Tuesday, December 11, 2012

Business Impact Analysis and Disaster Recovery


The readers may be wondering how backwater a Malaysian author can be to still write about Disaster Recovery when we’re hitting 2013. Well, I figured that with the end of the world hype, floods and political events in Thailand as well as the Japanese earthquake and tsunami, the topic may just be in vogue again. Also, I’ve been working on a Disaster Recover improvement solution and felt that there are still a number of customers not sufficiently aware of what’s best for their organization.

What I really want to expound is the lack of emphasis on the practical side of acting on a Business Impact Analysis (BIA) result. I am assuming the readers are aware of a BIA and have had professionally trained teams walk through the exercise with you; where the CIO and business owners are able to identify IT services, applications and infrastructure that are supporting critical business function. Note; the IT piece of the puzzle is NOT critical unless the business part is.

The outcome desired is the reduction and mitigation of business impact, failing which a contingency is in place. So like all good IT Outsourcer, the vendor has to advise on what’s best for the business, and not how much money the outsourcer can make by overselling hot site synchronous data replication as the solution for all IT ailments.

The figure below illustrates “anecdotal” evidence of risk probability versus event categories (once readers pony up their SLA data to your’s truly and I’ve received at least 120 data points, I’ll be more than happy to provide an accurate statistical sampling of the probabilities), you will see that the largest occurrence of business disruption does not come from an actual Disaster incident but a Type A risk – failures due to operational weaknesses.


Why boil it down to operational weaknesses?

Simply; if you could stress test and quality assure your applications you will reduce the amount of catastrophic bugs that add extra zeroes into your accounting software, risking customer lawsuits as well as incidents where an overworked operator ignored a bunch of RAID drives with parity errors teetering at going blinkers on the 24/7 banking application.

I’ve personally went through an incident in my previous incarnation that led to a 48 hour email outage because of an operational change incident where no Disaster Recovery can salvage.

Type B risks are much easier to resolve because it is an elimination of single point of failures. For example, a transaction server running 1,000 transactions a second, each committing income to the company; but unfortunately, resides on a RAID-0 setup with only a single core switch and a single instance server.

Although rare in this day and age it may still be possible if you look deep enough into how your IT services value chain is setup.



The figure above is highly simplified but when you spread eagle the entire IT ecosystem, any one of those single point of failures can lead to a money losing outage of critical business function. It gets worst when there’s no parts sparing in place and the last backup tape has never been tested for restoration. Suffice to say, the organization won’t have type B risks if it didn’t have an IT outsourcer exhibiting Type A behaviour.

Type C risks are arguable; because organizations which have more direct relations with activities that are deemed “sensitive or sensationalist” may suffer from external or even internal attacks. Strangely, Malaysian and government link sites tend to suffer a spike in hacking or defacing attacks during international level football matches! (You will need to speak to the good folks at Malaysia CyberSecurity for the details)

Finally type D risks; the actual DR solution to mitigate a full blown disaster, is it necessary – YES. But don’t do it because it is mandated by the central bank, do it because you’ve done your homework. Before you spend money on the DR solution, you may wish to allocate your hard earned IT budget to mitigate the biggest risk to business operations. More importantly, find an honest IT Outsourcer that has your interests at heart to work on the solution together.

To summarize, mitigate Type A risks with a top notch IT Outsourcing team and adequate process adherence. Mitigate Type B risks by eliminating single point of failures, Type C risks with security hardening and lastly Type D, when you’ve done what you can with all of the above.

Tuesday, November 20, 2012

Why Insourcing IT will fail in Malaysia’s top GLCs


The rather controversial sensationalist title will hopefully create sufficient traction in readership, but before you pass judgement that this will be another negativity riddled diatribe; I promise you that I shall provide the answers to the problem statement alongside the issues, so here goes.

1) The CIO does not exist or sits 3 to 4 levels below the CEO, sometimes even below the CFO. Ultimately, the unit exists as a cost centre. Pretty much a death knell to any business unit, I’ve also heard of statements that IT should be used like “utility” and it’s a “commodity” – double ouch. Talk about watering down any semblance of pride that the CIO could have. He's no better than the cleaner's boss - that's commodity for you.

It also means that the KPIs are skewed towards punishing mistakes versus celebrating “value” that IT brings to the company.

The solution:-
Making the CIO pit boss will not change anything. Ultimately, you need dynamism, boldness and the aptitude to make IT relevant to the business. Being top dog means you get to call the shots, but if you’re shooting blanks you’ll be down the totem pole before you could say fore.

Get to know the business, learn debit from credit and understand how business impact analysis is not meant to figure out Recovery Time Objective; but Business Loss/Value Outcomes (BLO).

2) There’s no means (or political will) to measure BUSINESS VALUE from IT
You’ve heard it, seen it and some of you have experienced it, the Enterprise Architecture folks have probably spent the last 2 years producing box filled diagrams with multipoint arrows and squiggly shaped outcomes that must abide by some “Principle”.

But in all honesty, nobody took the time to “measure” absolute dollar value returns from IT. I snuck in “political will” because in reality Malaysians are a shy bunch. We don’t like to call attention to ourselves, and most of all, we do not like to declare success until success is achieved. Part superstition (“my wife needs to be 3 months pregnant before I tell the world”) part playing it safe (“I might get fired if I over promise, best aim low shoot high”).

But ultimately, with power comes great responsibility. The CIO needs to put down figures “before” the IT investment, and show numbers “after” the investment. It does not take rocket science to work out productivity improvements versus hardware and software spent.

The biggest farce I’ve heard from IT thus far is -> “I’m not finance, I do not know how to count” versus the biggest farce I’ve heard from finance “I’m not IT, I do not understand IT… so I can’t count it”

The Solution:-
Mr. CEO, you know what to do; it’s about time you find replacements for both the CFO and the CIO. You’re paying big bucks for folks to run your business, not rule the playground like a bunch of kids.


3) There’s no means (or political will) period
Heard this argument enough … “IT is not our core business”. OK. I hear you.
But when I ask them “What IS your core business?”, you’ll soon realize that there’s 5 different answers from 5 different board of directors and C level executives.

When the business is schizophrenic you can bet your bottom dollar that IT will be locked up in a mental institute soon enough.



The Solution:-
Read the definition of IT -> “Information” Technology!

Business thrives on information, and decisions are made based on accurate and timely information processing. Stop spending money on data centre expansion and LAN upgrades and start focusing on the kinds of data that you need in order for you to sieve them into information; cogitate those rough nuggets and turn them into intelligence, better yet; knowledge for business consumption. All the underlying infrastructure upgrades are a by product -> NOT THE END GOAL.

If you need tacit knowledge, convert them into videos and scenario roll play sessions, if you need real time data; plunk in visualization tools with real time sensors and hire decent programmers to put the vision together.

In summary, CIOs and CTOs need to be at the driving wheel -> provided that they know what to do; more importantly, stop treating them like cost centres or like the proverbial saying – you are what you’re expected to be. Secondly, businesses need to “get real” with IT, when money is spent, return is expected, stop counting pennies and focus on business value. Lastly, the business needs to get their acts together, yes; easier said than done but there has to be an overarching leadership to drive the objectives through.

Sacred cows are meant to be slaughtered. They make good steak.

__


You’ve probably noticed by now that the same reasons also contribute to why Outsourcing IT fails in Malaysia… if you did, there’s hope after all for IT in Malaysia J  

Saturday, November 17, 2012

Connecting the Dots within the Business


We’ve played it before while growing up, connecting the dots. Searching for direct value for the organization applies the same principles, the business has to work out which business activity directly impacts another activity whilst being enhanced or weakened by the ones prior.
Figure 1 - Simple Connect the Dot

Unfortunately, the realities of most organizations are highly complex interchanging inputs and outputs which can only be described by the figure below.
Figure 2 - Reality of Connecting the Dot within the Organization

Like all puzzles, one needs to begin, well, from the beginning and identify the end in sight. This is where business philosophy takes several stands.
  • The Vision first
  • The People and Values first
  • Customer first

These are all well and good, but businesses by its very nature is a production engine, to create either products or services. So I take an extremely practical approach of working out how the organization’s value chain works from production to ultimately customer consumption. Porter (1985) worked it out as Value Chain, and it was soon focused towards the left -> supply side, where we have a series of findings under Supply Chain Management. More focus also occurred on the right of the Value Chain and we have Customer Demand Management and Customer Relationship Management. In the middle, there’s a litany of literature on operations efficiency, management and quality principles.

Needless to say, because of the vast array of knowledge, the company or rather the people within the organization struggle to avoid reinventing the tacit knowledge of running a great company.

Therefore, like all manner of problems that are too large, we have to break them out into chunks. But more importantly, create an immediate feedback loop to understand how one department’s actions create positive or negative karma throughout the organization. Especially those sowed by individualized performance indicators that result in a zero sum outcome. 

An overarching intelligence needs to exist in order to coalesce the corporation’s tacit knowledge and ensure its perpetuity, and this lies within the organization’s leadership and the efficiency in cascading and reinforcing findings. 

Thursday, November 15, 2012

Searching for the city's “Value Flow"

We’ve established earlier that the primordial city latches onto an elementary level of energy, i.e. food through the agriculture, the rivers, oceans as well as valuable metals in mining towns.  Initially there would be a swarm of smaller companies leeching off the primary flow of resources into manufacturing engines; unfortunately, not all of these companies will survive and oligopolies quickly take form when weaker competitors die off, leaving a few primary players to completely dominate the source.

Take away the source of “energy” and we have a stark reminder through the island of Hashima, Japan (HQ to Bond’s nemesis in Skyfall), once the most densely populated area per sq/km with 5,000 people living within a 150m x 450m area due to its coal mining operations; Hashima was soon abandoned when coal ran out in the 1970s.

20121029-173446.jpg
Island of Hashima, Japan

Stacks
Inside the abandoned city
For more on the city, checkout this blog by messynessychic.

In the modern city, the whole notion of living off a single “source” of value will lose relevance. Manufacturers can buy raw materials from other cities, and food as well as supplies can be shipped from locations where it is cheaper to grow and produce.

The following are crucial criterion in order for a city to succeed and grow.

A) The final products and services need to be exported (internal demand is insufficient)
Arbitrage has to happen – where revenue and margins returned outweighs the cost of production and manufacturing of the product. We use the term product interchangeably with services; and the raw material for services comes from people of a certain skill set to deliver the service at the quality required to succeed.
Only then can ancillary services survive to support these larger production and manufacturing businesses because they live off the excesses of the manufacturing process. More importantly, it is crucial for the ancillary services to make the primary businesses successful.

B) Decision nerve centres generates gravity between businesses
Modern cities continue to exist sans natural resources because they are headquarters, regional centres and/or country representative branches. The city then becomes an aggregation of decision making nerve centres of various productions and manufacturing organizations; and the interplay of communications and consumption between the businesses then sustains value within the city.
This is essential as the economics of logistics and communications allows cross selling of services to occur more easily. The analogy of nerve centres are used because nerve cells are clustered and strengthened the more the brains computes and uses a particular area of the brain.  
In short, people come together because everyone is there!

C) Achieving the Critical Mass of Flow
Which brings us to a conundrum, how do we achieve critical mass; within the context of artificially created cities when nothing is there in the first place; taxation policies, cheap office buildings, great logistical and communications infrastructure comes to mind including the required people power to manned the fancy empty buildings. But having all this secret sauce does not make a good restaurant without good marketing; not to mention the key to any real estate investment – location, location, location.

So city buildings have several options:-
  • Create one as an extension to the existing city, allowing the flow of value from the current city to be enhanced with the new. The Iskandar region in Johor, Malaysia is a good example as Singapore can become the staging ground to international customers. Assuming again, that the macroeconomics of Singapore can survive the tribulations of the recent economic crisis. More importantly, the satellite city needs to add symbiotic value instead of existing as a parasitic leech.
  • Stands independently and hopefully becomes a beacon to businesses and consumers. For the consumer we see entertainment and retail centres, and for businesses, the traditional attraction of the nation’s natural resources comes to light.
Regardless of the options, the global economy needs to be growing before value can flow into a new location, naturally immediate economic energy needs to start from the nation of the city. Otherwise it begets an even crucial question, would a multinational choose to relocate their business from an existing mecca to a new one considering that there are no surpluses to spill over.

D) Supplying the Soul of the City
As we strip away all the outward fittings of high tech building infrastructure and logistics, what remains are the people. The city needs to be cognizant on the type of talents that needs to populate the new environment. Are we creating and aggregating low end factory workers or are we producing planners, managers, technologists, engineers and innovators. If that cannot be sourced from the locale, the city has no choice but to lower immigration laws and allow influx of foreigners that exhibit the qualities required for the city to succeed.

It is the soul that allows value to be created, and foremost, value that are generated without resorting to siphoning the natural resources are the most admired. This can be seen from the fields of biotechnology, medicine, electronics and information technology. If the country is still stuck in the rut of manufacturing, then it must persist to continuously shave off waste and innovate to produce products that are more efficient, enduring and better than the competitors whilst being economically more competitive. The whole notion of productivity, discipline and anti-corruption is fundamental to the issue.

E) Working against the tide of technology
We have seen hints of the surging technological tidal wave in the form of teleworkers. Organizations that outsource work to individuals versus corporations; this creates a negative flow that pushes against the aggregation of people into city centres as organizations no longer require an army of individuals to be physically location together for productive work to occur. Payables processing happens offshore while receivables are directly debited from customer accounts. Payroll and tax administration gets reduced down to mere mouse clicks while legal firm from 5,000 km away tightens up the contracts.

The city of tomorrow may be smaller and stretched out versus sky scraping monoliths that extend the corporate ego. Organizations will migrate to building campuses and research centres as the focus shifts towards innovation versus processing administrative work. We’ve seen this happened successfully to give birth to the Toyota Prius as they crammed substantial workforce within a wide open space – “Obeya” to heighten communication and productivity.

To end, we covered 5 criterions for success, the ability to export products and services generated from the city, creation of a nexus for trade to happen through establishment of decision centres i.e. headquarters, attaining critical mass, supplying talents and lastly working with technology and shifting the paradigm of tall skinny buildings. The table below underscores the evolution of tomorrow’s city.

Analogues
City of Today
City of Tomorrow
Manufacturer Plant
Processes and Produces Products
Outsourced to cheaper nations, with clear build and quality specifications
Head quarters
Processes Administration
Showcase for customers, vision of the company’s potential and future. A mecca for business to occur.
Research Centres
Small cramped underfunded facilities that double as a warehouse
Campus wide facilities that co-exist with top management to allow seamless communication and flow of ideas

Thursday, November 8, 2012

City Building and the Outsourcer

 After spending some time with folks from Iskandar Region, Malaysia’s effort to create a booming and global Southern region through planned city development; my thoughts ruminate around how exactly one catalyses a parcel of land into a great city. More importantly, what role does the outsourcer play in realizing this vision?

Rummaging through the annals of history, city states seem to arrive rather serendipitously, and once created perpetuates almost indefinitely unless there’s a cataclysmic natural event which decimates the entire population.  Even war couldn’t smite the likes of London and Paris. So why the allusion to serendipity; primarily because it all began rather logically but then magically takes a life of its own within a short course of 20 to 50 years after several hundred years of relative organic growth.

To begin, the primordial city was chosen due to the wealth of the land. Usually where the river meets the ocean and massive alluvial lands for farming and domesticating animals exists or to some extent mining towns. Population grew and they develop ever refined niches of value throughout the chain of raw materials from production to consumption; continuously turning natural resources into goods and secondary supplementary/augmentative activities that allow the producers and consumers to exist in relative comfort.
If one would zoom out and see the big picture, we are nothing more but ants attracted to sugar; sugar being available natural resources for sustenance. I call this the Genesis period. Life was simple and the dots which connect the value chain of respective land dwellers are close together. A tanner lives beside an animal farm and he’s a stone throw away from the market because logistics and infrastructure were rudimentary.

The second evolution of the city is the trading ports; a natural extension considering as the city grows, goods need to be sourced from farther away as local resources and land slowly depletes, as well as the benefits of comparative advantage mooted by David Ricardo in 1817. Interestingly, trading ports have a notorious nature of flourishing as an outcome of black markets and crime; goods were seized en-route or simply went missing during offloading. So it becomes a natural order for businesses to setup shops that ply these goods and factories as close as possible to the ports as black market items sold many fold more expensive than legalize goods.

Within the 20th century, we see governments across many nations attempt city building on steroids; artificially sprouting mushrooms of steel and concrete with words like “hubs” plied, typically surrounding manufacturing, financial services, education and entertainment. These “artificial” cities have a certain set pattern of growth and stagnation. More importantly, it attempts to attract the “ant” in us with monetary wealth; the sugar of today.

I ask myself, can a city generate wealth without natural resources? So here’s what I’ve observed from these city building endeavours

a) Manufacturing
The hallmark of the industrial age and humbly, one of the most crucial pillar of nation building for any country; is the ability to harness natural resources and refine them into goods that fulfils needs and desires.  Policies like tax breaks for more advanced foreign companies can catalyse initial growth, but it does not necessarily create value for the populace other than salaries and services to support factory workers, managers and the factory itself. The flow of money is obvious but are mere droplets compared to the torrents of wealth should one owns the intellectual property of the product. Primarily because foreign companies repatriates the bulk of profits back home. Every nation hits a manufacturing ceiling once natural resources runs out and salaries increased to the point where it is no longer economical for the manufacturing centre to function.

b) Gambling and Entertainment
Names like Monaca, Macau and Las Vegas comes to mind, and recently we could also add Singapore into the category.  A certain level of romanticism is latched onto these cities, and we all love the back story of how it came to be. Ultimately though; despite its seedy origins, people arrive time and again because of the lure of gambling pay outs.  With a country like Malaysia, where the image of an Islamic state is crucial for political survival, it has little choice but to focus towards the family spectrum with the likes of Legoland and other theme parks in the works. Quaint, but does it directly tug at your soul’s yearning for money generating potential – likely not. Would it be the primary wealth generator for the city – likely not again.

You may be arguing that Disney generates USD11 billion in their parks globally (2011); but the fact of the matter is, Malaysia does not own the Disney brand so we’re back at repatriating profits.

c) Purpose built Government Centres
Grandiosity comes to mind, huge swaths of lands and artificial lakes carved out with the hope that beauty shall make bureaucracy more palatable – I digress. Herein lies the rub with government centres, they only grow as fast as the country’s ability to collect taxes. The city will largely be manned by government workers and the ministries are also fuelled by government budgets so we will not see explosive growth, but rather half empty government buildings waiting to be “repurposed” once the budget hits a deficit too large to politicize away.

d) Financial Centres
Financial centres are strange creatures to me, especially the whole idea of plunking a bunch of bankers in one location and voila you have a financial centre. Global financial centres like Amsterdam began as an offshoot of trading. You need bank guarantees, loans, trading notes and insurance i.e. means to “facilitate” monetary and business transaction for traders - simple.
So sans the organic way of supplying services for traders (which must exist first), you’re left with exchanges that trade financial products and centres with the objective of “generating capital” for local and foreign businesses as well as profit for investors. For example, countries with trade surpluses tend to have low cost of funds for international financing (Although today, it’s more likely monetary policies that artificially lowers the cost of funds e.g. Japan). 

Financial centres require strong legal systems to solemnize contracts, reduced or zero government taxation to move money in and out of country as well as a bonus, an exchange to allow trading of financial products with hopefully low rates and easy means of transaction. Sadly, the way governments outbid each other in this regard is not unique; once you get rid of taxes, governments are left with relaxing regulatory controls as well as allowing for some level of transactional opacity.

This in turn creates room for “financial innovation”; i.e. financial products that can be illegal in one country but clearly acceptable at the location of trade. Post Global Depression 2008, it’s an approach that most regulators will cringe at. 

Having said that, not all forms of financial innovation are bad, Malaysia for example has one of the largest placement of Sukuk or Islamic bonds; and offer services for generating capital that are permissible through Syariah (Islamic law), appealing to investors from the Middle East. Alas, the question arises again, is this enough to catalyse a great city? You tell me. Is there a great Islamic financial district in existence today?

To summarize and break down the thought process, a great city is a series of cascading outcomes; you cannot proverbially place the cart in front of the horse.
1)       A city lives off consistent sources of massive wealth that not only sustains its denizens but compounds growth. It is only as strong and vibrant as its largest income generator.
2)       Once that is established, people will come, more importantly; entrepreneurs -> business owners that create and catalyses even more value through the initial source of wealth must exist.
3)       To assist no. 2; there needs to be proven and consistent rule of law, easy means of funding and establishing the business as well as the ability to connect business owners with customers -> Productivity from Day 0
4)       Abundance of economically viable “people resources” with the skills to execute the business
5)       Cheap if not free telecommunications to rapidly accelerate the flow of business
6)       To a smaller extent, some might say negligible, a low cost base for establishing the business foot print -> logistics, electricity and rental costs etc.

Element no. 1 is humbly the hardest to envision, create and nurture. The same old strategic thinking cap applies; what’s the differentiator of one city hub versus the next? What’s the barrier to entry? Etc.

You may be wondering about the Outsourcer by now, well; outsourcing at its core augments one or more pieces of a business. Simply, the outsourcer’s value is derived from being cheaper and better or enhances business value (brings better ROI) compared to having the entrepreneur build the function from scratch.
We’ve also established that each city needs to have the means to generate sustained wealth, be it new or old. So by extension the outsourcer’s best bet at being successful, is the ability to augment the business that feeds off as well as generate the main arterial sources of income.

I’d like to think of it as being the cybernetic implant augmenting the “arm” of the business.
In developing cities overnight, ala Iskandar Malaysia, Dubai, Pudong in China, the plan often begins with extensive capital investment on office space and public infrastructure. That is all well and good but the point that is missing is the secret sauce -> the miracle making cities great are entrepreneurs!

The individual who saw the opportunity to open a tannery beside the cattle farm; and the banker who discovers the populace’s latent innovative potential and unleash it through venture capitalism.

The entrepreneur connects the dots of value within the city, the entrepreneur then innovates to produce products and services that not only make these connections stronger but uncovers arbitrage to profit from. Every instance where business value is generated, it gets ploughed back into the city and the city grows!
The outsourcer must become a business cybernetic scientist that makes the entrepreneur better; hence, the outsourcer’s destiny is intertwined with that of the entrepreneur.

In order for a plot of land to leap the chasm of backwater subsistence and transform itself into great city therefore requires great entrepreneurs and great entrepreneurs require even better outsourcers. 

Thursday, October 18, 2012

Caveat Venditor


IT Outsourcing is an exciting business in Malaysia, captive IT outsourcing organizations like Felda-Prodata, iPerintis, iCIMB and VADS collectively generates well over half a billion US dollars in revenue. As far as global multinationals are concerned, we have the major stalwarts likes IBM, HP, CSC, Dell, SAP and T-Systems offering their wares to financial services and oil and gas sectors; the top two most lucrative sectors within the Malaysia Economy.

According to the Malaysian government’s Enterprise Transformation Program (ETP), IT Services and Outsourcing contributes 37% of GNI or RM7.215 billion in 2009 with a projected growth of 6.8% yearly, bringing the estimates to about RM9 billion by 2012 (approx. USD3 billion).

Although many foreign vendors and IT Outsourcing suppliers are keen on getting into the Malaysia market, a number of hidden costs needs to be accounted for in order to make a respectable margin and I’ll be sharing with the readers some of my experiences within the last 10 years.

The scenario that I’ll be discussing is a straight up open or by invitation only tender of competitive bids; and large government link organizations such as PETRONAS (a Global Fortune 500 company) and Maybank (Malaysia’s No. 1 bank) are extremely supportive of competitive bids to attain the best IT services at the best price.

The devil however, lies in the details.

The following are the typical cost components associated with participating and executing an IT Outsourcing contract in Malaysia. The scenario applies for large enterprises as well as government link organizations. There seems to be a lack of new paradigm when applying these cost components; so unfortunately for the IT industry, customers have adopted paradigms from the property/construction industry.
My personal debate is that a number of these cost elements are irrelevant, but unfortunately non-negotiable from where the customer stands.

1.       Buying the Tender Document (Not refundable)
The nominal sum is anywhere from RM100 to RM5,000 (USD30 to USD1600). The rational is that the customer had to spend money preparing for the tender specifications.

2.       Preparing, Printing and Shipping the Tender Proposal Document.
Tender documents tend to be divided into 2 parts, Technical and Commercial. These need to be sealed separately and mixing the details together can disqualify the bidder. The catch is, most of the time it needs to be in physical paper printed form, and yes, in multiple copies. The most painful tender that I’ve heard off, required 21 copies in total, while my personal experience averages about three to five copies of each document or 10 documents in total. So we’re talking about massive administrative work within a very short time frame!

3.       Bid Bond (A banker’s guarantee - Refundable after the tender has been awarded)
Cited as a reason to filter companies that does not have the financial strength to carry through the project, it can be substantial. The amount varies, from a flat fee of say USD25,000 or 1%-3% of the project budget. Here’s a hint, I use it as an indicator of the budget because of the percentage. The larger the banker’s guarantee, the larger the budget; but do use your own discretion and proceed with caution, lest you overprice your bid.

The challenge to vendors is the lengthy tender period from RFP (Request for Proposal) to actual award, typically anywhere from three to nine months. Substantial investment interests could have been earned from the bond.

4.       Performance Bond (A banker’s guarantee upon award - Refundable after the outsourcing contract scope has been performed)
This is treated like a piggy bank that customers can dip their hands into to penalize the vendor should they underperform. The trend that I am exposed to is a 5% figure of the overall contract cost but this can vary. Again, this places a strain on cash flow as you need to pony up at the beginning of the engagement.

5.       Service tax of 6%
This may seem obvious, but during negotiations, the customers in Malaysia have a tendency to compel the vendor to reduce the bid price to negate the 6%. The only rationale that I can think off is a negotiation technique to immediately shave something off the top.

6.       Escrow Services
These are payments a 3rd party provider that maintains a product’s source code in the event the vendor goes bust. Relevant only to bespoke software development scenarios, and not particularly as yet, although I’ve seen a situation where the customer insisted on it.

7.       Premiums from Insurance
Again, the construction industry paradigm is heavily adopted here, particularly requests for Public Liability Insurance, a need that is irrelevant within a software development project that is only use in house. So the risk of “public” users being “hurt” by the software is extremely rare. There is however, a growing trend of requesting for Professional Indemnity Insurance, covering liabilities equivalent to the outsourcing project value or more. The premium unfortunately, can be prohibitive.

8.       Risk of not getting paid when contracting through a 3rd party
The question is whether you as a vendor should “prime” the contract. On one hand you expose yourself to all the risk as the primary contract participant; however, you could also fall prey to situations where the prime does not pay you as a subcontractor, citing customers not paying as a reason to renege.

Although this may be true, you are legally entitled to go after the primary contractor; sadly, if the situation gets really bad, the primary vendor tend to file for bankruptcy. So it is highly important that you pick your friends carefully within Malaysian shores.

9.       Margins at risk
a.       Accepted Liabilities
Depending on the customer, this can be a negotiation point. Some have chosen to disqualify vendors that choose not to comply with the terms of liabilities. The advice is to qualify first and negotiate the terms later once you’ve successfully been shortlisted. Values vary from 50% to 200% of the outsourcing project price should you fail to deliver the project.
b.       Penalties for lateness, delivery completeness, service level breach
There are usually a daily prescribed rate, which can be anything from 0.5% of the project cost per day or a flat rate of several thousand ringgit. The challenge here is negotiating for a ceiling and a penalty figure that makes sense for the customer. A service level breach is more straight forward, dip below the guarantee, and you will be accorded penalty points which can be translated to monetary terms or more free services in man days.

To end, while the list may not be conclusive this represents the major hidden costs that needs to be accounted for.

As a vendor we like to argue that contracting terms should not be punitive, and relationships are built upon trust, but the realities of Malaysian IT Outsourcing can lead to vendor cost overruns for those who are not prepared. Sales would divert the risk to the delivery team for the sake of meeting numbers, but suffice to say the business will not last long when it bleeds from winning a Pyrrhic IT Outsourcing Contract.

My advice for Malaysian customers is that it’s high time to review some of the terms, as it unnecessarily heightens the risk of failure from a vendor cash flow standpoint; secondly, it also forces the vendor to pass the risk back to the customer through the prices.

So I wish everyone good luck on your respective IT Outsourcing endeavours, Caveat Emptor e Caveat Venditor!

Tuesday, July 31, 2012

Program Management of IT Investments

Every single IT investment that goes into the company falls into the following simple categories.

Does it ...
1) ...DIRECTLY increases revenue (increased economies of scope, market penetration, deepening of wallet share)
2) ...DIRECTLY clamps down on expenditure (increased  economies of scale, cheaper components/raw material)
3) ...INDIRECTLY do one or more of the above  [(economies of scale+scope)/no. of derivation]
4) ...reduces immediate risks (customer retention, early warning from direct market exposure etc.)
5) ...immediately improves your brand presence and internal culture
6) ...immediately improves efficiency (which can fall under c), however to be specific, efficiency that comes at a cost)
7) ...immediately improves agility  (again, can be part of c))

Of the 7, no. 5) is the hardest to achieve as well as the most sustainable.

Unfortunately, all investments suffer from 2 hidden costs
a) it requires tender loving care... a transaction cost for upkeep, monitoring and management  (from Williamson, 1985 and Coase, 1937)
b) it can be contraindicative to other invested activities.

For example:-

Investing in risk management solutions eat precious time that could be allocate for other duties, or worst, creates bureaucracy which kills 6) and 7)
Investing in agility means reduced control, thus increasing risks.
Investing in 1) increasing economies of scope usually means higher expenditure on high value skill sets or a particular tool. While clamping down on expenditure with low value commodity components means lowered quality.

So do select well, and understand how the numbers impact one another. Consolidation and efficiency for the sake of doing it leads to a stoic, detached organization from the customer. The key is still -> does all of the 7 activities add value to the customer, and is it worth it?

Sometimes companies self sabotage themselves by undertaking 2 activities that are from 2 opposite ends of  each other. Implementation lethargy kicks in and the company wonders why they haven't achieved the intended goal.