director of Information Systems at bearing manufacturer NSK, admits that he originally didn t want to pursue an offshore solution when identifying a supplier to help integrate their new global ERP (enterprise resource planning) software platform with its European systems. Doran said: We went looking primarily for an onshore, European-based partner but quickly found that virtually everyone has moved to an offshore model. So we broadened our search to look at an offshore solution though with a lot of trepidation. Making Offshoring Work NashTech s team in Hanoi, Vietnam, led the bulk of the development work. Doran believes that building close relationships between his own team and the Vietnam-based designers was key to the project s success. Doran said: NSK sent its senior design and technical staff to Vietnam three or four times a year and the Vietnamese also came here, so the teams saw each other every six weeks or so. That paid dividends. It s very important on a project of this scale to have one unified team and together we achieved that. If I was doing it all again, I d start to work more closely with Vietnam from the outset. The Real Prize The project was completed on time and on budget in October 2013. NSK has now started a postimplementation phase, which will involve working with NashTech on at least two further projects. Doran concludes: The process went very well and NashTech never left our side. It s very hard for a supplier to become a partner; it takes trust, respect and commitment on both sides. But NashTech has. They have worked incredibly hard with us. 10