Axon And IT Offshoring, April 2007

Axon and IT Offshoring

The offshoring business case

Global player in the delivery of Business Transformation

By Peter Louis
April 2007

© 2007 Peter Louis. All Rights Reserved

Contents

1. IT offshoring overview

2. Industry analysis

3. Axon & IT offshoring

4. Recommendations

5. Conclusions

6. Questions

© 2007 Peter Louis. All Rights Reserved 2

What is IT offshoring

IT offshoring is the outsourcing of an IT task, function or
service such that the task, function or service is
performed offshore in another country.

Note. Various other terms in use include offshore IT outsourcing (offshore ITO),
ITO offshoring, global sourcing and global delivery.

Source: SearchCIO.com
© 2007 Peter Louis. All Rights Reserved IT offshoring overview 3

Global IT offshoring market forecast comparison

Global IT offshoring market forecast

3% CAGR

200
180
180
160 150

140 Addressable
37% CAGR Market
$US 120
Billions Market
100
Expenditure
80 72

60
40
15
20
0
2005 2010
Year
Source: McKinsey, 2006

IT offshoring overview

What are the drivers behind IT offshoring?


Drivers behind IT offshoring

Growth rate of offshoring drivers over time, 2004 – 2006
90
"Very Important" or "Important"

80 Cost Reduction
% of Firms Citing Drivers as

70 Access to Qualified Personnel

60 Competitive Pressures
Business Process Redesign
50
Increased Speed to Market
40

30

20
Access to New Markets
10

0
2004 2005 2006

Survey Year
Source: Offshoring Research Network (Duke University), 2007

Drivers behind IT offshoring

Growth rate of offshoring drivers over time, 2004 – 2006
90
"Very Important" or "Important"

80 Cost Reduction
% of Firms Citing Drivers as

70 Access to Qualified Personnel

60 Competitive Pressures
Business Process Redesign
50
40

30

20
Access to New Markets
10

0
2004 2005 2006

Survey Year

Risks associated with IT offshoring

Perceived risks of offshoring, 2004 – 2006
60
Operational Challenges
"Very Important" or "Important

Lack of Acceptance by
50 Internal Clients
% of Firms Citing Risk as

Loss of Managerial Control
40 Lack of Acceptance by
Customers
30
Cultural Differences
Political Backlash
20
Political Instability

10

0
2004 2005 2006

Survey Year

Contents



3. Axon and IT offshoring

4. Recommendations

5. Conclusions

6. Questions


Industry analysis

Who are the players?


Global IT outsourcing 2006 vendor shares, Big Six – the incumbents

$4.1
$5.4
$17 In 2006, Big Six earned
a total of $54.6 billion
from IT outsourcing
$7 deals

And cornered 75% of
the market

$3.2

$17.9

Note: Accenture’s ITO revenues are estimated at 60% of total outsourcing revenues

Source: SEC fiscal year 2006 10-K filings
© 2007 Peter Louis. All Rights Reserved Industry analysis 12

Global IT outsourcing 2006 vendor shares, Big Six – the incumbents

$4.1
$5.4
$17 In 2006, Big Six earned
a total of $54.6 billion
from IT outsourcing
$7 deals

And cornered 75% of
the market

$3.2

$17.9

Note: Accenture’s ITO revenues are estimated at 60% of total outsourcing revenues

Source: SEC fiscal year 2006 10-K filings

2006 best managed global IT outsourcing vendors, top 10 – which
includes 8 new contenders

Big ITO wins in 2006, high
standards, highest CSS scores

GM awarded more than $700m in IT
services contracts over a 5-year period

Source: sourcingmag.com, 2006

2006 best managed global IT outsourcing vendors, top 10 – which
includes 8 new contenders

Pioneered offshore development
centre model for software delivery

Agile, fast moving, strong track
Big ITO wins in 2006, high record of delivering business results
standards, highest CSS scores

Crossing over to $2b in annual revenue

Well-established, structured
Received 2006 ITO Excellence methodologies grew income 38%
Award for work with Vanguard Car
Rental
Indian pioneer, Fortune Top 10 companies
among TCS’ valued customers

Ranked #1 among the world's speciality
offshore infrastructure service providers GM awarded more than $700m in IT
for two consecutive years services contracts over a 5-year period

Revenue up 33% with outsourcing
comprising > 38% of total revenue base
Source: sourcingmag.com, 2006

Industry analysis

Where is offshoring taking place?


Offshoring locations, top 5 – the incumbents

China

Thailand

India

Malaysia

Brazil

Source: AT Kearney, 2007

Offshoring locations, top 5 plus 9 new contenders

Russia

Poland

China
Czech
Republic

Thailand
Tunisia
Mexico
Philippines

Egypt India

Malaysia

Brazil South Africa Indonesia


Industry analysis

What do decision makers want to offshore?


Functions likely to be outsourced over next 12 months

Buyer spending plans

PC Maintenance & Support

Network Management

Data Centre Management

Server Management

Web Hosting Onshore

Database Management Offshore

Help Desk

Application Maintenance & Support

Application Development

Low Relative Focus High

Source: Diamond, 2006

Industry analysis

And who are the decision makers?


The corporate officers most likely to drive the IT outsourcing decision

IT outsourcing decision makers

VP Sales

Ops Mgr

CEO

COO

VP Ops

CFO

IT Manager

VP IT

CIO

Low Relative Focus High

Source: Diamond, 2005 & 2006

Companies who have offshored

Note: This sample is for illustrative purposes only
Source: InformationAge 2007; Silicon.com, 2006; InformationWeek, 2006

Companies who have offshored, have partnered with

Note: This sample is for illustrative purposes only

General offshore ITO trends over the coming years

• Emerging outsourcing centres • Service providers will continue to standardise,
- Philippines, Mexico, Russia, C Europe, Vietnam & industrialise & leverage pre-configured offerings
Malaysia will attract work at the expense of India - By 2008, 50% of new deals will include IT utility
• Remote Infrastructure Management Outsourcing component with infrastructure generating most
growth to exceed other infrastructure outsourcing interest from buyers & investment from providers
models - By 2008, more than 70% of new application utility
- Global market valued at $8 billion by 2010 offerings targeted at business units/ line managers
- From 2005, market will grow by CAGR of 61% - Business process utility, a major evolution of BPO
• Global delivery – use of IT labour continuing at a where highly standardised business processes run
rapid pace with vigorous competition on a unified one-to-many technology platform
- Global sourcing moving beyond search for cheap • Deal size, structure and complexity
labour to more complex deals - Offshore pure players invited to bid on deals > $30
- Pressure to reduce costs and improve profits million; deal sizes getting smaller
- Offshore providers seeking to better serve - Deals have more complex terms & conditions,
prospective clients by acquiring front-end penalties & incentives and multi-sourcing strategies
capabilities and consultancies as market matures, deals are being shared
• Nearshoring • Maturing market leads to convergence/collision
- Risk adjusted cost/benefit assessment continues to - Players, like telecommunication and financial
drive some buyers into the nearshore market services providers, have blurred the distinction
between IT and business services
Source: neoIT, 2006; Everest, 2007; Gartner, 2005; Tholons, 2007

Contents




4. Recommendations

5. Conclusions

6. Questions


Axon and IT offshoring

Who is Axon?


Axon’s raison d'être

A business transformation consultancy that designs,
implements and supports solutions that address
complex business issues faced by large organisations
who have selected SAP as their strategic enterprise
platform

Source: Axon.co.uk
© 2007 Peter Louis. All Rights Reserved Axon and IT offshoring 28


What capabilities does Axon employ
to meet its Mission?


Axon’s capabilities

Specialist SAP expertise
(across business functions)

Source: Axon.co.uk



Feanix Corp
Presence Presence
TUI

Source: Axon.co.uk



Feanix Corp
Presence Presence
TUI

Expertise & Shared
Service Centres

MyDruid Services

JSPC i-Solutions

Source: Axon.co.uk


What’s the current picture?


Axon’s addressable market, 2006

Axon’s share of the SAP market

$11,052

In 2006, Axon earned
$220 million

This represents less
than 2% of the £11
billion SAP market

$220
Note: Based on 2006 forecasted revenue for SAP and Axon

Source: Altium, 2006


Which locations are best suited to Axon?


Recap on what buyers want from ITO offshoring:
All the benefits but none of the risks, please!

What buyers want

Reduced Costs

Access to Qualified Personnel


Reduced Managerial Risks

Reduced Operational Risks


Recap on what buyers want from ITO offshoring:
All the benefits but none of the risks, please!

What buyers want What Axon needs to do
• Standardise & industrialise solutions
• Develop 1-to-m technology platform
Reduced Costs
• Reduce transition cost
• Reduce development & support costs

• Demonstrate SAP expertise
Access to Qualified Personnel • Mature ITO capabilities
• Employ industry best practices

• Demonstrate repeatability
• Demonstrate domain expertise

• Provide greater visibility of operations
Reduced Managerial Risks
• Protect IP rights

• Reduce transition risk
Reduced Operational Risks • Ensure greater operational reliability
• Provide global service delivery


What Axon must do, what the country must do

Axon’s requirements
• Standardised & indus solutions

• Develop 1-to-m tech platform

• Reduce transition cost

• Reduce dev & supp cost


• Mature ITO experience


• Demonstrate repeatability

• Demonstrate domain expertise

• Ensure greater oper reliability



Axon’s requirements Country’s requirements
• Standardised & indus solutions • Reduce transition cost

• Develop 1-to-m tech platform • Reduce dev & sup costs

• Reduce transition cost • Demonstrate SAP expertise

• Reduce dev & supp cost • Provide greater visibility of
operations
• Ensure greater operational
• Demonstrate repeatability reliability

• Demonstrate domain expertise • Provide global service delivery



Contents




4. Recommendations

5. Conclusions

6. Questions


Recommendations

Given Axon’s existing strategy and capabilities, the author recommends that Axon should:
Complement offshore delivery capability with a “nearshore” offering (e.g., Brazil, or Russia)
- Provides robust communications, common business practices, IP rights protection, high buyer visibility
- Enables a truly global service delivery network for the EU or the US to provide business continuity assurance
- Allows buyers to try nearshore before buying into offshore thus lowering barriers to accepting the offshore model
Actively focus selling efforts on key decision makers
- Although the CEO, CFO & COOs might control the purse strings, the key decision as to what gets outsourced
rests within the IT function. Axon should engage with key decision makers at the earliest opportunity
Accelerate partnering initiatives to become the “most favoured” partner for SAP ITO and BPO deals
- The age of the mega deal is over; Tier 1 providers are leveraging the strengths of their Value Net
- Axon needs to be seen as a valued partner, by Tier 1 providers and clients, where SAP is the platform of choice
Standardise and industrialise SAP offerings
- Organizations are seeing the benefits of adopting standard processes (wasn’t this the basis for SAP?)
- Standardisation employs best practices, reduces costs & minimizes risk
- Axon needs to standardise offerings on a 1-to-m technology platform and actively promote its benefits
Gear up for the demand for SAP application development & management services
- IT offshoring decision makers have identified these as areas where offshoring was high on their agenda
- Between ‘04 and ‘10, the global Applications Develop market alone will grow from $23 b to $50 b (Gartner, 2005)
- Axon needs to ensure that its proposition provides the capabilities to meet client and partner expectations

© 2007 Peter Louis. All Rights Reserved Recommendations 44

Contents




4. Recommendations

5. Conclusions

6. Questions


Conclusions

The offshore ITO market is competitive but one in which Axon can successfully compete.
However, Axon must:

Meet buyer expectations by developing capabilities to support propositions and ultimately
the brand promise

Engage with not only niche or Tier 2 / 3 providers (e.g., SAP) but also the Big Six, who still
dominate the market, and clients

Ensure that the Axon message is heard by the key decision makers who ultimately decide
what gets offshored and to whom

© 2007 Peter Louis. All Rights Reserved Conclusions 46

Contents




4. Recommendations

5. Conclusions

6. Questions


Questions

Questions?


Disclaimer

The information presented has been prepared using
sources believed by the author to be reliable and
accurate. However, the author makes no warranty or
assumes any legal liability or responsibility for the
accuracy or completeness of any information
presented. Moreover, the author accepts no
responsibility for the decisions made by readers.


Attachments

Attachments


2006 best managed global IT outsourcing vendors, top 10 includes 8 new
contenders

Rank Vendor Est. 05 Note
Rev
1 ACS $4.4b 2006’s top ITO contract, high standards, highest CSS scores

2 Satyam $1.1b Pioneered offshore development centre model for software delivery

3 Cognizant $886m Agile, fast moving, strong track record of delivering business results

4 Perot Systems $2b Awarded for superior ITO services

5 Infosys $2.2b Crossing over to $2b in Annual Revenue

6 Patni $450m Well-established, structured methodologies grew income 38%

7 TATA Consulting $2.9b Indian pioneer. Fortune Top 10 companies among TCS’ valued customers

8 HCL $757m Ranked #1 among the world's specialty offshore infrastructure service
providers for two consecutive years
9 Hewlett Packard $86.7b GM awarded more than $700m in IT services contracts over a 5-year period

10 Capgemini $6.9b Revenue up 33% with outsourcing comprising > 38% of total revenue base

Source: Sourcingmag.com, 2006
© 2007 Peter Louis. All Rights Reserved Attachments 52

Principal offshoring locations, top 5 – the incumbents

Country Differentiation / competitive disadvantage Locations

India English language skills & conducive business Bangalore, Chennai, Mumbai, Pune,
environment; low-cost, high volume of highly skilled IT Kolkota, Gurgaon
labour; urban infrastructure; attrition to US/Europe
China High volume of highly skilled IT labour; lack western Shanghai, Dalian, Xi’an, Shenzhen,
language skills; culturally distant from West; deficient IP Chengdu
rights protection; favoured destination for Japanese firms
Malaysia English/Chinese language skills, Western business Kuala Lumpur, Cyberjaya and
practices; low-cost, highly skilled IT labour; robust Putrajaya
infrastructure (e.g., “Multimedia Super Corridor”);
government incentives
Thailand English/Japanese language skills; low-cost, large volume Bangkok
of highly skilled IT labour, robust high-tech infrastructure;
favourable government incentives
Brazil Low-cost, large pool of highly skilled IT labour; cultural Sao Paulo, Rio de Janeiro, Belo
affinity with US/West; favourable time-zone for US; near- Horizonte
shore alternative for N. America


Emerging offshoring locations – 9 new contenders

Country Differentiation / competitive disadvantage Locations

Indonesia Large volume of low-cost IT labour; English language Jakarta
skills; low cost; western language skills
Philippines Very good English language skills, cultural affinity with US; Manila
large volume of low cost IT labour
Mexico US policies encourage investment; cultural ties to US; Mexico City
provides low-cost nearshore alternative for US market
Egypt High volume of engineering/IT graduates per year; English Cairo, Giza, Alexandria
language skills, vicinity to Europe
Czech Rep Foreign language skills; IP rights protection; preferred Prague
nearshore alternative for W. European firms
Poland Large pool of IT labour; low wages encourages migration; Krakow, Wroclaw, Warsaw
European firms preferred nearshore alternative
Tunisia Low cost IT labour; French language skills; nearshore Tunis
alternative for French-speaking Europe
South Africa Very good English skills; cultural affinity with West; Cape Town
Western business practices; low cost skilled IT labour
Russia Huge pool of highly skilled low-cost software engineers; Moscow, St Petersburg
cultural & geographical proximity with West; strong
government support; weak business environment

Outsourced services

IT function Description Countries

Application Custom and packaged software applications including India, Russia, Malaysia,
Development enterprise-wide solutions such as SAP, PeopleSoft, Brazil, Czech Republic,
Oracle and Siebel Israel, Thailand, Poland
Application Maintenance & hosting of packaged software India, Malaysia, Czech
Maintenance & Support applications including SAP, PeopleSoft, Oracle and Republic, Thailand,
Siebel Singapore, Brazil, Russia,
Poland
Help Desk Desktop/client applications such as MS Office, Lotus India, Philippines, Czech
Notes, Internet Explorer, Windows XP, Microsoft Access, Republic, Egypt
PC & network security
Database Management Includes database software maintenance & India, China, Russia,
configuration, monitoring & problem resolution and Thailand, Philippines,
security management for Oracle, UDB, MySQL, SQL Malaysia, Brazil
Server
Web Hosting Hosting of client websites & Intranet, site maintenance & India, Malaysia,
support, traffic monitoring Philippines


Outsourced services, cnt’d

IT function Description Countries

Server Management Automated server monitoring & resolution, server India, Malaysia,
performance management, server administration; server Singapore
backup & restore management, email administration,
enterprise application administration
Data Centre Management of core IT operations, hardware (AS/400s, India
Management IBM m/f, UNIX boxes), software (MVS TSO/ISPF, CICS,
DB2), and personnel (operators, system analysts)
Network Management Network management of LAN/WAN, network support, India, Singapore,
7x24x365 network monitoring and notification, traffic Malaysia
analysis, problem resolution, device management &
service
PC Maintenance & Virus removal, software installation, data recovery, India
Support hardware replacement, software/hardware upgrades


Companies who have offshored

Company Provider Offshore ITO service lines

Ricoh Satyam Software development (firmware applications that run copiers)

Burger King MindTree Software development (Specification Supplier Management System)

Volvo MindTree Software development and maintenance (dealer management system)

Dixons HCL IT infrastructure support and software development, system development,
application delivery, infrastructure support and maintenance
Whitbread CSC Application support

Threshers Xansa Applications management, IT operations and hosting for Threshers' SAP
financials, WebSphere, Business Objects and JDA merchandising applications.
Somerfield Tata IT helpdesk, IT infrastructure, servers and networks

Barclays Accenture Software development and support


Pound equivalents for selected items

Item Slide Pound equivalent

Global IT Offshoring Market Forecast: 2010 addressable market size 4 £107 billion

Global IT Offshoring Market Forecast: 2010 market expenditure 4 £43 billion

Global IT outsourcing 2006 vendor shares, Big Six – the incumbents: Earnings 13 £32 billion

Axon’s addressable market, 2006 – SAP’s earnings 35 £6.6 billion

Axon’s addressable market, 2006 – Axon’s earnings 35 £137 million

Applications Development market size in 2004 44 £13.8 billion

Applications Development market size in 2010 44 £24 billion

Note: £1 = US$1.6682, average exchange rate from 3 Jan 2000 to 18 Apr 2007

Source: Federal Reserve Board

Axon And IT Offshoring, April 2007

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