Against the Grain: Bucking the outsourcing trend

The painting says it all. Dominating Vazir Sultan Tobacco's boardroom is an original print of the erstwhile Nizam of Hyderabad inaugurating the company's formation in 1930. Even today, the company exudes an old-world charm that its name conjures up. It's stone walls are a throwback from another time. It's a company where tradition is respected.

As it turns out, that's not the only thing that gets attention at VST.

Underneath its distaste for chrome, glass and anything loudly modern, VST's been busy pulling off an IT feat few other modern companies have attempted.

In an era when outsourcing has become a stock-in-trade practice, when managements -- fed on a healthy dose of strategy-speak and cost cutting -- are salivating over what they can outsource next, to insource seems contrarian.

But it's making sense to VST. The bold decision has fixed nagging problems and created a more agile company. In fact, the arrangement has worked so well that its IT team has begun to contribute to the company's bottom-line.

Strangely enough, this was all achieved by an accountant -- not a career CIO.

Outsourcing Heyday

An affiliate of British American Tobacco, the Hyderabad-based Vazir Sultan Tobacco (today known as VST Industries) manufactures cigarettes in the small segment (less than 60 mm in length). Their best-known brands include Charminar, Charms, XL Filter and Shaan. While the major part of the Rs 340-crore company's revenues flow in from cigarettes, it also has a presence in the non-manufactured and cut tobacco market. (India is the world's second largest producer of tobacco and VST appears in all tobacco-related market research studies). VST's 1,100-strong workforce manufactures 33,000 million sticks of cigarettes a year.

When Ratnakar Nemani, a qualified Cost Accountant, joined VST in 1992, he was shown a solidly vintage office with white walls, clean lines and tall ceilings. From there he watched a company in the midst of a transition. VST, which has been conversant with IT since computers were first introduced, found IT sucking at its feet. Over time, as the company grew more dependant on IT, every department became its own IT expert. Soon, VST was running all its operation across 20 offices in isolation. "We were struggling to get [data] for financials or decision-making," says Nemani, who is today CIO and SAP Practice Head.

An ERP running across various business processes was in order. But, there were doubts within the organization whether they had the in-house skills to pull off such a complex project. "Before the ERP, we had 12 people with expertise in the old standalone business applications. It was tough decision to upgrade and integrate the standalone business apps with the current group -- or go ERP with new people," Nemani says.

At the back of their mind, what worried management was an attrition VST couldn't solve. The idea of running an ERP with an IT team whose numbers waxed and waned was frightening. N. Sai Sankar, Finance Director and Company Secretary, remembers thinking that outsourcing was a good idea since "we noticed that people kept changing and we needed to ensure that we didn't lag behind with our [ERP roll-out] schedule." Outsourcing would also allow VST to concentrate on business. Hiring a vendor, back then, made sense all around.

So, in late 2001, the ERP got off its feet. Eager to get their act together, the teams worked swiftly. Nemani, who was part of the finance department then, was embedded into the ERP team. By April 2002, six modules covering finance and control, production and planning, sales and distribution, materials management and quality management were complete. "We took the big-bang approach," Nemani remembers.

A year later, Nemani was charged with VST's outsourced IT. He oversaw the implementation of the People Information & Payroll System and the Tobacco Inventory Management System. By 2004, VST had outsourced all its IT processes to three vendors and began enjoying 99.5 percent uptime (from 90 percent earlier).

These were good times, Nemani remembers. VST became a training center for his vendor's new employees (VST has asked not to disclose its vendor's name) and skill retention was easy. "The vendor-customer relationship became a partner relationship," he recollects. Carried by this momentum, VST's corporate office was moved to thin clients, resulting in increased security and a 30 percent cost reduction.

But just as things were going well, the first signs of breakdown appeared. Support started to suffer. Critical situations did not receive sufficient attention. Nemani remembers how the vendor struggled to hold on the people whose skills ran VST's operations. "One of our basic premises for outsourcing was that the vendor might have better retention policies. But our vendors faced similar problems," he says.

As the vendor replaced its people more often, Nemani says that a breach in process knowledge opened up. "When it comes to [ERP], it's not enough to have only technical know-how, domain knowledge is important in solving real-time problems. This was perhaps the reason why during some extremely critical times, we had less support than we needed."

Soon, routine processes like the printing of invoices began slowing down, holding the business to ransom as goods were stopped from leaving the factory. In a bid to get work done, members of each department, led by Nemani, began to takeover, learning to resolve ERP issues on their own. Nemani became stronger in his belief that they might as well run the ERP themselves.

In the meanwhile, poor support was taking a toll on VST's Tobacco Inventory Management Systems, an application at the heart of the company. The repercussions began to be felt among the 15,000 tobacco farmers who had associated themselves with VST and were crucial to business.

Then, in 2006, the Union budget, which was held on the last working day of February, required all companies to amend their taxes. "We had to revise all our invoices for taxes because our trucks had to leave the factory with new prices," remembers Nemani.

With no support from his vendor, Nemani was left to deal with the problem himself. "I was up till 2 AM at the factory and there were about 30 trucks lined up outside the factory. I worked 72 straight hours to ensure that invoices were made and that the trucks kept moving," Nemani says.

That was the last straw.

Against The Tide

His presence -- not only at crucial junctures such as these -- but throughout the project, made it easier when Nemani asked VST's management to let him bring the company's IT back in-house. "After they outsource, most companies don't bother. In our case, while 100 percent responsibility had gone to our outsourcing partner, my responsibility grew to 200 percent just to ensure nothing went wrong."

In that sense, Nemani says, he was always at the helm. Clubbed with the fact that outsourcing was not really an option any longer, Nemani asked for a chance to run it himself. "When VST cannot avoid risk by outsourcing, we thought that we could convert that risk into an opportunity," he says.

But that decision could not have been easy for VST's management: as bad as the situation seemed, changing horses mid-stream could have only been a daunting proposition. Factor in that they were going to entrust the backbone of their business to an accountant and Nemani's request must have seemed absurd.

To their credit, VST's management looked at the problem practically and showed boldness at a critical time. They gave Nemani the nod to bring VST's IT back inhouse -- but not before they put him through due diligence.

"When I offered to takeover IT, I was interviewed by Sankar over two days. He wanted to get to the bottom of: 'why do you want to get into IT?' He wanted to be sure because there were so many potential issues. I think I convinced him when I told him that he could replace me if I didn't do well in IT," Nemani says with a smile.

It was a bluff VST's management never intended to call, mainly because they were not going to risk their business -- and the additional Rs 1.4 crore that Nemani requested for -- on sheer bravado.

Nemani was categorical about his ability to deal with the insourcing move. And he pointed to his track record to prove it. "When the CEO asked me how I would manage, I told him 'I've already been part of this process for four years. We were already doing all of the work when they were not supporting us'," he remembers saying.

It helped that Nemani garnered support from his direct superior, Sankar. The Finance Director and Company Secretary says that he had seen Nemani's grow from a finance personnel to an IT evangelist. "He has been involved in the [IT] operation right from the beginning, so we thought an opportunity should be given to him. Initially, we were a bit skeptical, but his confidence helped," says Sankar.

That wasn't the end of it. Management knew it was crucial that Nemani had an IT team to back him up. Before VST had outsourced, it had an IT department that was 20 people strong. Over time their strength had dwindled to three.

Once again, Nemani took the road less traveled. He banded together a team made up of representatives from functional areas -- not IT professionals. Much like his own experience, members of other departments had also found ways to work around the vendors -- building expertise along the way. "They are not LOB (line-of-business) heads," says Nemani, "but business experts, the second or third level of each department. And even they had enough confidence."

His unusual approach, however, could cut one of either two ways: by using business experts who needed ERP training, the business could take off -- or the lack of IT training could spell disaster. By making business processes more important that IT, Nemani was opening up a new model: one in which IT, it seemed, would take a back seat.

Point of No Return

In the meanwhile, business was moving at full steam. To meet VST's competition head-on, management required IT to be more than a support function, they needed IT to step up its game. VST needed new ERP functionalities for treasury and risk management and the company also needed to bring the Tobacco division under the ERP. By this time, VST's ERP was five-years-old and was ready for an upgrade. "We wanted contemporary technology working for us," says Nemani.

VST's management turned to Nemani and pointed out that if he wanted to handle IT, he would need to bring it back in-house and upgrade to the next version of ERP -- at the same time.

To meet the new challenge, Nemani decided he needed to hire more people from outside -- and again the bias was on people with functional knowledge. "We had recruited people who had five-plus years of functional experience with one year of ERP exposure. In one instance, we recruited one person who worked at the Nagpur ordnance factory. He has many years of domain knowledge but knows nothing about ERP. We trained him in SAP, and his business processes expertise did the rest."

Nemani recruited six people and provided them with three months of intensive training in SAP. Hiring and training, he says, still worked out cheaper than the outsourcing package -- by almost 20 percent.

As Hyderabad's evenings got chillier, the city geared up for festival season. Dussehra and Id were round the corner and Diwali wasn't too far. While almost everyone logged off early to shop for the festivities, Nemani's team was putting in extra hours at work. It was make-or-break time and the team knew it. The slightest trip up could mean the end of everything Nemani had promised. "The whole company watched my team and I, wondering whether we were up to the job."

It wasn't easy, Nemani recalls. "October 17, 2007, was the last working day (given the holidays and the weekend) before the upgrade went up on Monday morning (October 22). At that point one of my team members quit, asking to be relieved immediately," Nemani remembers. As hard as it was, Nemani knew that the team would cope. "At VST, we do not allow people to hold work at ransom. Nobody is indispensable. As a CIO, I knew [the ERP upgrade] would work -- with or without him. I was sure we would manage with the in-house team."

Manage they did. Nemani's team successfully completed the upgrade. The new version went live at the appointed time, and everyone breathed a sigh of relief. But even as Nemani validated the confidence that was placed in him and his team, the last few days had taught him a lesson: attrition -- the problem that had crippled vendor -- had been insourced with the company's ERP.

In his endeavor to fight attrition, Nemani says he has support from across the organization. "We were all confident -- not only the CIO/CFO but also all the team heads -- that we are one team."

Nemani also made one thing clear with his vendor: that there would be poaching of each other's people for six months after the ERP was insourced. "Today, we have enough backup, so at any point in time, anyone leaving cannot really spell trouble," he says.

Today, Nemani maintains a good relationship with his vendor -- partially because they still handle other parts of the outsourcing deal. But, also because Nemani made it a point that there would be no bad blood between them. He isn't just taking the high road. He says he empathizes with his vendor's attrition problem. In fact, after a recent employee satisfaction survey, Nemani's outsourcer found that its happiest employees were those stationed at VST.

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