Outsourcing Strategies and Challenges

Linda Cohen

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Outsourcing Happens Take Control or Be Left Behind

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Key Issues
1. What are the current trends in outsourcing? 2. What should be externally sourced, and what is the risk? 3. How will IT organizations skill up to multisourcing in the future? 4. How can you assure quality service in a multisourced enterprise?

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Outsourcing Generations: Historical Overview

Cost Reduction Business Value Transformation Speed & Scale

IT Reduction

IT Expansion

IT Access
Web Services

Mainframe
Time Sharing

Client/Server PC

ERP

ASP Internet

Facilities Infrastructure Management Outsourcing

Applications Outsourcing

Process Outsourcing

1970

1980

1990

2000

2010
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Disruptive Technologies

Future Prospects: The Bottom Line

Consulting 4.1% CAGR
40

Software Maintenance 7.1% CAGR

Gross Margin (%)

Hardware Maintenance 1.7% CAGR

20

Business Process and Transaction Management 9.1% CAGR

Education/ Training 5.6% CAGR

IT Management Services 8.4% CAGR Development and Integration 5.4% CAGR

6 8 10

Relative Growth: CAGR (%) 2000-2005

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To Reduce Costs, SPs Must Invest: To Invest, SPs Must Be Profitable

Start
Service provider must Is the Deal continuously reduce Profitable? cost per unit of service Labor Technology NO and Processes YES Margins

To reduce costs requires investment $

$ $ $ $ $ $ $ $ $
Investment Money

Profit
$$ $ $ $

Ensuring long-term investment requires adequate profitability

No incentive for SP to invest Investment stops SPs margins shrink further Service quality deteriorates over time Enterprise client suffers SP must either raise prices or terminate deal

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Mass Customization Rules

Yesterday Customized SingleCompany Processes Today Semi-Custom Process by Company Semi-Custom Code and Custom Integration Semi-Custom Infrastructure Tomorrow Standard Horizontal Process by Vertical Noncustom Code and Integration Future Standard Horizontal Processes by Vertical MassCustomized Code and Integration Common Infrastructure Low

Process

Custom Code Applications and Integration

Infrastructure

Custom Infrastructure

Common Infrastructure Medium

Level of Customization

High

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Gartners Sourcing Life Cycle

Sourcing Strategy

Strategic

Tactical

Evaluation and Selection

Sourcing Management

Ph

Alignment Organization assessment Core competencies Market scan Make-or-buy decisions Risk analysis

as e

Identification Criteria development Organization fit Selection process Partnership opportunities

e as Ph

Contract Development
se a Ph 3

Relationship Ph Performance as assessment e 4 Goals: reach business objectives, efficiency, quality, innovation Transition

Governance model Metrics Payment models Terms and conditions Provision for changes
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How is a Sourcing Strategy built?

Stage 1 Discovery and Identification
Assessment of Change Capability Strategy and Performance Review Skill & Knowledge Capital Review Business Alignment Assessment Risk Identification and Review High-Level Market and Pricing Review Develop Sourcing Principles Org. Restructure and Skill Acquisition Plan Identification of Most Viable Alternatives Outsourcing Action Plan

Stage 2 Analysis and Conclusions

Sourcing Scenario Establishment

Stage 3 Implementation Planning

Retained Function Improvement and Development Plan

A sourcing strategy is the starting point for mapping disruptive business change into effective changes to the operational environment. The strategy should be revisited frequently to ensure that no misalignment is allowed to develop.
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Selection of RiskOptimal Scenario

Sourcing Governance Plan

Strategic Gap Analysis

High-Level Sourcing Strategy Business Case

Detailed Sourcing Strategy Implementation Plan

New Realities: IT as Broker

IT Core Value

CIO

IT Management and Governance

Outsourcing or Insourcing or Joint Venture

ESP Prime Contractor(s)

Retained Internal IS Competencies

Best-of-Breed Subcontractors
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Use Gartners Checklist of 25 IS Competencies

Technical (T) Six Business (B) Nine Behavioral (H) 10
T1 Understanding existing systems and technology T2 Designing and developing applications T3 Applying procedures, tools and methods T4 Integrating systems T5 Designing technical architecture T6 Understanding emerging technologies
B1 Understanding business practices and approaches B2 Understanding business organization, politics and culture

B3 Behaving commercially B4 Understanding and analyzing the competitive situation B5 Managing projects B6 Managing change in the business resulting

from IT applications B7 Planning, prioritizing and

administering work B8 Communicating/listening and gathering information B9 Focusing on customers

H1 Leading, inspiring and building trust H2 Thinking creatively and innovating H3 Focusing on results H4 Thinking strategically H5 Coaching, delegating and developing H6 Building relationships/ team-working H7 Influencing and persuading H8 Principled negotiating H9 Resolving conflicts and problems H10Being adaptable

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The Skills (R)Evolution

Share of skills of IS staff (%)
100 90 80 70 60 50 40 30 20 10 0

Business management skills

IT management skills

The Business IT Partner and Sourcing Governance

Product and technical skills

2000 2001 2002 2003 2004
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Three Types of Service Expectation

Competitive Advantage

EffectivenessFocused Business Value Enhancement

Transformation

3%5% EfficiencyFocused

15%17% Utility 80% Relationship Complexity

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Where the service volumes are now

Partnerships Change Over Time: Know When Its Time to Change

Transformation

Stage 2 Enhancement Complexity

= Inflection Points = Peak Performance
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Goals

Enhancement

Stage 1 Enhancement

Utility Key:
= New/Revised Contract = Planning/Negotiation and Vendor Evaluation

Time

Establish Mutual Agreement on the Benefits for Each Partner

Service Recipient
Efficiency and

Service Provider
Predictable, recurring

Utility

Enhancement

continuous Continuous optimization improvement Competitive parity a Optimum value at or advantage competitive price Preferred Preferential partner partner status Competitive advantage Enhanced revenue Premier or exclusive status partner status

Revenue and profit enhancement revenue Referenceable Predictable profits Extend relationship Brand enhancement Business expansion engagement Repeatable knowledge Extend relationship
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Transformation

Importance of the Contract vs. the Relationship in Partnering

Transformation Enhancement Utility
The Contract The Contract Relationship Management Dominates

The Contract

Business Value

Contractual Management Dominates

Relationship Impact Key:

= Contractual Management = Relationship Management

= The Partnership
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Different Contract Arrangements Stress Different Competencies

Business Value-Add
Transformation

Relationship
Utility

Enhancement

Cost Efficiency

Straightforward Contract Management

Complex

al havior es Be enci ss usine ies Compet B enc ology echn cies Compet T eten Comp
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Different Contract Arrangements Stress Different Competencies

Business Value-Add
Transformation

Relationship
Utility

Enhancement

Cost Efficiency

Straightforward Contract Management

Complex

Technology Business Behavioral Competencies Competencies Competencies

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Different Contract Arrangements Stress Different Competencies

Business Value-Add
Transformation

Relationship
Utility

Enhancement

Cost Efficiency

Straightforward Contract Management

Complex

Techno Compe logy Busine tencies Compe ss tencies Behavio Compe ral tencies
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One or Many ESPs? Look Within

Single Source  Inexperienced with multisupplier management and integration  Protracted procurement process  Can attract a single large provider Prime Contractor  Understands supplier management  Lacks the resources and infrastructures for multisupplier integration  Wants to select key suppliers General Contractor  Adequate supplier management  Lacks the resources and infrastructures for multisupplier integration  Wants flexibility for supplier selection Best-of-Breed  Strong supplier management and integration capacity  Needs top performance from selected suppliers  Cannot attract a single large vendor
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Recommendations
Embrace the idea of a multisourced environment to support business needs, and re-skill IT to effectively manage and optimize external provider relationships. The IT services market offers everything but maturity. Risk management is fundamental to every IT sourcing evaluation. Employ the sourcing life cycle as the key to successful business operations. Master sourcing governance and management to deliver seamless business operations.

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