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
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

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

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

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.
© 2007 Peter Louis. All Rights Reserved Disclaimer 49

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

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


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Axon and IT Offshoring

The offshoring business case

Global player in the delivery of Business Transformation

© 2007 Peter Louis. All Rights Reserved

3. Axon & IT offshoring

© 2007 Peter Louis. All Rights Reserved 2

IT offshoring is the outsourcing of an IT task, function or

Global IT offshoring market forecast

What are the drivers behind IT offshoring?

© 2007 Peter Louis. All Rights Reserved 5

Growth rate of offshoring drivers over time, 2004 – 2006

70 Access to Qualified Personnel

Growth rate of offshoring drivers over time, 2004 – 2006

70 Access to Qualified Personnel

Perceived risks of offshoring, 2004 – 2006

Loss of Managerial Control

Perceived risks of offshoring, 2004 – 2006

Loss of Managerial Control

3. Axon and IT offshoring

© 2007 Peter Louis. All Rights Reserved 10

Who are the players?

© 2007 Peter Louis. All Rights Reserved 11

And cornered 75% of

Source: SEC fiscal year 2006 10-K filings

And cornered 75% of

Source: SEC fiscal year 2006 10-K filings

Big ITO wins in 2006, high

GM awarded more than $700m in IT

Source: sourcingmag.com, 2006

Pioneered offshore development

Agile, fast moving, strong track

Crossing over to $2b in annual revenue

Ranked #1 among the world's speciality

Revenue up 33% with outsourcing

Where is offshoring taking place?

© 2007 Peter Louis. All Rights Reserved 16

Source: AT Kearney, 2007

Brazil South Africa Indonesia

Source: AT Kearney, 2007

What do decision makers want to offshore?

© 2007 Peter Louis. All Rights Reserved 19

Buyer spending plans

PC Maintenance & Support

Data Centre Management

Web Hosting Onshore

Database Management Offshore

Application Maintenance & Support

Low Relative Focus High

Source: Diamond, 2006

And who are the decision makers?

© 2007 Peter Louis. All Rights Reserved 21

IT outsourcing decision makers

Low Relative Focus High

Source: Diamond, 2005 & 2006

Note: This sample is for illustrative purposes only

Note: This sample is for illustrative purposes only

• Emerging outsourcing centres • Service providers will continue to standardise,

3. Axon and IT offshoring

© 2007 Peter Louis. All Rights Reserved 26

© 2007 Peter Louis. All Rights Reserved 27

A business transformation consultancy that designs,

What capabilities does Axon employ

© 2007 Peter Louis. All Rights Reserved 29