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Achieving Competitive Advantage through Collaborative Partnerships
Business
Competitive Advantage
Transformation
through
in Action
Collaborative Partnerships
www.cxoeurope.com
Published by CxO Research Ltd Cover Price ÂŁ199
A CxO Research Initiative
A CxO Research Initiative
Achieving
The Outsourcing Project
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Solutions Index A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships
ACS
Atos Origin
CSC
IBM
SBS
p61
p90
p100
p20
p44
www.acs-inc.com/emea
ACS is the leading provider of diversified, end-to-end business process outsourcing (BPO) and information technology (IT) outsourcing solutions to commercial and government clients worldwide.
www.atosorigin.com
Atos Origin is a leading international IT services company. Its business is turning client vision into results through the application of consulting, systems integration and managed operations.
www.CSC.com
Founded in 1959, Computer Sciences Corporation is a leading global IT services company with approximately 90,000 employees located around the world.
www.ibm.com/services
IBM Global Services provides comprehensive IT services integrated with business insight to reduce costs, improve productivity and assert competitive advantage.
www.siemens.com/sbs
Siemens Business Services is one of the world's top 10 outsourcing providers serving over 200 major clients in 44 countries.
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Contents
A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships
Section 1 Strategy 8
Business Case Outline Jean-Francois Poisson Bell Canada
42
Europe’s Back-Office Babel: Will language derail offshoring? Paul Morrison – Alsbridge
12
EXECUTIVE VISIONS Mega-deals, Multi-Sourcing and Value: A Perspective on the Future of IT Outsourcing An interview with David Jordan IBM
44
Outsourcing with Siemens Business Services – Maximizing your Enterprise Performance SBS – PROFILE
46 Knowledge Transfer is the Key to Successful Strategic Outsourcing 50 Dr. Joseph W. Rottman Dr. Mary C. Lacity – University 53 of Missouri, St. Louis IBM Global Services - Full Service, on Demand Outsourcing Capability 56 IBM – PROFILE Transformational Outsourcing – Mixing Oil and Water? NETWORK RAIL – CASE STUDY 58 Juergen Weigand – WHU Business impact of outsourcing a fact-based analysis Erasmus University Rotterdam
Knowledge Process Outsourcing (KPO) – Opportunities and Challenges Marc Vollenweider – Evalueserve
16 20 23 29 32 36 37 40
Dr. Aleksandra (Saska) Mojsilovic – IBM Research
61
The Offshoring Revolution – Global 62 Implications Torbjörn Fredriksson – UNCTAD EXECUTIVE VISIONS IT Outsourcing: Enhance your Performance through Progressive Value Generation 65 An interview with Christian Oecking - SBS EXECUTIVE VISIONS Offshoring strategies An interview with Chris Disher – 69 Booz Allen Hamilton World-class information technology equal to the scale and magnitude of the Olympic Games OLYMPIC GAMES – CASE STUDY
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Employee Transition Rebecca Scholl – ACS Europe Inland Revenue’s ASPIRE Procurement Experience Don Brown – Former Commercial Director - Inland Revenue Atos Origin hosts and manages critical business applications for Network Rail NETWORK RAIL – CASE STUDY Criticism, Empowerment and the Growth of organizations Prof. dr Slawomir J. Magala – Erasmus University Rotterdam Technology-based results ACS – PROFILE EXECUTIVE VISIONS Look before you leap into Outsourcing An interview with Robert L (Bob) Carlson – Former HSBC Global Head Of IT Operations Agfa Europe Shared Service Centre chooses a Data Management Capture solution to improve A/P process efficiency Luc Le Brun – Agfa-Gevaert EXECUTIVE VISIONS Benchmarking overview An interview with Tom Olavi Bangemann – The Hackett Group
Contents
72
Achieving Significant Cost Reductions through Data Center Consolidation for Standard Chartered Bank STANDARD CHARTERED BANK – CASE STUDY
Section 2 Governance
96
Shaping Relationships that Last – Principles of Dynamic Sourcing David Thomas – Computer Sciences Corporation (CSC)
100
For dynamic, innovative, results-driven sourcing solutions, talk to CSC CSC – PROFILE
88
102 Outsourcing relationships at work: Setting guidelines for behaviour Leslie Willcocks – London School of Economics Sara Cullen – Cullen Group 105 Transparency in Outsourcing John Dain – Atos Origin Establishing/Living a Successful Strategic Partnership Dr Peter Patzina –KarstadtQuelle 108 The emergence of dynamic sourcing partnerships - A collaborative business model delivering increased business impact, agility and innovation David Moschella – Computer 110 Sciences Corporation (CSC) EXECUTIVE VISIONS Does Technology Matter in BPO Relationships An interview with Bernhard Fischer – SAP AG
90
Atos Origin – A leading business and technology integrator ATOS ORIGIN – PROFILE
93
The future of finance… using BPO/ KPO to fix the business partnering problem Dr. Martin Fahy – National University of Ireland
76 80 83 85
Retendering & Renegotiation Companies often miss substantial cost savings by rubber stamping the renewal of existing deals Stephen Dunn – Everest Consulting Group EXECUTIVE VISIONS Dispute resolution An interview with Mark Appel International Centre for Dispute Resolution Innovative Application Management and Global Sourcing approach gives Philips Semiconductors an added ‘Impulse’ bringing significant business benefits and cost savings! PHILIPS SEMICONDUCTORS – CASE STUDY Outsourcing Contracts – Are they worth the paper they’re written on? Gill Andrews – Bird & Bird IBC Solutions Index
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Contents Section 2 Governance 76
Outsourcing relationships at work: Setting guidelines for behaviour Leslie Willcocks – London School of Economics Sara Cullen – Cullen Group
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Transparency in Outsourcing John Dain – Atos Origin
83
Establishing/Living a Successful Strategic Partnership Dr Peter Patzina –KarstadtQuelle
85
88
The emergence of dynamic sourcing partnerships A collaborative business model delivering increased business impact, agility and innovation David Moschella – Computer Sciences Corporation (CSC) EXECUTIVE VISIONS Does Technology Matter in BPO Relationships An interview with Bernhard Fischer – SAP AG
90
Atos Origin – A leading business and technology integrator ATOS ORIGIN – PROFILE
93
The future of finance… using BPO/KPO to fix the business partnering problem Dr. Martin Fahy – National University of Ireland
96
Shaping Relationships that Last – Principles of Dynamic SourcingSM David Thomas – Computer Sciences Corporation (CSC)
100 For dynamic, innovative, results-driven sourcing solutions, talk to CSC CSC – PROFILE 102 Retendering & Renegotiation Companies often miss substantial cost savings by rubber stamping the renewal of existing deals Stephen Dunn – Everest Consulting Group 105 EXECUTIVE VISIONS Dispute resolution An interview with Mark Appel – International Centre for Dispute Resolution 108 Innovative Application Management and Global Sourcing approach gives Philips Semiconductors an added ‘Impulse’ bringing significant business benefits and cost savings! PHILIPS SEMICONDUCTORS – CASE STUDY 110 Outsourcing Contracts – Are they worth the paper they’re written on? Gill Andrews – Bird & Bird
IBC Solutions Index
www.cxoeurope.com NB All illustrations within this publication can be viewed at a larger scale at the above website
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The Advisory Panel A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships
David Barrett
John Buscher
Robert L (Bob) Carlson
John Dain
Head of IT and Telecoms practice group, London, Simmons & Simmons
Partner, TPI
Former HSBC Global Head Of IT Operations and Telecommunications
Senior Vice President Global Managed Operations, Atos Origin
Bob Carlson is a Visiting Industry Associate at the Oxford Internet Institute (OII) where he is writing a book on ‘RightSourcing’ that outlines best practices for getting sourcing decisions right. Bob is also Principle of Robert L Carlson Associates, a consulting and advisory service for global IT and sourcing issues. Bob retired recently from HSBC after 25 years working across the world. He was HSBC Group Head of IT Operations and Telecommunications from June 2000 with responsibility for some 7,500 related staff and the infrastructure that supports HSBC's 100+ million customers and 250,000 employees and 10,000 offices in 80 countries worldwide.
John Dain has responsibility for all major international outsourcing and the company's service portfolio. He has 30 years experience in the IT industry and combines a broad technical knowledge with sound business and management experience. John's main focus is to create a working environment that challenges the technical and innovative capabilities of all staff, is quality driven, and based on sound financial success. He joined Philips Electronics in 1971 and was appointed General Manager in 1986. In 1990 he was appointed Regional Manager Philips C&P Asia/Pacific, and from 1990 to 1997 successfully established companies in Australia, China, Hong Kong, Malaysia, Singapore and Taiwan. With the creation of Origin he was responsible for merging these companies into the new organisation and from 1997 to 1999 was responsible for company operations in Brazil. In 1999 John was appointed Vice President responsible for worldwide sales and marketing for Managed Services. In 2000 Atos Origin was formed and in 2001 he was appointed to his present position. In 2001/2 he led the team that successfully won the largest outsourcing contract ever completed by a European IT service company.
David joined Simmons & Simmons in 2000 and heads the IT and Telecoms practice group in London. He also heads the firm's global TMT industry sector group. David Barrett is a leading figure in the world of outsourcing. Besides being recognised as a lawyer with international experience in outsourcing, he is also regarded as a 'thought leader' in all matters to do with outsourcing and the globalisation of services - particularly in respect of information technology. David has worked extensively with offshore outsourcing providers in India and now China together with company and government bodies outsourcing to international destinations. David is a member of the World Outsourcing Council (the only lawyer to be on that body) and is Deputy Chairman of the International Association of Outsourcing Professionals. He is also listed as a leading individual in the “Chambers Guide to the Legal Profession”; “Who's Who in the Law” and in “The World's Leading Lawyers”. David received his legal education in the UK and USA.
John Buscher is a Partner at the world's largest global sourcing advisory company, TPI. John has over 24 years of finance and business experience and he has been instrumental in helping large corporations achieve their sourcing aims by providing advice and guidance in setting sourcing strategy, managing large outsourcing transactions and ongoing sourcing management activities. John's area of expertise includes the information technology outsourcing (ITO) and business process outsourcing (BPO) as well as shared services strategies across a wide range of industry sectors. Before joining TPI, John held various management positions at EDS and Perot Systems. In his last role, he worked as a Business Development Manager. He was responsible for needs assessment, financial analysis, financial costing, application/system software evaluation, hardware evaluation, data centre operations and creative problem solving.
Stephan Gropp
David Jordan
Les Mara
Robert Morgan
Director, Global Education Business Partners, Sun Microsystems
Vice President IBM Europe
Head of Business Processing Outsourcing EMEA, HP
Director, Business & Brand Development, Morgan Chambers
Since October 2004 Stephan Gropp is responsible for managing the education business partner relationships on a global basis for Sun Microsystems. Before that he was the Senior Director of Sun Educational Services in EMEA being responsible for the entire education business in that region. Together with his team he led the outsourcing project of the instructor led training to Accenture in 2003 in his timezone. He joined Sun in 1998 as General Manager for Educational Services in Germany/Austria. Mr. Gropp has been in the IT industry for more than 25 years. He has been a Director of Consulting and Training services with Informix in Central and Eastern Europe. Prior to that he was at Amdahl for 15 years where he held various support positions as Soft and Hardware specialist, including 5 years as Technical Support Manager for Central Europe.
David Jordan is a Vice President of IBM and part of IBM’s European Headquarters team. David is responsible for IBM’s major services sales in northern Europe. David’s previous roles in IBM have included; General Manager for IBM’s major services business in Asia Pacific for the telecommunications, media and energy industries. Vice President for IBM’s Consulting and System Integration business to the telecommunications, media and energy industries for the UK, Netherlands, Middle East, Ireland, and Africa. Prior to joining IBM, David was Head of Telecoms, Europe for Computer Sciences Corporation where he was responsible for business in the telecommunications industry in Europe. Earlier in his career, David founded and ran his own telecommunications consulting business and spent four years as a Board member of one of British Telecom’s subsidiaries. David has spent over 30 years in the computer industry with 18 of these years in the telecommunications industry. David has operated at Board level with P+L responsibility for 17 years and has specialized in the consulting, systems integration and outsourcing areas. David has worked and lived in the USA, Europe and Japan and is currently based in Zurich, Switzerland.
Les has a 25 year career in the Services Industry, with deep knowledge and expertise in Consulting, Systems Integration and Outsourcing. Over this time Les has worked in most Industry Sectors and with many significant organisations throughout Europe on challenging business change & Outsourcing programmes. For the past 5 years Les has focused his efforts on developing the BPO Services market in Europe. Les has clear views on what is driving the rapid growth in demand for BPO and is passionate about the customer service and the delivery of successful business outcomes.
Part of the City's 1980s deregulation and liberalisation, Robert worked with various Outsourcing vendors. As Outsourcing steadily became more sophisticated and a genuinely strategic Client decision, he helped found Morgan Chambers (1994) the first independent, end-client centric, practitioner led Sourcing advice and support consultancy. CEO from 1999 - 2004, he is now responsible for group Business and Brand Development within Europe.
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The Advisory Panel Chris Disher
Steven Ferrari
Mr. Miguel Ribeiro Ferreira
Bernhard Fischer
Vice President Booz Allen Hamilton
Service Development Director, Prudential
Group Financial Controller Electricidade De Portugal, SA
VP Solution Management, Business Process Outsourcing – SAP AG
Mr. Disher is a Vice President and founding Partner of Booz Allen Hamilton’s Global Outsourcing Advisory Service. With over twenty-five years of consulting experience, Mr. Disher specializes in organization and technology strategies for step change improvement in business performance. He has led global client engagements that involve cost reduction, business operations and administrative performance improvement, and outsourcing. Mr. Disher is a founding member of the International Association of Outsourcing Professionals serving on the Standards Board and as Chairman of the Research Committee. He also serves as Officer in Charge for the Offshoring Research Initiative with Duke University. Mr. Disher is a frequent speaker on trends in outsourcing, offshoring, and IT effectiveness.
Steven has been with Prudential for three years. Recently, as Service Development Director, he is responsible for the business development of the Mumbai offshore centre that now employs over 1000 people; outsourced policy administration in the UK; and Customer Service Account Management for Distribution Partners, namely financial advisers, banks and employee benefit consultants. Previously as Offshoring Director, he was responsible for setting up the Mumbai centre with major workstreams including company, property and IT infrastructure set-up; HR & Change Management; Migration and Business Continuity. Former employment included three years at AXA UK as Business Development Director for Offshore Service Centre in Bangalore (AXA Business Services) fulfilling the customer servicing needs of AXA companies in the UK, Japan and Australia. Prior to AXA, Steven spent three and a half years at PwC as a senior consultant in the Management Consulting Division for Financial Services Strategic Change, specialising in strategy reviews, cost reduction, process improvement, outsourcing and offshoring.
Mr. Miguel Ribeiro Ferreira was appointed head of our planning and control, consolidation, accounting and tax office of EDP Energias de Portugal in August 2003. From August 2001 to July 2003 he was head of treasury, consolidation, planning and control, accounting and tax issues of Novabase Group (a Euronext/Lisbon listed company). From April 1993 to July 2001 he was responsible for BCP Group's consolidation and financial & prudential reporting (a Euronext/Lisbon listed company). From September 1991 to March 1993, he served as an Audit Staff at Price Waterhouse Audit Department. Mr. Ribeiro Ferreira holds a management degree from Lisbon's Instituto Superior de Gestão and post-graduate degree in advanced corporate finance from Universidade Católica Portuguesa, Lisbon.
Bernhard Fischer is responsible for SAP’s solution strategy in regards to BPO. Prior to the Solution Management responsibility for BPO Bernhard owned solution strategy, solution delivery and customers support at SAP’s B2B-subsidiary SAPMarkets and SAP’s succeeding Business Unit “Marketplaces”. Bernhard has been with SAP since 1990 executing a variety of responsibilities including software development for the R/3 system administration suite of tools, R/3 implementations in Europe and North America, foundation of the Regional Support Centers in Walldorf, Singapore and Shanghai. Before joining SAP he was member of a design team for the operating software of PBX systems with German vendor Siemens-Nixdorf. Bernhard holds a masters degree in Physics at the Technical University of Karlsruhe.
Christian Oecking
Dr Peter Patzina
Jean-Francois Poisson
Rebecca Scholl
President of Global IT Outsourcing, Siemens Business Services
CIO Mail Order KarstadtQuelle and Managing Director of Itellium GmbH
General Manager - Contract Management, Bell Canada
Director Of Strategy ACS Europe
Christian Oecking is a member of the Executive Board of Siemens Business Services GmbH & Co. OHG and is responsible for the IT outsourcing business of Siemens Business Services globally. He is especially interested in the strategic aspects of outsourcing projects and in their effect on the value of the respective partner companies. Christian Oecking is a recognised author and speaker on the subject of strategic outsourcing. Before joining Siemens Business Services in 1998, Christian Oecking worked as Director of Business Development at EDS Deutschland GmbH. He is a graduate in civil engineering and studied mechanical engineering at the University of Dortmund.
Dr. Peter Patzina is Managing Director of Itellium Systems & Services GmbH, responsible for consultancy and systems integration for the mail-order business of KarstadtQuelle and also CIO of the mail-order business of the group. After studying business administration and completing a post-graduate-study, Peter Patzina started as a management trainee at Quelle in 1990. After several management positions in IT he became CIO of Quelle and Neckermann, the two big mail-order companies of KarstadtQuelle. In 2003 he became Managing Director of Itellium.
Jean-Francois is a member of the International Association of Outsourcing Professionals (IAOP) and a Certified Outsourcing Professional. As General Manager- Contract Management, Jean-Francois Poisson is currently responsible within a real estate team to manage Bell Canada Real Estate Management Services Agreement; one of the largest real estate outsourcing ventures in Canada. Previously, Jean-Francois has participated within the Outsourcing Team to the development of outsourcing governance processes, and in setting up important outsourcing projects between Bell Canada and outside providers. Jean-Francois combines theoretical model knowledge to the daily management experience of outsourcing ventures. He’s a sought after guest speaker for various outsourcing events across the USA and Europe, and a contributor to the first MRI and CXO outsourcing projects.
Rebecca is Director of Market Strategy for ACS in Europe. She is responsible for developing ACS' BPO value proposition in Europe, providing market intelligence, assisting on overall marketing efforts in Europe, helping form partnerships, identifying acquisition candidates and developing influential business relationships in Europe. Prior to joining ACS in 2004, Rebecca was the principal analyst at Gartner, Inc. covering the BPO market. During her five years at Gartner, Rebecca published numerous reports on BPO Market Trends, including The Rise of BPO in 2000 (2001), BPO at the Cross-Roads (2002), BPO Validated: Verticalization and Aggregation Accelerate (2003). Prior to Gartner, Rebecca was a senior consultant at BIPE in France, specialising in the pharmaceutical and telecommunications industry segments. Rebecca earned a master of science degree in management from the Community of European Management Schools at the Ecole des Hautes Etudes Commerciales (HEC) in Paris and a degree in international economics at the Institut d'Etudes Politiques de Paris. She is fluent in English, French, Spanish, and Russian.
Mr. Disher completed a Double Masters in Accounting and Business Administration from Southern Illinois University. He holds a B.S. in Environmental Sciences from the University of Illinois. Mr. Disher is a Certified Management Accountant (C.M.A.).
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The Advisory Panel A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships
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Thank You Neil Smith
David Thomas
Leslie Willcocks
Chief Operating Officer Risk Management, Deutsche Bank
Vice President, European Business Development, CSC
Professor of Information Management Warwick University Business School
Neil Smith is the Chief Operating Officer for Deutsche Bank's Risk Management division. Since joining DB in 1996, Neil has led numerous efficiency drives, including outsourcing initiatives for both low level data process and high value knowledgebased services. Prior to DB, he spent three years at Credit Suisse, two as head of its collateral management group and a year as Head of European Equities within product control. Neil trained as a chartered accountant with KPMG and upon qualifying spent three years with the Institute of Chartered Accountants of Scotland as both a lecturer and manager of the London training centre. He has a BA in business studies from the Robert Gordon University, Aberdeen.
Mr. Thomas is a vice president within CSC's European Business Development group, a specialist unit focusing upon large-scale outsourcing transactions and acquisitions. Mr. Thomas has been in the IT industry for more than 20 years. He has worked for a number of global companies and has held senior positions in sales management, international marketing, business strategy and acquisitions. He has worked with a financial services focus for over a decade within capital markets as well as retail finance. He has a deep understanding of outsourcing - of both IT and business processes. Mr. Thomas has a BSc in Pure Mathematics and Economics.
Leslie has an international reputation for his work on e-business, information management, IT evaluation and information systems outsourcing. He is Professor of Information Management and E-business at Warwick Business School, Associate Fellow at Templeton College, Oxford, and holds several visiting professorships. He is co-author of 24 books and over 150 refereed papers in journals such as Harvard Business Review, Sloan Management Review, California Management Review, MIS Quarterly, MISQ Executive. In February 2001 he won the PriceWaterhouseCoopers/Michael Corbett Associates World Outsourcing Achievement Award for his contribution to this field. He is a regular keynote speaker at international practitioner and academic conferences, and has been retained as adviser by major corporations and several government institutions in the UK, USA and Australia. Books include Global IT Outsourcing (Wiley, 2001) and Intelligent IT Outsourcing (Butterworth, 2004)
Introduction Welcome to the fourth edition of The Outsourcing Project - Achieving Competitive Advantage through Collaborative Partnerships. This report and the accompanying website are designed to put you in touch with the best outsourcing solutions available today. This issue includes white papers from consultants, academics, end users and industry solution providers. These are the individuals who have the vision and the sense of community to contribute to The Outsourcing Project. For that we thank them, and trust their efforts will be appreciated and reflected in your support. We would also like to offer our thanks to each of our editorial advisory panel members for their support and guidance. The complete content of the report is also mirrored on the website at www.cxoeurope.com Make sure you regularly visit the website to find updates, fresh insights, news and guidance. We hope you enjoy reading this edition and pass it on to other members of your organization. Finally, if you have something to contribute to this forum please get in touch.
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We would like to thank all those members of the outsourcing industry worldwide, who have been so generous with their time, advice and assistance during the production of this book. There are too many to mention by name – but you know who you are!
Achieving Competitive Advantage through Collaborative Partnerships ©CxO Research Limited The entire contents of the publication are protected by copyright, full details of which are available from the publisher. All rights reserved. No part of this publication can be reproduced, stored in a retrieval systems or transmitted in any form or by any means - electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the copyright owner.
Published by: CxO Research Limited Barnhill House, 30 Barnhill Road Hayes, Middlesex. UB4 9AP Tel : +44 (0)208 845 2248 Fax: +44 (0)208 845 9512 email: info@cxoresearch.com
Publisher . . . . . . . . . . . . . . . .Tony H.Johal Publishing Consultant . . . . . . .Ron Lawson Editor . . . . . . . . . . . . . . . . . . .Richard Hampson Art Director . . . . . . . . . . . . . . .David Witcomb New Media Consultant . . . . . .Richard Starr Production . . . . . . . . . . . . . . .Nina Kaur Accounts . . . . . . . . . . . . . . . .Naginder Johal
Issn: 1476-2064 While every effort is made to ensure the accuracy of the contents of this book, the publisher accepts no responsibility for any errors or omissions, or any loss or damage, consequential or otherwise, suffered as a result of any material here published.
Tony Johal Publisher tony@cxoresearch.com
The publisher assumes no responsibility for statements made by advertisers in business competition, nor do they assume responsibility for statements/opinions expressed or implied in the articles of this publication.
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Strategy
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Section 1
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SECTION 1 Strategy
BUSINESS CASE OUTLINE
Jean-Francois Poisson General Manager - Contract Management Bell Canada
Introduction For many, preparing an outsourcing business case is a daunting task; what information should be made available, how much should be disclosed, which detail would be relevant and really helpful to make and enlighten decision? In reality, it is much simpler than one might think. The business case should build itself throughout the decision making process followed by the organization. This white paper is intended to be used as a guide for the preparation of any Outsourcing Business Case. It is purposely generic so it applies to any type of outsourcing. The reader may also find it useful as a guide or a step by step process to conduct the outsourcing analysis.
regular review
Is there a significant opportunity to be gained by outsourcing? Will outsourcing, at this time, resolve a significant constraint*?
Yes
Is the service strategic (core) to Bell?
Insource
Outsource No
regular review
Insource
The first objective of the Outsourcing Business Case is to document, in a comprehensive manner, the strategic analysis leading to the outsourcing decision. Secondly, to document in a rigorous manner, how outsourcing upon the contemplated terms is an attractive opportunity for the enterprise. And lastly, to clearly define the future mode of operations by providing a ‘blueprint’ of how it will be achieved. In other words; to formulate a clear vision of how the outsourced services will be offered within the enterprise, to identify all operational, organizational (HR) and financial impacts on the enterprise bottom
No
Insource
Corporate Strategic Imperatives and Core Competencies
Business Case Primary Purposes
Will outsourcing, at this time, introduce a significant risk?
Business Case Yes
• Executive Summary
Evaluate Outsourcing Business Case
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• Operations • Human Resources
No
Is there, at this time, a significant unresolved constraint*?
Yes
Figure 1: Illustration of an outsourcing decision process.
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• Strategy
• Financials • Communications
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Strategy SECTION 1
A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships
line, and explaining how this initiative will be communicated to all stakeholders. The Business Case must be a self contained, stand-alone document which articulates clearly the critical elements of the proposal and outlines the outsourcing rationale. It provides a permanent record of the project and serves as a detailed document for board presentation and senior executive endorsement. As previously documented in two previous articles published by the author under MRI and CxO Research Ltd, succeeding at business process outsourcing has a lot to do with making the right strategic decision, transitioning the operations and the human resources, developing the proper contractual and financial model, and properly communicating throughout the process. Hence focus the Outsourcing Business Case around the five key outsourcing dimensions shown in FIG. 2
It summarizes key issues and highlights the conclusions and recommendations for a quick understanding of the outsourcing solution. The executive summary should also contain an Authorization Section with the appropriate corporate approval workflow of the executives who are required to Recommend, Endorse, and Approve the outsourcing project.
Strategy The strategic section/plan outlines the assessment of the enterprise seeking outsourcing solutions. It describes the current enterprise situation, highlights industry trends and benchmarks, and shows process comparisons between the enterprise and the industy. The following analysis supports the rationale for selecting the proposed alternate service delivery model or outsourcing. Here in more detail what the Strategic plan discloses:
Executive Summary Like any other Executive paper, the first section should be the Executive Summary, the latter provides an overview of all the key elements of the outsourcing initiative and a summary of the five following sections: • • • • •
Strategy Operation Human Resources Financial Communication
• Overall Strategy A clear articulation of the business definition, a description of the key factors driving change within the enterprise as well as the market within which they operate, the enterprise strategy to respond to these changes and the impact this will have on its operation, customers, and labour force. • Business Requirements A clear articulation of what the enterprise
Recompeting
“The outsourcing ecosystem is a systematic approach to proceed with each phase of any type of outsourcing throughout its duration”
Managing Relationship
Identify opportunity
Strategy Operations Finance Human Resources Communication
Implementation
Develop Business Case
Outsourcing assessment
is seeking to do and what it will gain from outsourcing the activity (ie. cost competitiveness, improve quality, access to technology, increase control, variable cost structure, flexibility, etc....). • Strategic Choice An assessment of the outsourcing options and the competitive advantages over the status quo. • Strategic Objectives A description of what the enterprise is seeking from the outsourcing transaction and relationship. This would include future opportunities between the enterprise and the provider and the importance of the relationship to the enterprise. • Structural Model A review of potential outsourcing structural models such as: Divestiture, Sale of business, Subsidiary, Joint Venture, etc. and the recommendation of the most desirable financial structure. • Contractual Model An evaluation of potential business models (General/Sub Contractor, Consignment, Principal/Agent, etc.) with a recommendation of a contractual model that will meet the outsourcing objectives. • Provider Selection and/or Recommendation A recap of the potential providers, and a brief review as to why these providers could be selected. (ie. financial stability, management, ownership, market growth, expertise, past experience, business fit, etc,). • Risk Mitigation A risk mitigation matrix highlighting the major risks to proceed with the outsourcing as well as the mitigation tactics to address these risks. • Exit Strategy A description of the alternatives available should the relationship prove unsatisfactory and/or re-entry strategies should the enterprise decide to repatriate the function in the future.
Operation Figure 2
The operational section/plan outlines how the outsourced activities will be transitioned, and how the relationship will be structured and managed. The operation plan sets out the
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mechanisms through which the enterprise will implement its strategic plan. This section likely includes the following key elements: • Division of Functions, Roles and Responsibilities A description of the outsourcer functions, roles and responsibilities. From the client perspective, a description of the ‘stay back team’ retained in the enterprise. Such a team is usually required to take over the management of the business relationship and to act as the point of contact between the enterprise and the provider. • Transition activities A description of the transition phases and their respective timelines. • Division of Assets and Systems A description of which assets and systems will need to be shared with the provider and how the risks of giving such access to a third party will be controlled and safeguarded. (Gateways, Restricted Access, Logical Access Control, etc). • Management of day to day operations A day to day interface and escalation protocol. • Management of the Overall Relationship A description of how the overall relationship would be managed. This must include identification of the key people involved and the protocol for periodic senior executive interfaces. • Management of Outsourcing Contract Performance A description of how performance under the contract would be measured and managed, including the description of the key performance measures and incentive formula if any.
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This section would likely include the following clarifications; • Division of Human Resources It provides a summary of the resources affected by the project. The HR plan documents the migration of resources to the provider if any, or their re-assignment in the enterprise as well as the potential for the employees to be eligible for retirement and the estimate of the severance costs of such alternatives. • Diagnostic of the enterprise’s Human Resource Needs An identification and diagnostic of the human resources required within the enterprise to implement the plan set out above (transition team, ongoing management team, ‘on site manager’, etc.). An emphasis on the competencies or expertise required to excel in the new mode of operation. If need be, the skills and knowledge gaps with a plan for filling such gaps. • Diagnostic of the Provider's Human Resources Needs An identification of human resource (management and non-management) required by the provider to implement the outsourcing set out above.
Financial The financial section/plan outlines the financial rationale for outsourcing this business activity and the financial impact that the transaction will have on the enterprise bottom line. This section includes; • Financial Baseline A set of financial pro forma reflecting the impact on the business after proceeding with the outsourcing as proposed for the duration of the outsourcing term.
• Management of the Financial Processes A description of how the financial relationship would be managed. This will include elements such as: the mechanism for billing and payments, etc. • Financial Study Lastly, any economic studies and conclusions to support the outsourcing decision and business model.
Communication The communication section/plan outlines the communication components of the outsourcing project; moreover, how it will be implemented. The communication plan ensures that the current partner relationship is well known to all stakeholders in a timely manner. • Enterprise Employee Communication Plan This plan should have two components: first, a general communication strategy designed to keep employees affected by the outsourcing and their union (if any) informed of the status of the transaction; and second, an individual communication strategy designed to keep each employee informed of the impact of the outsourcing on him or her. • Customer Communication Plan A communication plan focused on communicating to customers the impact the outsourcing will have on them as well as the changes which will likely take place moving forward. In some instance, a jointly enterprise/provider communication might be appropriate.
Human Resources
• Incremental Impact of Transaction on the Provider If relevant, a set of financial statements reflecting the impact on the provider of the transaction as proposed.
• Regulatory and or Government/Community Communication Plan If required, a communication strategy to demonstrate to any regulatory organization the resulting impact of the outsourcing decision on the constituents.
The Human Resource section/plan outlines in some detail how the enterprise Human Resource members are impacted by the outsourcing and what the potential outcomes are.
• Provider's Valuation A valuation of the provider's business as a stand alone business operating as a going concern.
• Union A communication strategy that comply with the current union and any legal board requirements.
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Conclusion It is imperative to make The Outsourcing Business Case (OBC) speak. The OBC needs to catch executives’ attention, bottom line is that it is about getting executives’ buy-in. Unfortunately for many, outsourcing business case means finance and it is all about cost…true that the financial plan might draw the most attention at this point; however, outsourcing best practices are more than just money talk. Outsourcing implies the transformation and the transition of critical business activities involving People, Processes and Technology. When facing outsourcing failures, many blame the lack of relationship management and unrealized benefits. Other questions should also be raised, was there an Outsourcing Business Case to start with? Was the outsourcing decision made on a solid ground? This article, part of a series of outsourcing papers, is aimed at simplifying outsourcing
processes. The reader may want to review two previous white papers entitled The Outsourcing Performance Assessment Model and The Outsourcing Business Plan, which together might be useful in guiding the outsourcing journey.
Biography Jean-Francois is a member of the International Association of Outsourcing Professionals (IAOP) and a Certified Outsourcing Professional. As General ManagerContract Management, Jean-Francois Poisson is currently responsible within a real estate team to manage Bell Canada Real Estate Management Services Agreement; one of the largest real estate outsourcing ventures in Canada. Previously, Jean-Francois has participated within the Outsourcing Team to the development of outsourcing governance processes, and in setting up important outsourcing projects between Bell Canada and outside providers.
About the Author Jean-Francois combines theoretical model knowledge to the daily management experience of outsourcing ventures. He’s a sought after guest speaker for various outsourcing events across the USA and Europe, and a contributor to the first MRI and CXO outsourcing projects.
N.B. This white paper contains certain forwardlooking approaches and statements that reflect the current views and experimentation of the author with respect to his involvement in outsourcing, and are subject to discretionary usage in Bell Canada.
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EXECUTIVE VISIONS MEGA-DEALS, MULTI-SOURCING AND VALUE: A PERSPECTIVE ON THE FUTURE OF IT OUTSOURCING.
An interview with David Jordan Vice President IBM Europe
Q) Some commentators say that outsourcing has failed to deliver on its promise and that ‘in-sourcing’ is the next wave: what is your view? There has certainly been some degree of scepticism in the market about the true benefits of outsourcing – but lets look at the facts. First we must recognise that, beyond any tactical benefits such as immediate cost savings, the longer-term business benefits will always be difficult to prove conclusively. Various studies have demonstrated the positive short-term impact of outsourcing decisions on company share prices but the multiplicity of market forces hinders the demonstration of any long term link. However, IBM Research and Harvard Business School recently analysed a sample of 56 outsourcing deals and their impact on some important client financial metrics: Earnings Before Interest and Taxes (EBIT), Return on Assets (ROA) and Sales, General and Administration expenses (SG&A). The work1 looked at deals with a range of service providers – not just IBM. Compared to their sector peers, those companies which outsourced were shown to have performed much better in the two years following the outsourcing decision:
Figure 1: Relationship between the size of the IT outsourcing agreement and growth in earnings
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• • •
11.8 points higher annual EBIT growth 16.1 points higher ROA growth 5.7 points lower SG&A growth.
In addition to this compelling picture, the improvement in earnings was greater for larger outsourcing deals (figure 1). In a survey conducted during 2005 of over 800 European firms which had outsourced, Gartner2 noted that “satisfaction levels with service provisioning are consistently high across continental Europe”. Less than 10% of those questioned considered in-sourcing as an option – and even in many of these cases, it was a matter of scope adjustment rather than complete termination of the agreement. So what does this all mean? The facts point to a high level of satisfaction with existing outsourcing agreements and demonstrable, long-term business benefits from outsourcing IT.
Q) Is the mega-deal a thing of the past? Much as been made recently about the shift in client buying behaviour to smaller ‘less risky’ deals – the mega-deal is dead and ‘multi-sourcing’ is the vogue. Let me first explode a few myths here. Our own analysis of publicly announced IT outsourcing deals in Europe shows that, for contract values above $500M, signings levels in the last few years have rarely been higher since the market first started 20 years ago (figure 2). A recent report from TPI3 specifically on mega-deals confirms this picture. Of course, there are now an increasing number of ‘second generation’ deals to swell the numbers – renewals of contracts first signed 7-10 years ago. However, the fact that these are being renewed as broad-scope ‘mega-deals’ serves to reinforce the notion that for many clients, such arrangements deliver the best overall business and financial value. Overall, we have certainly seen many more smaller deals and this arises due to many factors – only some of which relate to buyer behaviour: • contract length: some clients are signing shorter contracts: 3-5 years compared to 7-10 years. In some cases, the client has done this to increase flexibility by providing contractual ‘break-points’. Another factor is the growth in applications management outsourcing where shorter deals have always been the norm compared to infrastructure outsourcing. So the
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Figure 2: Total European IT outsourcing signings by year for deals larger than $500M total contract value (source: IBM analysis of publicly announce deals) What does all of this mean? Well the market remains large with a diverse range of customers and customer requirements but the mega deal is very much ‘alive and kicking’.
Q) But aren’t mega-deals just too risky these days – we have seen some large deals terminate? It is interesting that you mention risk. It used to be the case that outsourcing was just about cost savings but today it is also about the transfer of risk from the customer to the supplier. In the hugely competitive and fast moving business world of our customers, the risks involved in deploying IT are both intense and material to the results of their business - the assurance that the IT will succeed can outweigh any potential cost savings. However, if a client chooses the right supplier, he can transfer the risks to them, be assured of a positive outcome and begin to enjoy additional benefits of flexibility and value that were not possible with his more limited resources.
The analogy I use with many clients is that of a senior business executive hosting an important dinner party. If the event is important enough, he or she will want to ensure that their guests are properly attended to by hiring a professional chef. The chef will be someone they trust and rely upon to gather the best quality ingredients, put in the hard work and take away their concerns over the catering arrangements. Furthermore, the meal needs to have the right balance of courses and flavours so they’ll use a single chef for the entire event – not a different one for each course! Its all about flexibility and capability as well - a professional chef is more likely to be able to cope with last minute additional guests and requests for vegetarian alternatives! Returning from our analogy, multi-sourcing has its place in the market but in our experience, if you select capable and suitably flexible suppliers, the benefits of larger, broader-scope deals are clear: • fewer interfaces and boundaries of responsibility – hence less risk of failure; • less management effort for the client – hence a potentially smaller retained organisation; • clearer contractual responsibilities – the client has only ‘one tie to grab’; • greater scale and therefore greater overall cost savings; • greater interest from the supplier to provide additional value he sees his fortunes tied more closely to those of his client. These benefits are brought into even sharper focus if you consider that most outsourcing contracts are no longer about ‘your mess for less’ – they are much more about driving transformation and innovation - about delivering company wide, global processes, improving service levels and improving IT’s link with the business. It is very difficult to secure large scale transformation when all of the components are ‘owned’ by separate service providers with their own responsibilities, motivations and agendas. Sure, we have seen some large deals terminate. Opinions towards outsourcing can sometimes be almost religious. When a change of CEO or company ownership occurs, changes in sourcing strategy can lead to difficult decisions. Sometimes, expectations on both sides can be over-optimistic and when not met, problems occur – that’s when you find out how good your joint relationship management has been! There is also the harsh reality that bad news makes very good press. Only a small fraction of large deals unwind and when they do, it tends to be more visible. It is a testament to the outsourcing industry and their clients that such large undertakings can execute smooth ‘reverse-transition’ of assets, staff and responsibilities back to the ‘in-house’ state.
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deals are similar in scope but the shorter duration means a smaller total contract value. global sourcing: we have seen the increasing acceptance of global sourcing models creating additional pricing pressure – originally in the applications arena but increasingly around infrastructure services. So the deals are similar in scope but the costs are lowered by the suppliers. market maturity: as the market has developed and sourcing know-how has increased, a greater number of smaller companies have sought the benefits of IT outsourcing. So more companies are on the ‘outsourcing runway’ expanding the market and the deal landscape is increasingly reflecting these smaller company deals. multi-sourcing: some clients have decided to let multiple contracts in parallel (eg desktop, datacentre, applications, network) rather than a single broad-scope deal. However, many clients have multiple outsourcing providers due entirely to historical reasons: possibly they started with a desktop deal then as confidence and experience developed, they let a separate contract covering the datacentre a few years later. Perhaps their first contractor was not able to provide the additional services. So there are certainly more ‘multi-sourced’ arrangements than there were, the trend however has been gradual – not the avalanche that many claim.
Q) Doesn’t multi-sourcing allow a client to select best-ofbreed contractors? The theory here is clear – but quite often, the procurement process does not direct the client towards best-of-breed suppliers but rather ‘medium-breed-but-cheapest’. In those scenarios where multi-sourcing is a tool adopted principally to beat prices down, there are few long term winners – least of all the client – if vendor margins reach unsustainable levels. If the services required are heavily commoditised then price will certainly be the main criterion but it is easy to overlook other considerations con-
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EXECUTIVE VISIONS An interview with David Jordan, Vice President, IBM Europe
cerning overall business value. Chief financial and operating officers are looking for new ways to meet business requirements and often, it is more than just a technology or cost debate. Additionally, in a world where customers are looking to transfer risk, multi-sourcing fails completely because the customer is the integrator and retains the overall risk of failure. Furthermore, each supplier with their cheapest bid component has little understanding of the customer’s overall strategy and little incentive for investment to deliver additional business value. Depending on the client situation, multi-sourcing can indeed be exactly the right strategy. When executed poorly however, multi-sourcing reminds me of John Glenn’s famous remark when asked what went through he mind when he was crouched in the Apollo nose-cone at launch-time: “I was thinking that the rocket had twenty thousand components, and each was made by the lowest bidder".
Depending on the client, multi-sourcing can indeed be exactly the right strategy. When executed poorly however, multi-sourcing reminds me of John Glenn’s famous remark when asked what went through he mind when he was crouched in the Apollo nose-cone at launch-time: “I was thinking that the rocket had twenty thousand components, and each was made by the lowest bidder". Finally, and speaking frankly, multi-sourcing has been with us for decades. IBM and other providers have for many years been driving best-of-breed service delivery by integrating specialist third-party suppliers into their delivery strategies as part of consortium approaches. Sometimes, a service provider has capabilities to meet certain price points, niche skills or perhaps they were the incumbent within a prior sourcing arrangement and have been retained to reduce risk. However, the lead service provider remains the single point of responsibility to the client for overall delivery and, in the case of commoditised services such as network bandwidth provision, the lead contractor can benchmark suppliers and introduce alternative sources of supply in line with changing client needs and supplier offerings. We have for decades been making a success of multi-sourcing but where the new trend is different is the dis-intermediation of prime supplier contracts. This dis-intermediation can save money but at the cost of risk and value; this is a worthwhile exchange for some clients and a disaster for others.
Q) We hear a great many claims about outsourcing delivering business value – what’s the best way to make it happen? To me, business value is about ensuring that an outsourcing arrangement not only meets the required savings and/or delivery performance improvements – but also has a direct impact on the client’s primary business objectives. These might relate to profit and revenue growth, market share acquisition, market entry or a myriad of other scenarios. The sourcing relationship should be able to positively influence the speed of achieving these business goals and/or significantly de-risk them. In doing so, one thing is certain: it is much more than just about IT.
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Let me provide a practical example from the telecommunications sector. In the telco business, a short time-to-market for new services is critical. However, the IT to support them involves new applications integrated with existing delivery and billing platforms. The more standardised and flexible these platforms – the faster new services can be launched. The telco could outsource the service creation/service operation and measure the supplier on running the existing platform for less. However, there would be more business value in engaging a supplier who could also transform the end-to-end process and be measured on speed to market and service profitability. This is where the subject touches again on multi-sourcing. If you want to use outsourcing to drive business and IT transformation, multi-sourcing will not be appropriate unless the client takes on the management and governance challenge, bears the additional integration cost and also assumes the associated risk of failure. If you invest in a trusted supplier to manage that risk, they must of course have appropriate control of the means to successfully deliver. Stretching our analogy somewhat, we could challenge our chef to be paid on the basis of how many compliments the meal attracted from guests during the evening. However, they might be somewhat reluctant to commit to this if we’d commissioned another chef to prepare the first course or that we’d already ordered the ingredients on their behalf from a cheap supermarket. Two areas of obvious synergy are infrastructure and applications. We find that many organisations could reap major advantages and cost savings by rationalising the management of legacy applications. By outsourcing both applications management and infrastructure, a service provider has the leverage to driving significant costs savings, free up funds for reinvestment and better integrate both areas for improved flexibility and other business benefits. One aspect of business value is innovation - it matters to many of our clients and is part of the IBM culture. Our most successful client relationships are those where the client has needed to drive transformation and has benefited in doing so by tapping into the many technology, business, research and product experts within the company and its partners. Leveraging this capability is far more effective within a broader relationship spanning both business and IT. We call this process Innovation Sourcing4.
Q) Don’t clients worry about their loss of control through outsourcing? Yes – there is always a delicate balance. This is exactly why outsourcing is a strategic decision for an organisation and should not be a knee-jerk reaction to a few bad financial quarters. A client needs to have a well-developed sourcing strategy, be clear what the objectives are and ensure that there are realistic expectations. If they go through this process, they make a conscious decision as to what controls (and risks) they can transfer to a partner and those they need to retain. The latter will relate to operations which drive competitive differentiation – perhaps related to critical customer- or supplier-facing processes. Once in an outsourcing relationship, the right contract, coupled with the right governance approach should provide all of the flexibility and controls a client needs consistent with the service
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provider’s assumed responsibilities. The key here is ‘the right contract’ which recognises the client’s unique business direction, plans and objectives. Blindly copying other companies’ supply contracts or following one dimensional advice from the army of outsourcing commentators will almost certainly lead to failure for all concerned.
Q) How do you see the outsourcing market develop over the next 2-3 years? The outsourcing market is a fascinating one – it has been the driver of IT services growth for many years now and the competitive landscape has changed dramatically from its early days. The last few years have seen the rapid increase in global sourcing solutions as well as the explosion in business process outsourcing. It is therefore somewhat difficult to predict the future. However, I see two segments emerging: • selective deal market: where clients decide that outsourcing is appropriate to a limited scope of operations and/or where a multi-sourcing approach meets their specific needs. IBM will remain a key player in these opportunities – indeed a recent IDC study5 identified IBM as the leader in terms of new deals signed and the leader in terms of participation in multisourcing contracts; • broad-scope deal market: focussed increasingly on riskreward, value-priced deals covering a broader scope of IT and business process operation. They are invariably transformational in nature and require suppliers with broad-scope capabilities and/or consortium-based approaches. This market will continue to provide a consistent level of signings opportunity year-on-year – including mega-deals.
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breadth of service: via consolidation or alliances, service providers will continue to widen their service portfolio to harness ‘best-of-breed’ capability; they will also look to improve the industry knowledge and process skills required to drive the transformation we have been discussing. Unless they do so, suppliers will be left with only a fiercely competitive, increasingly commoditised market to pursue.
Fortunately for IBM, we already have the global delivery infrastructure and breadth to compete – but this is only a ticket to the game. To win it, we’re working hard on delivering the business value and innovation that clients expect.
References 1. “Business impact of outsourcing – a fact-based analysis”, IBM Global Services, 2005, http://www1.ibm.com/services/ondemand/outsourcing_report.html 2. “Multi-client study: Utility Outsourcing, Application Management and Business Process Outsourcing Outsourcing Trends in Western Europe - 2005’, Gartner Deutschland GmbH, 2006 3. “The Many Myths of Mega-Deals”, 2005, TPI white paper available at http://www.tpi-sourcing.com 4. “Innovation Sourcing: Increasing Business Value Within Outsourcing Relationships”, T Clifton and J Benaroya (IBM), http://www.cxoeurope.com/documents.asp?d_ID=73 5. “IDC’s Top 100 Global Outsourcing Deals of 2004”, Nov 2005, IDC #32024
IBM will remain a leader in both market segments – the selective deal market driven by multi-sourcing plus the broader-scope deal market driven by transformational deals One important caveat here: deal size is purely a relative term. Service providers forget at their peril that any outsourcing decision is strategic in the context of the client so whilst a deal for $20M may by relatively modest in the wider deal landscape, for that client, it is probably a huge financial and (for some) emotional commitment. We envisage many of these broader-scope riskreward, value-based deals to be relatively modest in size.
Q) Finally, if this is what’s happening in the market, how will the competitive landscape change? I believe that we will continue to see a number of shifts in the supplier landscape. Primarily, we’ll continue to see consolidation prompted by two basic needs: • scale: service delivery today is all about scale economies and leveraging global resources. Many suppliers lack the necessary scale in order to compete in a sustainable manner;
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(C) Copyright IBM Corporation 2006, All Rights Reserved IBM, the IBM logo, the e-business logo, e-business on demand, e-business Hosting and WebSphere are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both. Other company, product and service names may be trademarks or service marks of others. References in the publication to IBM products or services do not imply that IBM intends to make them available in all countries in which IBM operates.
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KNOWLEDGE TRANSFER IS THE KEY TO SUCCESSFUL STRATEGIC OUTSOURCING
Dr. Joseph W. Rottman Assistant Professor of Information Systems University of Missouri, St. Louis
Dr. Mary C. Lacity Professor of Information Systems University of Missouri, St. Louis
Knowledge Transfer in Strategic Outsourcing Today, nearly every manager calls their outsourcing deals ‘strategic.’ In reality, much of outsourcing is still about cost reduction in back-office services. For us, the term ‘strategic outsourcing’ is restricted to circumstances for which suppliers play a key role in helping clients deliver innovative products to the market faster and cheaper than competitors. Based on 160 interviews with US clients and their Indian suppliers, we found that the main impediment to strategic sourcing is knowledge transfer. At the outset, both parties realize that strategic outsourcing requires the supplier to deeply understand the client’s business and technical domain. But there is often a disconnect between what each party means by ‘domain expertise.’ To the supplier, domain expertise means understanding the client’s industry. To the client, domain expertise means understanding the clients particular
business, technology, products, markets and processes. (See Figure 1) The key to strategic outsourcing is understanding the knowledge gap and how to fill it. Knowledge transfer entails balancing costs (such as supplier training) against risks (such as loss of intellectual property.) Our research uncovered five lessons on effective knowledge transfer (see Table 1). Three of these lessons help clients transfer knowledge to the supplier. Two lessons help clients protect their knowledge transfer investments. We illustrate these lessons by profiling one Fortune 500 US manufacturing company.
Knowledge Transfer: US Manufacturing A large industrial equipment manufacturing company we shall call US Manufacturing , illustrates the challenges of transferring knowledge to suppliers. This company sells heavy-duty industrial equipment that relies extensively on embedded software to operate.
FROM : Supplier’s general industry knowledge
TO : Client’s specific knowledge
Figure 1: WHAT IS THE KNOWLEDGE GAP & HOW & WHO WILL FILL IT?
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Knowledge Transfer
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Table 1: EFFECTIVE KNOWLEGDE TRANSFER PRACTICES 1. Motivate in-house staff to share knowledge with suppliers. Practices to transfer knowledge
2. Train the supplier’s employees as if they were internal employees. 3. Integrate the supplier employees fully into the development team.
Practices to protect the knowledge transfer investment
4. Require suppliers to have shadows for key onsite supplier roles to protect knowledge transfer investments. 5. Protect intellectual property by unitizing projects into small segments of work and dispersing work among multiple suppliers.
Table 1:
Executives at this company had the vision to use offshore suppliers to more quickly and more cheaply develop innovative software that is embedded in their core products. This company did not achieve their outsourcing vision until a second round of implementation. During the first attempt offshore, project costs exceeded budgets, software quality lessened and some projects were never finished. Much of the failure was attributed to the suppliers’ lack of client-specific knowledge. Instead of abandoning the vision, senior executives used the experience to develop five knowledge transfer practices. In its second attempt, these practices helped to drop development costs by 10 to 15 % and shorten product delivery times when compared to onshore. US Manufacturing can now declare with confidence that ‘our outsourcing deals are strategic.’ The successful knowledge transfer practices highlighted in this article are centered within US Manufacturing’s Six Sigma certified Software Center of Excellence (SCE). The SCE employs approximately 150 people and has an annual development spend of $32 million. The members of the SCE are tasked with the development and deployment of embedded software systems that are highly integrated into the manufacturing and operation of core products.
Recognizing the need for better knowledge transfer The Software Center of Excellence began its journey in late 2000 when several projects were sourced offshore. As an example, one project required a new Global Positioning System (GPS) steering system to be integrated into one of the larger product lines currently in production. US Manufacturing chose a large Indian supplier
for this project. The client delegated the design and creation of the integration project to the offshore supplier. They believed that the supplier had the sufficient domain knowledge because it had prior experience in this industry. This project failed to produce any of the deliverables outlined in the statement of work and was ultimately pulled back in house and completed well behind schedule and over budget. US Manufacturing experienced similar failures with other offshore projects. Each work product delivered from the offshore suppliers needed extensive rework to correct inaccurate and incomplete application development. Looking back, the manager of the SCE and his staff underestimated the need for extensive domain knowledge transfer (product, process and market) as well as their own expertise in managing offshore projects. Despite the failures, the SCE saw promise in some aspects of the original offshore engagements. For example, as the offshore employees became more experienced with embedded software and how the SCE interacted with business units, the members of SCE noticed that the quality of code improved and delivery times shortened. These improvements helped the management of the SCE convey a sense of optimism about offshore to the senior management. As one SCE manager noted: “We had to realize that our Indian suppliers did not understand embedded software or even the equipment we manufacture. They didn’t even know what our product looked like! Now we are spending considerable time on domain knowledge transfer and training.” The SCE used the lessons it learned and relaunched its offshore effort in January, 2004.
SCE managers’ second attempt at offshore focused obsessively on knowledge transfer, adhering to the five practices discussed below.
1. Motivate in-house staff to share knowledge with suppliers Like all of the US clients we studied, staff employees at the SCE were initially reticent to share their knowledge with suppliers. Would they be helping to build their own guillotines? Managers at the SCE addressed this issue head-on by sharing the vision of strategic outsourcing and the staff’s role within the vision. The SCE staff was motivated to share knowledge with suppliers because they were promised the following benefits: • Job security because strategic outsourcing would be used to reduce the immense backlog, not internal headcount • Reduction of the staff’s 60 - hour workweeks • More interesting career paths The SCE had a three-year backlog combined with a flat staffing forecast. According to the manager of the SCE: “My people were tired of working 60-hour weeks. We communicated that offshore was a way to better manage our project pipeline since we were not going to add a bunch of expensive North American resources to meet the demand and then lay them off later. And so they are not worried about losing their job. They just see this as a way of getting back to some kind of normal 40 to 50-hour workweek, and even more importantly, as a way for them to move up in their level of responsibility.” Considering the application development backlog facing SCE and the over-utilization of the internal staff, the SCE viewed offshore as way to better utilize their internal staff and move them into higher-level tasks. As the engineering supervisor at the SCE stated: “Many of our junior to mid-level people were wanting and ready to move up, but they were so busy with low-level tasks, they were not able to learn the necessary skills, or have exposure to the high profile projects. Once we got offshore working properly, our junior people were freed up to begin taking on tasks with greater responsibilities.” Roles with greater responsibilities included subject-matter experts, project managers, and architects. The SCE involved Human Resources to help map exciting future career paths for the SCE staff. Through these benefits,
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the SCE motivated their staff to share their knowledge with offshore suppliers.
2. Train the supplier’s employees as if they were internal employees Many CIOs would never co-train their internal employees with external supplier employees because of the high cost as well as concerns over the protection of intellectual property. The SCE, however, had little choice. The suppliers needed to deeply understand the internal functions of not only the manufacturing equipment, but of the entire company. Managers at the SCE decided that key supplier employees needed to undergo the same series of training sessions as internal employees. The SCE provided the key supplier employees with facility tours and training classes on engine architecture, production software, equipment simulation products, operating guides for various lines of equipment, quality assurance processes and an overview of all of the various manufacturing products and platforms. They were introduced to various software development tools, the development environment and embedded development tools. These classes were delivered on site and in person to the suppliers’ onsite employees. The SCE paid the supplier employees for the time spent in training, but it only paid offshore (versus the much higher on-shore) rates. For the offshore employees, the classes were recorded and streamed offshore. According to the manager of the SCE: “We couldn’t ship an engine or a piece of large equipment over to India, so we did the next best thing: we videotaped many equipment pieces in action and showed what the ECUs (Electronic Control Units) were designed to do.” In addition, the SCE invited most of the employees of the offshore suppliers to spend some time onsite prior to working on the outsourced projects. According to the Manager of the SCE: “What we saw was the benefit and real value of actually bringing those people here for a short time to bring them up to speed. Let them see how an application works and work right next to the team doing the development.”
3. Fully integrate the supplier employees into the development team Beyond formal training, knowledge is exchanged socially among members of a group with close proximity, trust, and solidarity. To promote social exchange of knowledge, the SCE made a concerted effort to encourage
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and facilitate unified teams. For example, supplier employees were invited to birthday parties and happy hours. The line between ‘us and them’ blurred and the supplier’s employees (both on and offshore) were viewed by US Manufacturing’s employees as team members. They all shared in the successes and challenges of the projects. Besides the obvious benefit of knowledge sharing, the business users at US Manufacturing had higher levels of customer satisfaction. According to the Group Project Manager at one of the SCE’s large Indian suppliers: “Of all of our embedded systems clients, the SCE at US Manufacturing has worked the hardest to make our employees feel very much part of the team. Our C-Sat (customer satisfaction ratings) from the client show the value of this integration. Our employees have internalized the mission and values of [US Manufacturing]. It is a highly coveted assignment to work on the [US Manufacturing] account.” While the lessons so far have appeared ‘warm and fuzzy,’ the SCE was aware of two significant risks associated with such expensive and extensive knowledge sharing: high costs of training and loss of intellectual property. The next two practices address these issues.
4. Require suppliers to have shadows for key onsite supplier roles to protect knowledge transfer investments The SCE incurred significant training costs to transfer knowledge to the suppliers. To reap the rewards of this investment, the SCE had to protect against supplier turnover. (Unwanted supplier employee turnover was as high as 75% in some of the companies we studied.) The SCE required that trained supplier employees remain on the account for at least one year after training or the supplier would incur the
Supplier One’s IP Segments
costs of training a replacement. For key supplier roles, the SCE went one step further. It required suppliers to provide shadow managers for key onsite supplier roles. Depending on the role, the required shadowing period was three to six months. This overlap period had two major benefits. First, the knowledge transfer was done predominately between the supplier’s employees, thus freeing up the SCE’s valuable architects and leads. Second, the incumbents were able to introduce their replacements to US Manufacturing’s business units and staff. This helped to maintain the social contacts and connections that were created during the engagement. According to the engineering supervisor: “Once we started overlapping the liaisons, our customers felt much better about rolling people off the project. The outgoing liaisons made our job much easier since they took their initial training and subsequent learning and were able to convey it to their replacement much, much better than we can.”
5. Protect intellectual property by unitizing projects into small segments of work and disperse work among multiple suppliers Besides protecting the knowledge transfer investment against turnover, the SCE also wanted to protect its intellectual property. This might seem to contradict the previous lessons of generous knowledge sharing, but it does not. Training focuses on products that are already in the market. The SCE’s main concern was protecting the new innovations the suppliers were helping to build. To mitigate this risk, the SCE (1) unitized projects into small segments of work and (2) dispensed these segments among three offshore suppliers to effectively distribute the intellectual property. They viewed their intel-
Supplier Two’s IP Segments
Figure 2: VIEWING INTELLECTUAL PROPERTY AS A PUZZLE
Supplier Three’s IP Segments
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lectual property as a puzzle. By distributing small pieces among three suppliers, no one supplier can assemble the puzzle on their own (See Figure 2). The first part of the strategy involved the unitization of tasks to be sourced. These tasks were typically 5 to 7 business day activities that had clearly defined objectives and requirements. The statements of work (SOWs) for these tasks were appended to the master service level agreements the SCE established with its suppliers. The segmentation of larger projects into such small components allowed the SCE to more easily capture all associated costs and manage deliverables and milestones closely. While the transactional overhead of this strategy was considerable, the Manager of the SCE claimed the transaction costs were more than recouped by such close monitoring: “In our first round [the failed attempt at offshore sourcing], projects were allowed to creep and the only people who saw the creep were the accounts payable people on our end and the accounts receivable people at the supplier. Now, each task has an owner and we watch the projects from a functional perspective, not an accounting perspective. By using this strategy, we are seeing much less re-work and the quality has improved considerably!” The second part of the strategy involves multi-sourcing. The SCE distributed work among three suppliers (two large and one boutique). While maintaining engagements with multiple suppliers did increase transaction costs and management overhead, the benefits included protection of intellectual property and the creation of a competitive environment to keep costs low and quality high. In summary, the five knowledge transfer practices resulted in success for the US manufacturer. The manager of the SCE concluded:
“Our suppliers are not only providing a lower cost talent pool, but they are helping us strategically. We keep looking for ways to increase the engagements. Our costs are down, productivity is up, and the quality is as good, if not better than what we can do in house.”
Realizing the benefits of knowledge sharing To elevate outsourcing from merely tactical (focused solely on costs) to strategic (focused on quality, innovation, speed and cost) effective knowledge transfer is critical. The suppliers need to have domain knowledge in customer – specific domains including product, process and market; not just a particular vertical. Utilizing these five effective practices, companies can achieve strategic outsourcing engagements by creating an environment that supported knowledge transfer while simultaneously protecting both intellectual property and development quality.
About the Authors Dr. Joseph Rottman is an Assistant Professor of Information Systems at the University of Missouri-St. Louis. He earned his Doctor of Science in Information Management from Washington University in St. Louis. He has conducted research and spoken internationally on global sourcing, innovation diffusion and public sector IT. He has conducted case studies in over 40 firms and has been engaged by Fortune 100 firms to analyze their offshore strategies. His publications have appeared in Sloan Management Review, MIS Quarterly Executive, IEEE Computer, the Journal of Information Technology, the Journal of Management Information Systems and leading practitioner outlets such as CIO Insight and the Cutter Consortium.
Dr. Mary Lacity is a Professor of Information Systems at the University of Missouri-St. Louis, Research Affiliate at Templeton College, Oxford University, and Doctoral Faculty Advisor at Washington University. Her research interests focus on IT management practices in the areas of sourcing, IT privatization, relationship management, and project management. She has conducted case studies in over 100 organizations and has surveyed both US and European IT managers on their management practices. She has given executive seminars world-wide and has served as an expert witness for the US Congress. She was the recipient of the 2000 World Outsourcing Achievement Award sponsored by PricewaterhouseCoopers and Michael Corbett and Associates. She has written six books: Global Sourcing of Business and IT Services (Palgrave, 2006; coauthor Leslie Willcocks), Netsourcing Business Applications (Prentice Hall, 2002; co-authors Thomas Kern and Leslie Willcocks); Global IT Outsourcing: Search for Business Advantage (Wiley, 2001; coauthor Leslie Willcocks); Strategic Sourcing of Information Systems (Wiley, 1997;co-author Leslie Willcocks); Beyond the Information Systems Outsourcing Bandwagon: The Insourcing Response (Wiley, 1995; co-author Rudy Hirschheim) and Information Systems Outsourcing: Myths, Metaphors, and Realities (Wiley, 1993; co-author Rudy Hirschheim). Her more than 50 publications have appeared in the Harvard Business Review, Sloan Management Review, MIS Quarterly, IEEE Computer, Communications of the ACM and many other academic and practitioner outlets. She is Senior Editor for MIS Quarterly Executive and US Editor of the Journal of Information Technology.
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www.ibm.com/services IBM Global Services provides comprehensive
International Business Machines Corporation
IT services integrated with business insight to reduce costs, improve productivity and assert competitive advantage.
Headquarters: One New Orchard Road, Armonk, NY 10504, Westchester County, United States, Tel +1 914-499-1900
Sam Palmisano – Chief Executive Officer Michael E Daniels – Senior Vice President, Global Technology Services, Global Services David Jordan – Vice President, IBM Europe
Business Contact: Trevor Clifton – Marketing Manager, Strategic Outsourcing E-mail: tclifton@uk.ibm.com Tel: +44 (0)1256 341174
IBM Global Services - full service, on demand outsourcing capability Outsourcing has long since evolved from a pure cost reduction focus towards one of strategic relationships helping businesses achieve a wide range of goals - driving greater systems and business process flexibility, optimizing IT and enabling business transformation. Clients can focus on their core business and rely on an outsourcing partner to leverage economies of scale, exploit new technologies and source the wide range of necessary skills. IBM is fully able to meet these evolving needs and can provide end-to-end outsourcing services for companies across industries and around the world, regardless of the size of a business or its hardware/software environment. IBM outsourcing capabilities include business transformation outsourcing, application management services, e-business Hosting services and strategic outsourcing (covering datacenter outsourcing, managed storage services, network outsourcing services, desktop and helpdesk services). These services can be tailored to industry and company-specific concerns to help reduce costs rapidly and add value over the long term. Success in outsourcing requires a focus from both parties on relationship development underpinned by a supplier capable of service delivery excellence. Furthermore, such relationships prosper best when underpinned by flexibility and joint investment in technological and business innovation. IBM's outsourcing services described below are guided by these principles and draw upon the company's technological expertise and business insight.
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IBM Global Services is focused on what matters most - working with you to provide the right business and technology services that deliver real business outcomes. We harness our insight into your industry, technology leadership and hands-on experience to deliver services that help increase the growth, efficiency and ongoing flexibility of your business - making it easier to anticipate and respond to your market and improve your ability to serve your customers. Your success is our success.
Business transformation outsourcing Business Transformation Outsourcing (BTO) delivers improved business results through the continuous strategic change and operation of business processes, applications and infrastructure with results measured against business outcomes. Through BTO, enterprises can leverage the expertise and scale of a strategic partner by handing over management of non-core processes to this partner and concentrating on their core business. IBM BTO services cover Finance and Administration, Human Resources, Procurement and Customer Relationship Management (CRM) as well as a variety of industry-specific processes. Within these areas, IBM BTO solutions consider and account for business and IT design, process and integration challenges. IBM Business Transformation Outsourcing provides a
strategic roadmap for change, global benchmarking and best practice-based change management, supported by IBM industry, process and IT expertise, as well as insights gained from our own internal on demand business transformation. IBM Business Transformation Outsourcing offers companies a wide array of advantages that will help them improve their business performance: Through BTO, companies will: • Reduce costs • Increase organizational agility • Improve speed to market • Strengthen their intellectual capital • Improve their competitive position • Benefit from disciplined, best practicebased processes • Improve risk management
Application management services Today, daily operations alone compel companies to continually upgrade and add to their application portfolios - a daunting proposition in terms of cost and management requirements. Indeed, attempting to respond fully to changing market trends and customer demands at an application level can overwhelm in-house IT organizations and quickly consume budgets. IBM Application Management Services (AMS) offers a flexible set of services that can help companies deploy and manage applications according to defined service levels and for a predictable cost, through proven governance, skills, processes and technologies. In this way, IBM AMS helps
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companies focus IT spending on implementing business strategies, rather than managing and maintaining applications. To mitigate engagement and deployment risks, IBM can help companies plan, implement and manage a customized application management solution and, in turn, provide proven project management techniques and systems integration expertise. IBM AMS can manage a single application, a subset of process-linked applications or the entire portfolio, as business needs dictate. Regardless of the scope of the engagement, IBM AMS offers the benefits of virtually unparalleled global reach in leveraging strategic relationships with industry-leading application vendors. Flexible service options and contracting methods make AMS solutions highly cost-effective over the short and long-terms.
e-business Hosting services IBM e-business Hosting offers organizations help in designing, deploying and managing their e-business strategies and mission-critical business processes through application hosting, facilities hosting and managed hosting services. Through e-business Hosting, companies access and leverage a leading-edge e-business infrastructure and business applications as Web-based services and enjoy the economies of variable pricing models. This flexibility is especially useful for businesses that have highly dynamic capacity and capability needs. With e-business Hosting services, businesses can purchase IT capabilities piece by piece, on an as-needed basis and pay accordingly. In this way, upfront investments are reduced. Plus, IBM infrastructural standardization supports simplified, rapid deployment delivering added cost savings and supported scalability. Our success in helping more than 5,000 clients implement their e-business strategies is borne out in a state-of-the-art global network of IBM hosting centres. These facilities provide rapid deployment of hosted solutions, fortified by industry-leading security and continuity support… multi platform support… reliable
high-bandwidth Internet access and bandwidth capacity on demand… no single point of network failure… and around-theclock monitoring and reporting. IBM provides superior world-wide customer support and has skilled technicians onsite, 24 hours a day. IBM e-business Hosting clients have access to a customized WebSphere portal, which consolidates critical business functions, performance data and multi-vendor monitoring and reporting services. With IBM's help, companies can improve speed to market by relying on IBM's expertise in designing, building and running IT environments… reducing up-front costs by paying for infrastructure and management as a service… mitigating risk in a climate of rapid technological change… and enjoying economies of scale in infrastructure, people and technologies.
On Demand In today's highly competitive environment, forward-looking organizations are evolving towards a business model that is: • Responsive: Capable of sensing change and responding dynamically to unpredictable fluctuations in supply or demand, market turns, emerging needs or unexpected competitive moves • Variable: Able to adapt cost structures and business processes in order to reduce risk, drive performance and achieve higher levels of productivity, capital efficiency and financial predictability • Focused: Committed to concentrating on core competencies and assets that differentiate the organization • Resilient: Leveraging systems and processes that are robust, scalable, security-rich and available Together, these characteristics comprise a concept IBM calls On Demand. In technology terms, this means that systems and solutions must be integrated, automated, virtualized and open - ready and able to respond to a variety of events in realtime. IBM Global Services can offer clients just that and, in turn, help support a
company's successful transformation to the on demand business model. IBM has incorporated on demand capabilities into its outsourcing offerings: a new and flexible pricing model designed to transform static IT overhead into a 'variable' expense matched to business needs. Companies can access and leverage infrastructure and service capacity as needed, so that the e-business environment is continually up-and-running, despite fluctuations in demand.
Strategic outsourcing IBM Strategic Outsourcing Services cover datacentre operations, desktop services, networks, storage etc and, if necessary, operate in concert with the other IBM outsourcing services. IBM Strategic Outsourcing consultants work closely with customer executives to improve a company's overall competitive advantage by evaluating business objectives and identifying specific processes and operations to outsource. IBM Strategic Outsourcing services can help businesses realize significant cost reductions and, at the same time, accelerate speed-tomarket, forge stronger links with partners, suppliers and customers, and achieve a potentially higher return on investment. Plus, strategic outsourcing can provide important flexibility and adaptability - critical building blocks for on demand initiatives and business transformation. IBM has introduced innovative on demand capabilities to its strategic outsourcing offerings. To deliver true on demand capabilities, IBM Strategic Outsourcing leverages the IBM Universal Management Infrastructure (UMI), a proven environment for outsourcing comprising hardware, software, architecture and best practices. Based on open standards, UMI is designed to help build and manage on demand computing environments - offering reliable and automated IT operations… improved capacity utilization… lower infrastructure and labour costs… and higher service levels. Strategic outsourcing on demand capabilities are tailored to cases in which IT demands - on
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SOLUTION PROVIDER – www.ibm.com/services
application assets or storage capacity or server performance - vary by season, month, day or even hour. While traditional outsourcing engagements allow for capacity fluctuations on a stable curve, adding on demand capabilities facilitates adjusting capacity to both predictable and unexpected demands - dynamically. With these capabilities, strategic outsourcing can offer businesses an additional and unprecedented ability to reduce costs by matching IT pricing to demand. The figure illustrates schematically the efficiencies provided by an on demand versus conventional model. IBM on demand capabilities within Strategic Outsourcing can be tailored to a company's business and IT requirements. More specifically, companies can choose from several options: • The IBM Flexible Demand Option provides IBM-managed services based on standardized infrastructures in IBM facilities. Multiple clients can share the environment in order to capture significant cost savings. At the same time, privacy and integrity are maintained through securityrich partitioning and other techniques. Services include automated, usage-based and variably priced provisioning of server, storage and network resources… balanced workloads… porting and testing… and powerful management and reporting capabilities.
• The IBM Flexible Support Option provides several alternatives for clients wishing to retain more control over their IT environment. For example: • IBM can help support a company's IT infrastructure up to and through the operating system layer. In this scenario, businesses retain IT ownership, as well as business process and application oversight; it is the infrastructure management that is outsourced. • Alternatively, IBM can provide an environment dedicated to a single client. Services and capabilities closely resemble those provided with the Flexible Demand Option, but in this case no infrastructural resources are shared with other clients. Either way, the IBM Flexible Support Option helps enable companies to pool and optimize resources across business units while harnessing the efficiencies of rapid and responsive scaling. When properly deployed and leveraged, adding on demand capabilities to strategic outsourcing can result in lower costs, greater resiliency, rapid up-and-down scalability, faster deployment and speedier time to market. More specifically, companies using strategic outsourcing on demand can benefit from: • Variable, usage-based costs • Ability to support shorter product lifecycles • Proactive risk management
• An increase in privacy, security and continuity • An open, highly integrated IT environment • Self-healing, self-managing systems • User-adaptive technology
Leadership Across industry lines, information technology has become a fundamental driver of business transformation and forwardlooking on demand initiatives. Likewise, outsourcing tools and offerings are on an evolutionary, increasingly strategic and specific path. IBM remains at the vanguard of associated thought leadership and capabilities development, with a full range of outsourcing offerings applicable to enterprises everywhere, in virtually every industry. Our tools and services can be applied alone or in concert in answer to your company's most pressing business directives. Plus, all IBM outsourcing engagements are fortified by our: • • • •
Global sourcing On Demand Business leadership Business, industry and IT consulting Strategic partnerships with leading service providers and product providers • Flexible financing options from IBM Global Financing • Virtually unmatched capabilities, skills and expertise.
www.ibm.com/services
© Copyright IBM Corporation 2005, All Rights Reserved IBM, the IBM logo, the e-business logo, e-business on demand, e-business Hosting and WebSphere are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both. Other company, product and service names may be trademarks or service marks of others.
Schematic representation of efficiencies provided by an on demand usage-based model versus a conventional approach.
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References in the publication to IBM products or services do not imply that IBM intends to make them available in all countries in which IBM operates.
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TRANSFORMATIONAL OUTSOURCING – MIXING OIL AND WATER?
Peter Kreutter
Juergen Weigand
Managing Director WHU GRID
Professor of Economics and Director WHU
Recently, many IT outsourcing providers have been scrambling to reposition themselves as proponents of a new business model known as transformational outsourcing, or business innovation partnership. In trying to integrate competencies from both IT outsourcing (i.e. run) and consulting and system integration (i.e. plan and build), they are aiming to escape a competition-intensive, low-margin commodity market and break into high-margin, added-value ‘utopia’. However, while the provider-side massively promotes the model, the proof of its concept and its degree of customer acceptance remain to be seen. Doubts over whether this shift is the right strategic response to changing market requirements have arisen from a scientific perspective. In this article, the authors will examine the current strategic challenges for IT outsourcing providers within the context of the German market. They will discuss the major arguments in favor of a new transformational outsourcing model and critically assess its validity. This discussion will be based on a theoretically oriented discussion regarding hold-up problems in the context of theory-based incomplete contracts, as well as the inherent mechanics of purchasing professional services such as IT outsourcing or transformational outsourcing. The authors conclude that while some demand for such offerings might exist, a repositioning in transitional outsourcing will not solve the
existing problems of most players in the outsourcing field. As such, it does not safeguard future survival.
Welcome To A Maturing Industry! In 1990, Daimler-Benz’s IT outsourcing unit ‘Debis’ was founded. It was to be the starting signal for the German IT outsourcing market, and since then, the industry has changed significantly. A clear understanding of this evolutionary industry trajectory is paramount for a discussion of current trends and challenges. In fact, by taking a long-term perspective, major shifts regarding market size, customer acceptance and industry organization become much more obvious than in a short-term analysis. Market volume rose to a stunning €14 billion in 2005, from a mere €0.7 billion back in 1994. The increase suggests a compound annual growth rate of about 30 per cent, and supports management legend Peter Drucker’s remark: ‘If you ask me what is the fastest growing industry – it’s outsourcing’. Although the proponents and opponents defended their positions in the early years, outsourcing is now considered to be one of the most important methods for restructuring and optimizing large parts of a corporate value network. Customers accept IT outsourcing’s value preposition. Even industries known for their reluctance regarding outsourcing, such as
banking, are increasingly turning to it, as decisions by Deutsche Bank and Zurich Financial Services demonstrate. A giant leap in the IT outsourcing industry’s degree of professionalism mirrors the market’s progressive development. Best practices regarding request for proposal (RFP) processes, overall contract structures and service level agreements (SLA) have developed over time, basically providing some form of ‘dominant design’. Today, companies on the customer side are able to hire specialized intermediaries, such as Gartner, TPI or Compass, for their unique, professional and up-to-date expertise in planning, structuring and negotiating outsourcing transactions. This seems to paint a bright picture, but it is only one side of the coin. As recently described by Harvard Business School’s Anita McGahan, it partially reflects the pattern found in emerging industries that are maturing, rather than being a unique development. This evolutionary, lifecycle-oriented process immediately raises the question regarding how other defining factors, such as the number of companies active in the market, the business margins or, in general, competition in the industry have developed. As far as the number of companies that are active is concerned, research by the new Otto Beisheim School of Management shows that the development of non-captive IT outsourcing in Germany clearly follows evolving indus-
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tries’ expected pattern. While initially increasing from 1990 to 1999, the number of vendors dropped dramatically from 2000 onwards. There is, of course, always reason enough to criticize studies of that type based on the wellknown problems of delineating industries and the difficulties of capturing every single company active within an industry. Nonetheless, none of the 15 participants who follow the development of the German IT outsourcing industry, and with whom the authors discussed the initial research results, questioned the overall pattern that was developing. A seasoned executive’s answer perfectly summarized one of the most often heard responses: ‘The graph sketches what I have experienced over the last couple of years - our industry is consolidating.’ In fact, what the theory had predicted, by means of robust empirical evidence from many industries, happened: a ‘shakeout’. Conventional wisdom would initially presume that the underlying reasons for the shakeout would be declining demand. However, according to the figures from Pierre Audoin Consultants, exactly the opposite hap-
pened, because the market volume rose by about 16% between 2000 and 2001. The bursting of the dot.com bubble, which occurred in the same year as the shakeout occurred, could offer an alternative, capital market-based explanation. However, since none of the examined companies, except one, matches the typical start-up profile, it is unlikely that this was the major driving force. In fact, the concurrent events seem to be coincidental. A different, more complex and internally driven mechanism that resulted in increased competitive pressure, that restricts market entry and encourages exit, is at work: the process of industry evolution towards a mature stage. Observable factors such as declining margins and decreasing growth rates support this hypothesis. It is ironic that a continuously increasing market volume could camouflage many of the evident signals. Anecdotal evidence of the increasing competition can be found in the business media’s recent coverage. T-Systems, one of the market leaders in Germany, suffers from profitability problems and declining growth. Siemens Business Services (SBS), another major player,
Number of companies active in the non-captive IT outsourcing market in Germany 1990-2005 60
50
40
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0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Figure 1
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has shown negative earnings for several quarters. International players such as LogicaCMG or CSC, that are active in the German market, aren’t immune either. LogicaCMG announced losses in the German market for the first half of 2005. Some weeks ago, CSC’s CEO, Van B. Honeycutt, analyzed the situation from a broader viewpoint: ‘For some time it has been apparent to us, and to other companies in our industry, that there is excess capacity in certain geographies, particularly Europe.’ The plain and simple message of all the facts is: Welcome to a maturing industry! Why is it so important to comprehend this fact and its direct implications in the context of the question discussed in this article? From our perspective, it is the industry’s mature situation and competitive pressure rather than any other factor, such as the customer demand or new technological innovation, which account for the observed shift towards the ‘transformational outsourcing’ model. In the words of Kim & Mauborgne’s best-selling 2005 strategy book, Blue Ocean Strategy, companies like IBM, Accenture or CSC try to create a ‘blue, unexplored ocean’: new and uncontested market space. The critical question is whether this can actually be achieved.
Defining Transformational Outsourcing And Its Characteristics Both in business practice and academia there is an ongoing discussion on whether ‘transformational outsourcing’ (as opposed to ‘traditional outsourcing’) could be a unique means of redefining and revitalizing the IT outsourcing market. With reference to its primary goal, transformational outsourcing can be defined as ‘outsourcing to achieve a rapid, sustainable step-change improvement in enterprise-level performance’. As shown in Figure 3, transformational outsourcing shall achieve a fundamentally new level of added value for customers. All this is supposed to be accomplished by the integration of competencies, for example in the fields of strategy business, technology and (traditional) IT outsourcing, that are currently separately offered and sourced. The basic underlying idea is that in the sense of a top-down, consulting-led approach, one single vendor will be fully in charge of: - the strategic redefinition of an entire valuechain along changing business demands, - providing and implementing new systems needed in the course of change, as well as:
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Market Volume (inMio. €) and Annual Growth Rates in German IT outsourcing market (Ovum 2006) 16.000
14.618 13.628
14.000
13%
12.638 12%
11.684
12.000 10.000
14%
10.785 11%
9.940
10% 8.000 8.5%
6.000
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9%
8.2% 7.8% 7.3%
4.000
8% 7%
2.000
6% 5%
0 2004
2005
2006
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2008
2009
application-led outsourcing plus infrastructure-led outsourcing
Figure 2
Traditional vs. Transformational Outsourcing (Mazzawi 2002) Traditional Outsourcing
Transformational Outsourcing
Operational focus
Business focus
All about cutting costs
All about creating value
Helps impose control
Helps to manage uncertainty
Aligns with fundamentally unchanged business processes
Aligns with the business processes that change in line with strategic goals
Based on external IT specialists achieving higher performance than a non-specialist company
Based on the creation of a network of partnerships in the new connected economy
Removes non-core functions from the business to provide a one-time release of capital
Business change and cost re-engineering enable sustained value creation
Figure 3
running those systems over a longer period of time.
At this point it is noteworthy that from a basic theoretical perspective, there is initially no difference between traditional and transformational outsourcing. The raison d´être of both can be found in transaction cost economics, which assumes that when firms rationally undertake sourcing decisions, they consider transaction-related costs, such as asset specificity, environmental uncertainty, and various other types. In a broad sense, transaction costs can be interpreted as the cost of using the external market, or the cost of the division of labor. Considering the additional theory that specialized service providers could attain cost advantages through economies of scale and scope, outsourcing of former internal activities could potentially generate positive economic value for a client.
The Hold-Up Problem - A Fundamental Barrier To Success The conditions of economic interchange between two sides are defined via contracts, thereby protecting the parties from a transaction by another opportunistic party. In general, the degree of protection depends on whether the contract is complete or incomplete, i.e. ‘does not fully specify the mapping from every possible contingency to rights, responsibilities, and actions.’ Asymmetric information and problems in measuring performance are among the major factors responsible for contracts’ incompleteness. This is critical, as it could lead to an undesirable situation for both parties in such a contract, known as a ‘hold-up’ problem. Hold-up refers to the ability of one party to expropriate the profits of another party. Loopholes in a contract are always an invitation to use them for one’s own benefit. Whether this will be actively pursued depends on how closely the other party is bound by the contract, i.e. if it has the ability to not only threaten, but to exercise an existing option to back out. IT outsourcing’s high switching costs usually mean that once operations are in place, there is some form of lock-in, specifically in respect of the client, which limits its ability to take action. In certain situations, the vendor could face a similar fate, too. A hold-up in IT outsourcing is far from simply being pure theoretical reasoning, as can be seen in the many studies examining outsourc-
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ing contracts’ successes and failures. The following press article about problems in the large, ‘traditional’ IT outsourcing transaction between IBM and Deutsche Bank, illustrates an excellent example of a hold-up situation. Whether this hold-up is real, or only perceived as such by the client, Deutsche Bank, doesn’t make much difference since tensions will inevitably increase in the service recipient and service provider’s important basis of mutual trust.
Deutsche Bank Faces Trouble In Data Center Outsourcing Deal Dark clouds have appeared on the horizon of Deutsche Bank’s data center outsourcing contract with US outsourcing giant IBM. This was disclosed by the German newspaper `Welt` in its Wednesday issue, citing a source within the banking industry, who preferred to remain anonymous.
Transformational outsourcing defined as integration of formerly shared compatencies (Fink et al.2004) Traditional model with shared competencies and different vendors
Traditional model with integrated competencies and a single vendor Intergrated project management
Build
Run
Plan Business Level
Business Level
Plan
Strategy & Business Consulting
IT Outsourcing
Run
Range of competencies of a Business Innovation Partner (i.e. Transformational Outsourcing Provider)
IT Level
IT Level
IT consulting & Systemintegration
Build
Figure 4
The four worlds of outsourcing (Cohn/Yopung 2006) Business Outcome
OPTIMIZATION
Value
CREATION
One-to-one
One-to-many,or many-to-many
Pay for business performance Delivery
Business transaction priced
Custom
Standard
MANAGEMENT
ACCESS
One-to-one
One-to-many,or many-to-many
Fee for service level
Pay for usage
Operational Outcome
Figure 5
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According to reports, the realized cost savings won’t reach the expected €80 million in Year One, but only €56 million. The initial cost basis was €400 million. Sources cite the reason for this as being the significantly increased costs of the so-called ‘change requests’ that Deutsche has to pay IBM for services beyond those defined and agreed on in the overall contract. Deutsche hasn’t officially commented on this issue. Source: dpa-AFX news, December 3, 2003 (Our translation) In general, there is a simple rule of thumb: the greater the perceived risk of facing a holdup, the less likely it is for a company to agree to a transaction, or make larger up-front investments. While recognizing the sensitivity traditional outsourcing has shown in respect of hold-ups, we will see that transformational outsourcing, with its extended business model, actually compounds the potential problem. First of all, by definition the integration, building, and running of the entire plan of the transformational outsourcing model increases complexity. The larger scope makes a detailed definition of the desired outcome, as well as the measuring overall performance, more difficult. In traditional outsourcing contracts it is currently established practice to benchmark cost and performance with respect to the market after a certain period, and to adjust them if necessary. Conversely, a transformational outsourcing solution’s high specificity will make it almost impossible to find a comparable solution and market price to be benchmarked against. Based on the incompleteness of the contract, and a greater information asymmetry arising in favor of the vendor due to the greater scope, the risk of a hold-up problem significantly increases in transformational outsourcing. Clients might therefore be potentially discouraged to enter such a deal. Secondly, and closely related, ‘changing the paradigm’ means weaving IT outsourcing activities into questions of business outcome. This again increases complexity, but in another dimension. In order to get a transformational outsourcing contract signed, a potential vendor needs to get the approval of two diverse, internal parties: IT executives and executives from the business side. Examining customers’ sourcing strategies and their decision-making processes will clarify the inherent problem arising from this situation.
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Generic sourcing strategies for professional services (Baker/Faulkner 1991) Traditional Outsourcing
Fractional Strategy
Pn
Pn
…
…
P2
P2
P1
P1 T1 T2
…
Tn
Relational Strategy
T1 T2
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P2
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P1 …
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Transactional Strategy
Pn
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Figure 6
Clients’ Sourcing Strategies Provide Another Fundamental Barrier To Success The field of professional services represents a major part of corporate expenditures. It includes a diverse set of activities, for instance advertising, financial advisory or consulting, and IT outsourcing, While others sourcing relations, for example manufacturing and supply of industrial parts, were for many years subject to extensive strategic considerations and far-reaching operational improvements, strategies for and optimization of professional services sourcing played a secondary role at best for a long time. Increasingly, ongoing cost pressures in almost all industries, and limitations on the generation of further cost savings in the traditional sourcing areas, call for a strategic and structured approach to professional services. The concept of ‘multisourcing’, i.e. ‘the disciplined provisioning and blending of business
and IT services from the optimal set of internal and external providers in the pursuit of business goals’ is one among different emerging approaches emphasizing this trend. Its paradigm regarding the question of how the division of labor is structured and organized is diametrically opposed to the one inherent in the transformational outsourcing offering that suppliers propose. Multisourcing stresses the strategic value of internally coordinating the different service offerings sourced, whereas transformational outsourcing’s one-stop-shop approach conversely draws its legitimacy from the supposed added value provided by a vendor’s external coordination. Naturally, the aggregation level of distinct activities plays an important role in evaluating optimal strategy. However, in respect of IT outsourcing activities alone, there is already significant empirical evidence from various studies that selective outsourcing produces better results than full or total outsourcing, clearly indicating the limits of external coordination.
Selective outsourcing refers to sourcing single know-how blocks, such as infrastructure management or application development, from bestof-breed providers, rather than relying on a single sourcing strategy for the entire information technology element. New market studies, for example, analysis from TPI, underline the increasing proportion of client companies turning to partial IT outsourcing. Recent examples include Deutsche Bank outsourcing its data center operations to IBM, while contracting LogicaCMG for application development. Zurich Financial Services followed a similar strategy by splitting its IT outsourcing activities between Computer Sciences Corp. (application management) and IBM (infrastructure and desktop management). Companies like General Motors and ABN AMRO have joined the list of those in favour of partial outsourcing. A second underlying multisourcing assumption is that services subject to external sourcing differ widely in nature, consequently, different sourcing strategies need to be employed. With regard to transformational outsourcing, even a cursory analysis shows that the distinct integrated competencies, namely common IT outsourcing and strategy and business consulting, are parts of largely differing sourcing worlds. The concept developed by Gartner classifies services based on the types of value delivered (business outcome vs operational outcome) and the business models (custom vs standard). Service activities for which the business outcome is difficult or impossible to measure will have to be placed into the ‘operational outcome’ quadrants as shown in Figure 5. In turn, all activities that can be evaluated in terms of their direct impact on business goals (e.g. revenue or market share) belong in the top two quadrants of ‘business outcome’. By explicitly addressing the problem of measuring business value in IT outsourcing (‘What is the value of your data network?’), Cohen/Young recognize its ‘operational outcome’ characteristics. Moreover, there has been a shift from customized to standard solutions during recent years, locating IT outsourcing in the lower right quadrant and clearly defining the type of sourcing strategies IT executives should pursue. In contrast, Business and strategy consulting is characterized by a strong focus on business outcome and a customized approach, in other words, the upper right quadrant.
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The model’s results regarding the inherent differences in both fields of competencies’ optimal sourcing strategy are supported by another study which focuses on two different dimensions in sourcing decisions. The first is what is called the product level, i.e. the distinct single offering meeting a specific need, and the second is the transaction level, i.e. how often a single product or offering is demanded by one customer over a given period of time. According to Baker/Faulkner’s theoretical reasoning, for strategy and business consulting services, which are project-based in nature and demand different functional expertise in each project, a transactional strategy usually provides the best results. Fractional strategies are supposed to be the most suitable approach to sourcing services with a profile similar to that of IT outsourcing. As outlined above, the trend in recent outsourcing transactions towards partial outsourcing backs this theoretical reasoning with empirical evidence. Finally, it’s important to mention that Baker/Faulkner are extremely skeptical of relational strategies, a classification into which transformational outsourcing would fall according to its profile. The practical arguments that these authors put forward, such as professional services companies’ observed growing opportunistic behavior, add weight to the argument for a higher risk of hold-ups Despite focusing on the different dimensions analyzed in both concepts, Cohen/Young and Baker/Faulkner come to the same conclusion: the business model characteristics of transformational outsourcing, i.e. the attempt to integrate different competencies, and the client’s differentiated value expectations, as well as sourcing strategies, seem to be rather incompatible in principle.
What Will The Future Hold? As we have outlined, transformational outsourcing faces some major barriers in the market from theoretical and practical points of view. However, this does not necessarily mean that there won’t be attractive, working transformational outsourcing deals in the future. The two major arguments, the risk of hold-up and the sourcing and decision-making processes, advanced against transformational outsourcing merely answer the strategic question regarding whether transformational outsourcing will be a business model that revolu-
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tionizes the entire IT outsourcing market. EDS’s recent decision to sell off its strategy consulting unit A.T. Kearney could be indicative of the inherent difficulties of such integrated business models. In the mid-1990s, EDS had already developed “co-sourcing”, a service model similar to transformational outsourcing. From our point of view, there are more obvious strategies with which vendors could improve their competitive positioning. On the one hand, a more focused, industry-specific service offering is one way a vendor could differentiate itself successfully in the market. This is an option even larger players could employ to position themselves against, for example, the services and technology powerhouse that is IBM. TietoEnator’s strong focus on telecommunications or Affiliated Computer Services’ focus on public sector clients are two examples that follow this logic. We consequently expect an increasing amount of knowhow switching mergers and acquisitions (M and A) deals in future. Computer Sciences’ disposal of its Austrian pulp and paper industry unit to TietoEnator, as well as WM-data’s acquisition of Atos Origin’s Nordic operation are prototypical of such moves. On the other hand, mature markets always demand aligned, efficient delivery structures. IT outsourcing is the key to control costs and maintain profitability, despite the market’s price pressures. Rather than just reducing factor costs by off-shoring activities to low-cost countries, the future challenge will be to replace some of today’s labour-intensive service activities by hardware and software technologies that will allow greater economies of scale and higher standardization. This could be one answer to the question regarding IBM’s future direction, since the common argument of a long-term trading up strategy from hardware to software and from software to services might be far too simple.
References [1]
[2]
Baker, W.E. and Faulkner, R.R. (1991). Strategies for managing suppliers of professional services. California Management Review. Vol. 33, No. 4, pp. 33-45. Besanko, D. et al. (2004). Economics of Strategy. Wiley, Hoboken. Cohen, L. and Young, A. (2006). Multisourcing: moving beyond outsourcing to achieve growth and agility. Harvard Business School Press, Boston.
[3]
Cullen, S. and Willcocks, L. (2003). Intelligent IT Outsourcing. Butterworth, Oxford. [4] Cunningham, P.A. and Fröschl, F. (1995). Outsourcing: Strategische Bewertung einer Informationsdienstleistung. Frankfurter Allgemeine Zeitung Verlag, Frankfurt. [5] Fink, D. et al. (2004). Die dritte Revolution der Wertschöpfung: Mit Co-Kompetenzen zum Unternehmenserfolg. Econ, München. [6] Göbel, E. (2002). Neue Institutionenökonomik: Konzeption und betriebswirtschaftliche Anwendung. Lucius & Lucius, Stuttgart. [7] Kim, C. and Mauborgne, R. (2005). Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant. Harvard Business School Press, Boston. [8] Kotler, P. et al. (2002). Marketing Professional Services: Forward-Thinking Strategies for Boosting Your Business, Your Image, and Your Profits. Prentice Hall Press, Englewood Cliffs. [9] Kreutter, P. and Weigand J. (2006). Consolidation patterns in the German IT outsourcing industry. G/R/I/D Working Paper, Vallendar. [10] Lacity, M.C. and Willcocks, L. (1998). An empirical investigation of information technology sourcing practices: Lessons from experience. MIS Quarterly, Vol. 22, No. 3, pp. 363-408. [11] Mazzawi, E. (2002). Transformational outsourcing. Business Strategy Review. Vol. 13, No. 3, pp. 39-43. [12] McGahan, A. (2004). How Industries Evolve: Principles for Achieving and Sustaining Superior Performance. Harvard Business School Press, Boston. [13] SMP Strategy Consulting (2006). SMP ITStudie 2006. Duesseldorf. [14] Williamson, O. E. (1975). Markets ands Hierarchies: analysis and antitrust implications, a study of the economics of internal organization. Free Press, New York.
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BUSINESS IMPACT OF OUTSOURCING A FACT-BASED ANALYSIS.
Scientists at the IBM T. J. Watson Research Center investigated the long-term effects on companies that outsourced a major portion of their IT infrastructure between 1998 and 2002. Unlike previous research that relied on the case-study approach, the IBM Research study1 is the first to apply rigorous statistical analysis to measure the impact of an outsourcing agreement on a company. The study concludes that companies engaged in information technology (IT) outsourcing outperformed their peers on a long-term basis in key business metrics, specifically selling, general and administrative (SG&A) expenses, return on assets (ROA) and earnings before interest and taxes (EBIT). Further, the research indicates that the larger the outsourcing contract, the more likely the improvement in bottom-line results. This white paper examines the results of the survey.
Dr. Aleksandra (Saska) Mojsilovic
with collaboration from Dr. Marc Bertoneche
Scientist, Mathematical Sciences IBM Research
Harvard Business School, Visiting Professor
Building better bottomline results Revenue growth. Product and service innovation. Cost containment. Process and performance improvements. Market-share expansion. These pressing concerns top today’s corporate agendas, as company executives look for ways to deliver better short- and long-term results. Executives are increasingly outsourcing information technology resources to help their companies reduce costs and better focus on core business strategies. This rapid growth in outsourcing IT has attracted the attention of researchers and practitioners alike, as they seek to ascertain the value of outsourcing IT. Most research has been qualitative, relying on case studies, interviews and questionnaires. In some cases, teams undertook quantitative approaches to understand the financial impact of outsourcing. Typically, however, they focused on shortterm stock performance. Using a rigorous statistical approach, IBM scientists analyzed the financials of 56 publicly traded companies – 38 non-IBM clients and 18 IBM clients. The analysis revealed a correlation between major IT outsourcing deals and significant improvements in key business metrics for those companies.
IT outsourcing was clearly a part of an effective management strategy that the companies in the study used to achieve positive results. The study illustrates that IT outsourcing is a proven business tool that other companies should consider to build better bottomline results and please shareholders.
Companies that outsourced IT outperformed peers on key business metrics Companies in the study realized better long-term improvements in business performance when compared to sector peers. The results were impressive.
Lower growth in SG&A Almost three-quarters of the companies studied observed significant reduction in selling, general and administrative (SG&A) expenses compared to sector peers. Prior to outsourcing, the annual growth in SG&A expenses of companies in the study was already 4.2 points lower than the sector median, likely due to preexisting corporate cultures focused on business improvement. Within one to two years after IT outsourcing, these companies improved even more. Annual growth in
SG&A expenses for these companies was 9.9 points lower than the sector median. One notable performer, a global supplier of advanced semiconductors with annual revenue of about US$1.3 billion, reduced SG&A expense by almost half after outsourcing IT. Meanwhile, SG&A expenses for the semiconductor supplier's competition grew by 9 points over the same period.
Increased growth in ROA Almost two-thirds of the companies studied outperformed their peers in return on assets (ROA) two to three years after IT outsourcing commenced. Prior to outsourcing, the annual ROA growth rate for companies in the study was 7.5 points lower than the sector median. After outsourcing, however, these companies experienced 8.6 points higher annual growth rate in ROA compared to the sector median-a substantial swing of 16.1 points. A global provider of travel and real estate services, for example, grew ROA by more than 300 percent, while its competitors' ROA dwindled by 29 percent.
Higher growth in EBIT Nearly two-thirds of the companies studied grew earnings before interest and taxes (EBIT)
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IT outsourcing connects global telecom company to better business results A global telecommunications company outsourced the management of its data centres and other processes in an agreement valued at US$4 billion. The year before the company outsourced IT, its quarterly SG&A expense was US$3.1 billion. Three years into the outsourcing agreement, quarterly SG&A expense dropped 13 percent to US$2.7 billion. The result is in marked contrast to the sector’s 200 percent increase in SG&A expenses during the same period.
faster than their peers. Two to three years after IT outsourcing, companies experienced an annual rate of growth in earnings 11.8 points higher than the growth rate of the sector median. To better understand the dual impact on earnings, please see the Appendix.
Improvement in earnings growth more likely with larger contracts Research by IBM scientists indicates that the larger the outsourcing contract, the more likely the improvement in bottom-line results. While 54 percent of companies engaged in IT outsourcing agreements of less than US$100 million per year experienced positive earnings growth, 71 percent of companies engaged in IT outsourcing agreements of greater than US$100 million per year realized positive growth in earnings. (See figure 1.)
Research analysis and methodology The quantitative analysis was performed by scientists in the Mathematical Sciences Department at the IBM T. J. Watson Research Center. They analyzed each company’s financial performance in the year prior to outsourcing and measured results up to three years after outsourcing began. Following the theoretical and empirical evidence that the key reasons for outsourcing include cost reduction and focus on core operation,2,3 IBM scientists focused their investigation on SG&A, EBIT and ROA. Figure 2 shows the before-and-after business results. Other studies that explored the effects of outsourcing have only analyzed peri-
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Figure 1: Relationship between the size of the IT outsourcing agreement and growth in earnings ods of months before and after the beginning of an outsourcing agreement. The IBM team utilized a patent-pending methodology to measure changes in business performance of diverse companies over a longer-term period— starting from one year prior to outsourcing and up to three years after. IBM used the Datamonitor ComputerWire database of historical services signings to identify candidates for the study. On July 15, 2004, the database listed 5,085 services engagements announced between May 1994
Outsourcing for stronger financial health A healthcare insurance company outsourced management of its data centres, PC support, companywide help desks and data networks to a service provider in January 2002 with a ten-year agreement worth over US$700 million. Prior to outsourcing, the company’s quarterly EBIT was US$47 million. Two years into the agreement, the company’s quarterly EBIT grew to US$119 million. The 153 percent increase in EBIT was ten times greater than the rate of earnings growth in the sector as a whole.
and May 2004. To minimize the selection bias, an automatic filter was implemented to search the database using the following criteria: - Multinational company listed on a U.S. stock exchange - Announced total contract value (TCV) of US$50 million or higher to a single provider/vendor - Outsourcing agreement announced between January 1, 1998, and November 31, 2002; end date chosen to allow sufficient time window for the impact analysis - Scope of outsourcing contract was predominantly IT, such as data centres, deskside support and hosting - Contract was the company’s first major IT outsourcing announcement The analysis demonstrates a strong correlation between outsourcing IT resources and the financial performance of the companies studied. It is important to note, however, that the results do not imply that outsourcing was necessarily the sole driver behind this improvement. To further establish confidence in the results, the IBM Research team ran a Monte Carlo simulation computing the probability of observing the same result in a random population of companies. The team randomly selected 56 companies while preserving the same
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References: 1 2
3
4
5 6 Figure 2: Difference in points in annual growth, as compared to sector median, prior to and after outsourcing IT
7 8
sector distribution, and ran the same analysis 1,000 times. The same financial improvements occurred in less than 5 percent of the samples, indicating a 95 percent confidence level in the results. Furthermore, an independent study recently released by the Katz School of Business at the University of Pittsburgh confirmed the results measured by the IBM team. Using different data, methodology and business metrics, the study concluded that firms experience significant improvements in operating efficiency for each of the first three years following the outsourcing contract.4
Conclusion Outsourcing IT is a strategic business decision that is likely to boost a firm’s performance. Most of the existing research on the effects and benefits of IT outsourcing is based on case studies and client interviews. The IBM study used robust statistical methods to take a fresh look at outsourcing, investigating its long-term impact on companies. Besides the wealth of knowledge on why and how to outsource, the results shed new light on the value that a well-structured and well-executed IT outsourcing agreement can deliver to a company. The study also emphasizes the potential that large-scale IT outsourcing strategies offer to boost the business performance and bottom-line objectives of companies.
Appendix Earnings before interest and taxes is determined by revenue, less costs; selling, general and administrative general expenses; as well as depreciation and amortization expenses. SG&A expense, also known as overhead, typically varies as a percent of revenue from 16 percent to 25 percent across industries.5 IT expense is typically accounted for within SG&A expense. IT expense as a percent of revenue also varies by sector—from 1.43 percent in construction to 6.64 percent in financial services.6 According to a study across multiple industries, IT expense accounts for half of a company’s capital expenses on average.7 Most Fortune 500 companies use accrualbased accounting, depreciating IT assets over three to five years.8 IT and capital expenses should decrease when a company successfully outsources IT. The expense reductions enable a company to realize lower SG&A expenses, as well as depreciation and amortization expenses, compounding the improvement in earnings.
1 “Outsourcing Business Impact,” IBM T.J. Watson Research Lab, 2004 M. A. Smith, S. Mitra, S. Narasimhan, “Information Systems Outsourcing: A study of Pre-Event Firm Characteristics,” Journal of Management Information Systems, Fall 1998, Vol. 15, No.2, pp. 61–93 D. J. Bruce, M. Useem, “The Impact of Corporate Outsourcing on Company Value,” European Journal of Management, Vol. 16, No. 6, pp. 635–643, 1998 Gao, Ning. “What does Stock and Accounting Performance tell us about Outsourcing?” Katz Graduate School of Business, University of Pittsburgh, 2005 “Today’s sluggish economy,” Controllers Report, March 2003 “Worldwide IT Trends and Benchmark Report,” Meta Group, 2004 Carr, Nicholas. “IT Doesn’t Matter,” Harvard Business Review, May 2003 Davis, Kendall; Rath, Anna; and Scanlon, Brian. “How IT Spending is Changing,” McKinsey Quarterly, 2004 Special Edition, 2004
© Copyright IBM Corporation 2006, All Rights Reserved IBM, the IBM logo and the On Demand Business logo are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries or both. Other company, product and service names may be trademarks or service marks of others. References in this publication to IBM products or services do not imply that IBM intends to make them available in all countries in which IBM operates.
It is important to understand the difference between the terms "points" and "percent" when they are used to describe growth or relationship with the median. Points reflect the actual numerical increase or decrease in percent. For example, when a central bank raises interest rates from four to six percent, they have raised rates by two points, not two percent."
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THE OFFSHORING REVOLUTION GLOBAL IMPLICATIONS
As companies continue to view offshoring as an attractive way to boost their competitiveness, the trend is gaining momentum. This is likely to add fuel to the debate on whether it is a welcome development or not. In this article, which draws on the World Investment Report 2004, the United Nations Conference on Trade and Development suggests that the offshoring of services offers considerable potential gains to both importers and exporters of the relevant services, as long as appropriate policies are adopted.
Torbjörn Fredriksson Senior Economist UNCTAD
The irreversible tradability revolution New information and communication technologies (ICT) have radically improved the possibility to trade services over a distance. The cost of one megahertz of processing power fell from $7,600 in 1970 to 17 cents by 1999; in India, the price of an international 2Mbps fibre leased line dropped by up to 80% only between 1997 and 2001.1 Such changes have led to a revolution in the way companies are organizing their production of services. The use of ICT allows knowledge to be codified, standardized and digitized, which in turn allows the production of more services to be split up, or ‘fragmented’, into smaller components that can be located elsewhere to take advantage of cost, quality, economies of scale or other factors. In fact, many of the forces driving the fragmentation and globalization of services are similar to those that have long led companies to create international production systems for the manufacture of goods. As highlighted in the World Investment Report 2004, the range of processes affected by the fragmentation of services is huge, from simple activities (e.g. entering numbers into a computer) to highly sophisticated tasks (e.g. architectural design, financial analysis, R&D).2 While some are specific to a particular industry, many are generic and cut across most
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industries. So, while the globalization of manufacturing activities affects only manufacturing, offshoring of services is of potential relevance to firms in all sectors from mining companies to banks. Obviously, not all services are affected, but many will be. In an UNCTAD/Roland Berger Strategy Consultants survey of leading European firms' offshoring strategies, no business process was explicitly excluded from offshoring considerations by more than 20% of the respondents. So, there are no ‘sacred cows’. More importantly, the fundamental changes in the tradability of services are irreversible in nature. Once companies learn to exploit fully the opportunities created by pooling services and locating them where they can be most efficiently performed, they are unlikely to go back to the old way of organizing their business processes. Consequently, policymakers need to carefully consider how best to address this new situation.
Offshoring vs outsourcing An important distinction should be made between outsourcing and offshoring (chart 1). Outsourcing implies moving a business process outside the firm to a third party service provider. This supplier may be located in the same country as the principal or abroad. Offshoring implies shifting the business pro-
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cess outside the home country. This can be done either by outsourcing the service to an external supplier (offshore outsourcing) or to a foreign affiliate (captive offshoring). Outsourcing of business processes within a country has existed in some form for centuries. It gained in importance as companies focus increasingly on what they do best (their core business) and outsource non-core activities. The global market for such outsourcing was estimated at $110 billion by end 2002 and is expected to grow to about $173 billion in 2007. Offshore outsourcing of business processes, meanwhile, accounted for only 1% of this market, but is expected to achieve a market share of 14% by 2007.3 In fact, in many countries, the bulk of the services exported have been generated as a result of captive offshoring. For example, up to 60% of India's exports of IT-enabled services are produced by foreign affiliates. Similarly, in Ireland, two-thirds of all employees in the call centre industry work in foreign affiliates.
Why do companies offshore services? The key factor behind the offshoring process is the search for improved competitiveness – through cost reduction and/or improved quality. Different studies show that cost savings can be substantial – often between 20 and 40%. Savings can be achieved partly by seeking out
Even more interesting is that companies often report quality gains from offshoring. For example, in the case of captive offshoring, the consolidation of services in a few rather than many locations may allow the development of centres of excellence. Moreover, when the ‘back-office services’ of one firm become the ‘front-office services’ of a specialized service
Contrary to common perceptions, offshoring is not simply a question of shifting activities from high-cost to low-cost locations. lower-cost locations, partly by consolidating operations and reducing the cost of infrastructure, training and management. Consolidation of activities may reduce the need for expenditures on infrastructure and maintenance, as well as labour costs.
Location
Internalized production
Externalized production (‘outsourcing’)
Domestic
Production kept in-house at home
Production outsourced to third-party service provider at home
Foreign (‘offshoring’)
Production by own foreign affiliate ‘Captive offshoring’
Offshore outsourcing to third-party provider abroad
Source: UNCTAD, World Investment Report 2004: The Shift Towards Services.
Chart 1: Offshoring and outsourcing
Customer support centres
Shared service centres
R&D services
1
Canada (81)
India (108)
India (532)
2
India (79)
Ireland (25)
China (368)
3
U.K. (48)
Hungary (14)
USA (132)
4
Philippines (40)
Poland (14)
U.K. (94)
5
Ireland (32)
Czech Republic (11)
Singapore (81)
6
China (21)
U.K. (11)
France (65)
7
USA (21)
Philippines (10)
Canada (56)
8
France (17)
China (9)
Germany (53)
9
Australia (15)
Singapore (9)
Taiwan Province of China (50)
10
Germany (13)
Malaysia (9)
Ireland (47)
Source: UNCTAD, based on data from LOCOMonitor.
Chart 2. Top 10 destinations by number of FDI projects related to selected service functions 2002-2005
provider, the latter may pay more attention to quality while the principal can focus scarce resources on its core activities. In some cases, offshoring has also taken place to cope with excess demand for certain kinds of services. This happened in the United States in the runup to the new Millennium as companies struggled to find sufficient number of computer programmers in their home country to address the Y2K problem, as well as in Europe before the introduction of the Euro. Contrary to common perceptions, offshoring is not simply a question of shifting activities from high-cost to low-cost locations. In fact, much restructuring takes place among the industrialized countries. For example, when Infineon Technologies in July 2003 announced the consolidation of its European customer logistics management from 19 to 3 locations, the new centres were placed in Dublin (Ireland), Kista (Sweden) and in Munich (Germany).4 This just illustrates that many factors other than cost differentials also influence where a service is ultimately produced. A review of FDI projects related to selected service functions during 2002-2005 confirms the diversity of destinations depending on the nature of the service that is offshored (chart 2). In the case of customer support centres, Anglo-Saxon countries dominate, led by Canada, India and the United Kingdom. Industrialized countries make up 7 of the top 10 destinations. English-speaking capabilities have so far been an essential asset to attract FDI projects in this kind of services. However, opportunities are emerging in locations in Eastern Europe, Africa and Latin America that can handle such languages as German, French, Spanish and Japanese.
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For shared services centres, the picture is slightly different, suggesting that for backoffice functions, access to other skills than language capabilities is relatively more important. The list of the top-10 destinations includes three new EU members (Czech Republic, Hungary and Poland) in high positions. For German speaking enterprises, a 2005 survey by Deutsche Bank and BITKOM found that these three countries will see the fastest
companies are concerned that the service quality will suffer if certain activities (e.g. customer services) are offshored to a foreign location. Others are afraid that control over the service activity or the institutional knowledge need to perform the tasks will be lost in the process. Data-security issues can also constitute a potential barrier to offshoring. Based on how companies perceive such risks, they differ significantly in their assessment of the poten-
If early movers in the area of offshoring continue to experience competitiveness gains, it will be difficult for their competitors not to follow suit sooner or later. growth as offshoring destinations. In 2005, Costa Rica and Romania also emerged as preferred locations for shared services centres. For R&D services, the skills requirements are particularly high. Still, India and China are now the top destinations for related FDI projects most of which are related to software development. As noted in the recently published World Investment Report 2005, more than half of the world's top R&D spending firms already do R&D in China, India or Singapore.5
How much will be offshored? The offshoring trend is still in its infancy. No one knows precisely how large the phenomenon will become. However, whatever the exact numbers, it is quite likely that we have only seen the tip of the iceberg. A recent assessment found that the global market for offshoring services is growing at an annual rate of 30%, possibly reaching $100 billion by 2008.6 Other studies put the maximum number of jobs in the U.S. that could be ‘at risk’ at around 14 million. Various other consultancy reports indicate that some 2-4 million service jobs are likely to be offshored in the next 5-10 years. If early movers in the area of offshoring continue to experience competitiveness gains, it will be difficult for their competitors not to follow suit sooner or later. As the trend gains momentum, it should also become easier for companies to find a larger number of capable suppliers of a growing range of services. Indeed, companies are still on a steep learning curve and many are struggling to cope with the challenges of offshoring. Many
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tial benefits from offshoring. For example, in the financial industry, the Royal Bank of Scotland – in contrast to competitors such as Barclays and HSBC – took a decision not to shift certain services abroad (at least not for the time being).7 Nevertheless, a growing number of companies are likely to consider new business processes as candidates for offshoring. According to the 2004 survey by UNCTAD and Roland Berger Strategy Consultants, only 40% of Europe's largest firms had any experience with services offshoring. About 44% of the firms stated that they had concrete plans for future
global economy. As the demand for offshoring grows from a wider range of companies seeking an optimal mix of locations in different time zones and with different capabilities, there is likely to be scope for more countries to find a niche in which they can develop a competitive position. As far as the importing countries are concerned, the offshoring trend has already given rise to concerns. No doubt, some workers will be negatively affected as companies restructure their services production. However, the magnitude of the possible impact is likely to be far smaller than that of normal fluctuations in demand and technological change. If Forrester Research, the consultancy firm, is right in estimating that 3.4 million service jobs will be offshored from the United States by 2015, it would correspond to a few hundred thousand jobs annually. Comparing this with the 4 million (!) job turnover that takes place on average every month in the U.S. economy helps to put the offshoring debate in perspective. Moreover, one new job created in an offshore location does not equate to one job lost in the importing country. In many cases, the offshoring process reflects an increased demand that has to be met by exploring new sources of skills. There is little evidence that offshoring of services has led to job losses in the source economies. In the U.K., for example, call centre employments is expected to increase from below 500,000 in 2003 to
The global shift in services offers potential benefits for countries at both ends of the process. offshoring most of which were related to various back-office functions. Within Europe, British companies have been most active in the area of offshoring. By contrast, companies in the large economies of France, Germany and Italy have shown much less interest in exploring the opportunities created by the tradability revolution.
What does it mean for the countries involved? The global shift in services offers potential benefits for countries at both ends of the process. For exporting countries, offshoring presents a new source of export revenues, the creation of new jobs in the service sector, opportunities for skills upgrading, and chances to become better connected with the
650,000 by 2007, despite the fact that many British companies are setting up call centre activities e.g. to India and South Africa. In the United States, similarly, call centre employment is predicted to grow from 3% in 2001 to 5% of the workforce by 2010. In addition, the fact that the United States was a pioneer in terms of both outsourcing and offshoring has given rise to a new business: contract service provision. It is no coincidence that many of the leading contract services providers such as Convergys, Sykes, Sitel, IBM and EDS are American. These and other similar companies are now exploiting the fruits of first-mover advantages developed in the United States by setting up a network of service centres in different parts of the world.
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For the importing economy, offshoring can allow companies to produce/source services more cost-effectively and thereby to improve their competitiveness and invest in new jobs. As shown by Catherine Mann at the Institute for International Economics in Washington, globalization of services is expected to lead to major productivity gains – maybe even larger than as a result of the globalization of manufacturing activities.
The policy challenge So what does this mean in terms of policies? What can countries do to reap greater gains from a process that is likely only to gain in force in the years to come? The first lesson is for policymakers to accept that the increased tradability of services will not be reversed. Hence, companies will continue to consider ways of restructuring their activities internationally. As all kinds of structural change, this creates opportunities and risks. Those policymakers that are able to address these in a constructive and forwardlooking manner stand the best chances of reaping the greatest gains. Conversely, those policymakers that primarily focus on ways to slow down or alter the trend towards offshoring, will at best be able to postpone the need for adjustment. On the other hand, such delays may eventually place their own companies in a worse competitive position compared with those companies that enter the learning process at an early stage. The second lesson is that all countries may identify niches in which they may offer attractive conditions for the production of services. As explained above, offshoring is not simply a North-South phenomenon. Both developed
and developing countries stand a chance of attracting centres of excellence for the production of specific services or business processes. Each country needs to assess carefully its strong as well as weak points in order to understand where it may have an opportunity to attract such activities. Thirdly, governments can influence corporate decisions in this area. Active investment promotion can ensure that prospective investors are aware of existing investment opportunities in a country. In this context, the provision of so-called after-care services may be particularly effective. As many as 40% of the largest European companies stated that factors beyond pure benchmarking affect their offshoring decisions, including internal lobbying by their own foreign affiliates. Investment promotion agencies can assist in such efforts. But even if the long-term benefits are substantial, there are also important short-term challenges to consider. All shifts in comparative advantage entail adjustments at the micro level. Some people do lose jobs, and there will be transition periods during which they search for new employment. People may have to acquire new skills or move to new locations to become employable. There are, in other words, real adjustment costs. In this situation, the role of the Government is to minimize or ameliorate such costs. The institutional challenge is to ease the transition process for those directly affected by offshoring, upgrade skills and increase innovation. This does not require measures to force service jobs to stay at home, but rather more constructive policies that encourage education, training and R&D. Protectionist measures aimed at arresting the offshoring trend would likely destroy
rather than save jobs. Indeed, limiting the ability of its firms to exploit opportunities from offshoring may have a negative effect on their international competitiveness, with considerably more serious implications for employment in the long term.
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McKinsey Global Institute (2003). New Horizons: Multinational Company Investment in Developing Economies (San Francisco: McKinsey Global Institute), www.mckinsey.com/knowledge/mgi. UNCTAD (2004), World Investment Report 2004: The Shift Towards Services (Geneva and New York: United Nations). Scholl, Rebecca S., Debashish Sinha, Ravi Datar and Sujay Chohan (2003). “India will generate $13.8 billion from offshore BPO exports in 2007”, Gartner Dataquest Report, June (Stamford, CT: Gartner, Inc.). UNCTAD (2004), World Investment Report 2004: The Shift Towards Services (Geneva and New York: United Nations). UNCTAD (2005), World Investment Report 2005: Transnational Corporations and the Internationalization of R&D (Geneva and New York: United Nations). EIU (2006), The Face of Offshoring: Closer to Home? (www.eiu.com/offshoring). According to the company: "The best outcome for our staff, shareholders and customers is to continue to employ people in countries in which we operate, provided the fiscal and regulatory climate is supportive of business" (http://www.guardian.co.uk/business/story/0,36 04,1065770,00.html).
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EXECUTIVE VISIONS IT OUTSOURCING: ENHANCE YOUR PERFORMANCE THROUGH PROGRESSIVE VALUE GENERATION
Christian Oecking President of Global IT Outsourcing, Siemens Business Services
EXECUTIVE VISIONS
Enterprises are looking for innovative ways to create added value through IT outsourcing. But what is innovation and how do you harness its potential to transform your business? Companies that outsource their IT functions seek greater innovation from service providers. CIOs are challenging service providers to help bring IT and business goals together through technology advancements and deliver transformation through a structured approach. Outsourcing clients want contractually agreed upon roadmaps for innovation. So what exactly is ‘innovation’? Industry analysts and business leaders agree that in order for a product or service to be considered an innovation, it must make a great leap forward in delivering a measurable benefit. Siemens Business Services defines innovation as something new and different that creates value. Value is defined as the ability to lower cost or create a business advantage. Innovations that create an advantage are those that empower organizations to reach beyond their current operating or business models and be opportunistic in the pursuit of growth. For enterprises, the real definition of innovation depends on their individual business requirements, industry factors, and competitive landscape. Once an optimal state of operations is identified through innovation, ‘transformation’ is the set of actions that will provide a roadmap to achieve the desired state
Five Ways to Innovate Siemens Business Services has found specific, measurable and repeatable ways to drive innovation and transformation: •
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Identify competitive advantage opportunities for clients. In 2004, the BBC became the first in the media marketplace to adopt an outsourcing approach to technology service provision. Focusing on strategic initiatives, the BBC is transforming the industry by connecting customers with anywhere/anytime content and leading the creation of a fully digital Britain. Enable structure for continuous evaluation of leading edge services/technologies. Radio Frequency identification technology is traditionally used in supply chain processes.
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At New York’s Jacobi Medical Center, patients now wear their medical history on an RFID wristband. Medical professionals now identify patients in seconds and access a secure database containing detailed medical history and care instructions. Use of leading edge technology has made Jacobi an innovator in patient care. Identify cost controlling opportunities for clients. At Owens Corning, an integrated service delivery model was leveraged to lowering costs by 25% over the course of the three-year outsourcing contract. Create repeatable processes that add value. In Vienna, a parking lot management solution was designed and implemented based on mobile phone messages (SMS) and mobile control units, enabling an easier payment process more efficient parking space administration. Create a long-term roadmap for innovation structured through corporate governance. A leading global beverage company contracted for a five-year roadmap of innovation and savings through a progressive gain-sharing approach.
Siemens Business Services defines, governs and delivers what should be done to drive innovation and transformation for its clients. This is done through a formalized process of creating a transformation roadmap that helps enterprises address and prioritize business challenges. First, the optimal alignment between the business and IT, the target operating model, is identified. Then, a proprietary tool is applied to facilitate the discussion and planning of which technologies and services will drive fulfillment of the target operating model.
Make Innovation a Requirement A formalized approach to innovation and transformation within an outsourcing relationship can provide business value and drive competitive advantage. An innovative service partner like Siemens Business Services can transform the entire IT environment, from the technology through the support processes, and provide the governance model for continuous improvement.
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EXECUTIVE VISIONS OFFSHORING STRATEGIES
An interview with Chris Disher Vice President and founding Partner Booz Allen Hamilton
CD: I believe that outsourcing should become part of corporate strategy and it is a part of the organisation’s global footprint and human capital strategy.
CxO: What are the key benefits that companies expect to receive through outsourcing and, in practice, are they ever realised? CD: The primary benefit companies look for is cost and, it is important to distinguish the phenomena that has happened over the last five years, in using outsourcing as a way to get access to resources that are offshore. And with the access to offshore resources we’re actually able to find lower cost options than companies have seen in the past. From what I have seen in outsourcing there are three places that companies get benefits from. One: better factor cost such as lower cost labour or lower cost facilities.Two: its access to scale, and three, some kind of competence, and I think its very challenging for companies to get lower cost services through outsourcing without offshoring because for large corporations they already have scale. In many traditional outsourcing approaches you transfer staff over to do exactly the same work as they were doing before, so there is no saving from labour, or even from a facility standpoint, as they are often using the same facility, so that leaves competence and that’s a difficult one from which to realise savings. In a recent presentation, I highlighted the hurdle for saving is significant: clients typically want 15 per cent. I think there is one outsourcing firm that says that’s the average they see in contacts. We know that vendors need 15 per cent and then there’s the overhead on top of that. And that all has to be covered when you go to a third party to get something done that you were doing for yourself. For onshore outsourcing that’s just very difficult to make. We see, in many cases, the company not getting the cost benefit that they expected through outsourcing; while that is the number one thing the companies look for. With offshore strategies, we see benefits in the 30 to 40 per cent range. Therefore it’s important that offshoring is part of your outsourcing strategy before I give you blanket statements about outsourcing. I also see in the market a lot of cases where offshoring of resources is promised in outsourcing arrangements but some-
how those promises are not executed. There are fewer and fewer resources available in places like India, which has a high turnover of staff. We are seeing some problems with access to resources there. Cost is number one and it depends on whether or not the companies are feeling the benefits. The second one that we are seeing is really important: accessing the ability to get resources globally. To summarise: are the companies getting the benefits? If it is cost, they surely are if they are offshoring - without that it is difficult. But they are also looking to get access to resources, which is a big benefit; and to support growth strategies. We are seeing some extremely good returns there.
CxO: Are we focusing too much on cost and neglecting effectiveness? CD: I don’t think so. I think in the executive’s mind the cost is number one. I believe quality is expected as a delightful benefit. Depending upon the service, the quality and effectiveness is important. We see that with more mature markets, where there is a better understanding of the service metrics and performance metrics and where those are well-defined, the outsourcer can focus upon and deliver against those metrics. So in a less mature services area (where there is more bundling of services together because the standards are not in place, without great clarity about where service stops, and against the measures) it is more difficult for those to claim that quality has actually improved.
EXECUTIVE VISIONS
CxO: How should outsourcing fit into corporate strategy?
CxO: What are the primary qualities that you should look for in an outsourcing partner, and how would you rank these qualities? CD: I think that would depend on what the service is, certainly. Each service should be measured on its own set of objectives. We can talk about speed, quality and cost, but at a very general level. However, those are kind of relevant depending on what you are trying to get done. For example, if the company is going to transform business processes and they have significant investments in renovation and IT, now that’s an extremely complex services offering and very difficult to outsource in a classical way. But suppose your performance measures around business improvement of that process? Contrast that with IT maintenance,
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which is where many companies started outsourcing. You are looking for consistent delivery, high quality and low cost. That’s easier to measure there. So it depends on what it is. If you are doing more transformational work, that opportunity is going to look completely different to someone doing some piecemeal piloting of IT maintenance.
CxO: What are the top five best practices in benchmarking? CD: I don’t think companies find benchmarking useful. I think it’s something that’s talked about a lot at the outset of the negotiation process. But, at the end of the day , I don’t think the vendors will ever believe that benchmarking will be done well. They always argue that apple-to-apple comparisons are difficult as each company is unique.
CxO: Could there be general benchmarking standards? CD: I think in very mature process where you are charging by the cost of transaction, and that was clear from the front end, that is possible. But with even simple things, like field support for IT, which has been around for some time, it’s just going to depend a lot on the profile of the customers’ users, their vocation and so forth. For example, how would you compare a bank at Canary Wharf in London with a bank in Wisconsin?
CxO: Why is relationship management so important to the success of the outsourcing arrangements? CD: Firstly, it’s one of the reasons that companies would say outsourcing arrangements fail. In a recent study, in association with IAOP, we surveyed nearly 60 companies and asked them if they were getting benefits from outsourcing. We found that there are few companies (one in ten) that are reaping consistent benefits. The rest of them are either having troubles or they’ve got a mixed bag. The main reason why arrangements fail is because both vendors and customers disagree on what the problems are. I asked the vendors and their customers questions about where the problem areas are and the finding was that expectations are not set-up properly from the very beginning. There seem to be real problems with skills and relationship management and the problems tend to be before the transaction is done and after the transaction is done. So relationship management is key to the whole process. Specifically, its crucial to understand the politics within each of the organisations, their own objectives, and how those companies work, what change management means, the impact it’s going to have on the business and a clear understanding of the company’s business objects and what their challenges are and their operating model. All this becomes important in knowing how to work within the organisation. So if you are going to drive significant change through outsourcing. Its also a key in helping expectation set in terms of what you are expecting me to deliver and what quality and services levels. When we talk about service level agreements (SLAs) what are we really talking about? Are we really seeing eye to eye on that? Getting expectations set and managing them properly are parts of relationship management.
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CxO: Previously you said that understanding the sources of value, risk and the organisation DNA are keys to building winwin relationships. Can you elaborate on that? CD: We have a mechanism at Booze, Allen and Hamilton called organisation DNA, it’s a way to find the culture of an organisation and how it works. There are components to that: the first is the motivators, performance measures, the roles of responsibility and all the other things that go to make up the organisation culture. And when you are putting two businesses together, it all needs to work seamlessly. It’s more important to understand information flow because you haven’t just chopped off part of an organism. That process still needs to work and the process is made of those components. So if you outsource departments such as contact centres or warranty claims, or something of that nature, and it comes to an outsourcer dealing with a company’s end customer, it’s important that you properly set up those performance measures, or the incentives. Having discussions about customer account profitability or market profitability versus customer satisfaction and the tensions between those is important.
CxO: How do you go about building win-win relationships? CD: It starts with making sure your outsourcing relationship is based on sound economic basis. We have seen many cases in the past where a company wants to enter a new market of an outsourcer or an industry, or do something to gain a certain client then they’ll do something, they’ll make a large investment to win the account but later on, when that account needs to be profitable, the customer should not be surprised that all of a sudden new charges are levied, or the vendor is interested in doing other things in that account to make sure it is profitable. Sound economics principles are a good place to start. The customer needs to clearly understand how the vendor is making money within the relationship. Far too often the customers don’t care so much about that and that really strains relationships.
CxO: Is there a best practice governance structure that can lead to a good relationship? CD: It depend on how you define governance. Some of it means just the day-to-day working relationship between the customer and the vendor, in which case they obviously need clear points of accountability between the two parties and somebody should bear the responsibility for those line operations that are being supported through the outsourcers, and that person needs to be an important player in working though the performance measures and standards that needs to be changed. Depending upon the complexity of the relationship, you might have a broader set of stakeholders involved in certain areas such as technology standards, working through the business architecture and design – it depends on the nature of the relationship and the service being provided. The more significant it is, the more important the governance becomes.
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CD: With outsourcing I have learned, over a long period of time, that the economic hurdles for large companies were pretty high in making these things successful until we saw the advantage through offshoring of work, or the advances in technologies that vendors can use. I think that’s number one. Many situations have failed in the past because of lack of understanding the economics. Secondly, bundling too much into these relationships makes it very difficult and risky. I am not saying that you are not going to find a company that’s done a large deal, and they will claim a great deal of success, but certainly we are seeing companies moving away from single vendor relationships to more of a portfolio of relationships. I think that’s been a very positive trend because it does so many things for the customers if they can learn to manage them properly. In dealing with a number of different vendors they’re learning how to work with them and so forth. I think the other good thing is that companies are learning to get human capital globally. I think that is critical for growth in the future as domestically, we are running out of people.
CxO: What is the current mood within the US with regards to what’s happening with offshoring? CD: When we were in a downturn in the economics cycle, people liked to point to the trend in offshoring of work as something that’s bad. We had an election going on, so I think the media and the politicians were using it as a somewhat of a smoking gun. In the background the companies were quietly going about trying to figure out how to improve performance. They looked at all of the options, including outsourcing and the movement of work to other countries. Now we are realising, as the economy has turned around and the companies are trying to grow, that we don’t have enough professionals to do the work, engineering or IT. For organisations that are growing internationally, they are looking to these new markets to do business in. They are not just looking to offshore work there but are looking to be able to access new regions of the world. Asia is an important one now, particularly China, but I think Latin America will become very important in the near future too. The other thing is the finding that we have from the Duke study, which really puts an exclamation mark over this point about growth and innovation. There is a chart in there that shows the number of jobs created offshore versus the number of jobs that are displaced in the US. Now we don’t know if someone lost their job or if they moved but where the work was moved offshore that ratio tended to be one to one. In other words I lost a job here, I moved it somewhere else. But within product development and engineering, one job displaced in the United States created 13 jobs offshore. What’s happening is companies are finding that they can get more resources, they can do more with the same, have more flexibility and they can support their growth strategies. They are able to use resources in lower cost countries to not only improve the bottom line but to fuel growth.
CxO: What will be the major challenges and opportunities over the next five years? CD: We are now in an outsourcing environment where there is everything from a very mature almost commodity-like process to very immature ones. The companies are looking at outsourcing all of those, human resources, finance and accounting, and so on. The highly bundled forms I would say are less matured. We are going to be cutting our teeth and learning how to outsource in those areas because those tend to be the hot ones, personnel, finance and engineering. I think there will be more success in the mature processes: IT and contact centres and some portions of procurement, so we will be working with more processes. And we will be doing them in multiple countries. This is important for corporate strategy: companies are going to need to learn how to deal with myriad of captive offshore, outsourced offshore, and onshore resources and relationships. They’re going to need to build the capabilities within the corporation so that they can manage that structure well. That’s what we are working on for the next five years.
About the Author Mr. Disher is a Vice President and founding Partner of Booz Allen Hamilton’s Global Outsourcing Advisory Service. With over twenty-five years of consulting experience, Mr. Disher specializes in organization and technology strategies for step change improvement in business performance. He has led global client engagements that involve cost reduction, business operations and administrative performance improvement, and outsourcing. Mr. Disher is a founding member of the International Association of Outsourcing Professionals serving on the Standards Board and as Chairman of the Research Committee. He also serves as Officer in Charge for the Offshoring Research Initiative with Duke University. Mr. Disher is a frequent speaker on trends in outsourcing, offshoring, and IT effectiveness.
EXECUTIVE VISIONS
CxO: Given your length and breadth of experience in outsourcing, what things have you learned, both good and bad, from those experiences?
Mr. Disher completed a Double Masters in Accounting and Business Administration from Southern Illinois University. He holds a B.S. in Environmental Sciences from the University of Illinois. Mr. Disher is a Certified Management Accountant (C.M.A.).
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Case Study
WORLD-CLASS INFORMATION TECHNOLOGY EQUAL TO THE SCALE AND MAGNITUDE OF THE OLYMPIC GAMES "We are extremely pleased to have expanded our partnership with Atos Origin as the Worldwide IT Partner for two more Games. Today the role and use of Information Technology is vital for the staging of the Games. Atos Origin was a crucial player in the success of the delivery of the Athens 2004 and Torino 2006 Olympic Games. We are confident that, in the future, Atos Origin will deliver an outstanding job for the Beijing 2008, Vancouver 2010 and London 2012 Olympic Games."
Jacques Rogge, President of the International Olympic Committee (IOC)
BUSINESS CHALLENGES Atos Origin is the Worldwide IT Partner for the International Olympic Committee (IOC) for the Olympic Games of Athens in 2004, Torino in 2006, Beijing in 2008, Vancouver in 2010 and London in 2012. This set a new world record as the largest sports IT contract ever awarded. For the Torino Olympic Winter Games in 2006, Atos Origin led the consortium of technology partners developing and managing the systems and software that power the Information Technology solutions
SOLUTIONS As lead integrator, project manager and IT operations manager, Atos Origin has also developed many of the key software applications used. Successfully delivering one of the largest IT projects in sports history represented a staggering task. The sheer volume of information processed to run and document the event creates a massive and complex IT environment requiring a dedicated power infrastructure, 450 extremely sophisticated data network Lenovo servers, 4,700 Lenovo computers, 1,800 results systems terminals and 700 Lenovo printers. One characteristic of this environment is the high degree of redundancy in data processing, which necessarily calls for fail-safe accuracy in data transfer. Another is the innovative IT security built into the entire IT environment, which
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could effectively be considered the highest-profile data system in the world over the course of 16 days. Protecting the Games’ IT infrastructure from undesired and/or uncontrolled phenomena that can impact any parts of the result chain and associated services is paramount. The innovative approach features monitoring of all deviations from ‘normal’ behavior of critical parameters in critical areas (applications, systems and networks), plus screening and correlation of all ‘alerts’ to allow the security team to focus and act only upon critical issues. Finally, there is the unparalleled testing program to ensure that smooth, seamless operations are ready on time. For an event of this magnitude, deadlines are not negotiable. When world-class athletes are ready to compete for gold after years of rigorous training and qualification, there are no second chances.
BENEFITS As one of the most high-profile customers that Atos Origin has ever had, the International Olympic Committee (IOC) has spurred Atos Origin to take on new directions since its involvement with the Olympic movement in 2004. The Athens 2004 Olympic Games was accomplished with significant cost and operational savings over previous Games. Atos Origin provided this without in any way increas-
Key components of Atos Origin’s IT mission • Infrastructure deployment • Critical monitoring system • Technology Partner management • Knowledge capture and transfer
Key capabilities demonstrated by Atos Origin for this Olympic Games project • Systems integration • Information security • Critical monitoring system • Technology Partner management • Knowledge capture and transfer
Achievements successfully completed • Competition results delivered to all participants, athletes, officials, media and press • Knowledge leveraged for the design of all key IT systems (3 to 5 years before start of Games) • Key core planning applications provided and deployed (3 years before start of Games) • Results systems integrated and tested (2 years before start of Games) • Complete array of IT systems operating and monitored once the Games began
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ing the risk of its technology operations, and actually succeeded in reducing the risk. Today’s systems implementations objective is focused on minimized cost with minimized risk. This is demonstrated in the Olympic Games program through massive re-use, facilitated by systematic knowledge capture and thorough, disciplined systems integration practices to redeploy large applications into new environments every other year. Specific components of the IT program critical to the Olympic Games’ success include the
integrated, holistic approach to security used to manage the highly visible environment. Other factors include effective partner and program management for the highly complex program comprising a diverse consortium of technology partners; intensive operations management; and design and building phases leveraging the knowledge base created through work at previous Games, which significantly reduce the learning curve. Meeting the immovable deadline with guaranteed quality every time can only be achieved
through relentless testing. Exhaustive preparation and testing were clearly vital to the success of the IT systems, to deliver seamless services and sub-second communication to the Olympic Family (partners, IOC members, athletes and media). Simulation testing was also used to develop test cells representing each of 15 sports disciplines and nine major applications. For each country where the Olympic Games are held, an Organizing Committee responsible for hosting and managing that particular edition of the Games is set up. Atos Origin partners with each Organizing Committee while working with the IOC to meet its strategic objectives. This kind of commitment and attention to detail at the local level was a factor that led to Atos Origin’s success in managing this prestigious contract.
The Olympic Games is the largest sporting event to take place worldwide and at regular intervals every two years. At the TORINO 2006 Olympic Games, Atos Origin developed the IT solution for the accreditation system that allowed Kodak to issue and activate 90,000 accreditations for Games comprising 84 events and represent thousands of hours of live competition. Live commentator services were delivered for 19 sports and approximately 250,000 INFO2006 pages viewed every day. The Winter Olympics spans 28 competition and non-competition venues, involves 2,500 athletes, 10,000 members of the media and 20,000 volunteers.
About Atos Origin Atos Origin is an international information technology services company. Its business is turning client vision into results through the application of consulting, systems integration and managed operations. The company’s annual revenues are more than EUR 5,5 billion and it employs over 47,000 people in 40 countries. Atos Origin is the Worldwide Information Technology Partner for the Olympic Games and has a client base of international blue-chip companies across all sectors. Atos Origin is quoted on the Paris Eurolist Market and trades as Atos Origin, Atos Consulting, Atos Euronext Market Solutions and Atos Worldline.
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EUROPE’S BACK-OFFICE BABEL: WILL LANGUAGE DERAIL OFFSHORING?
Paul Morrison Managing Consultant Alsbridge
The English language has provided firm foundations for the global outsourcing boom of the last 20 years. English-speaking businesses have been able to directly tap into the competitive workforces of Ireland, Canada and above all, India, in areas such as IT and call centres. As a result, offshoring today is dominated by Anglophone suppliers and customers - The US is easily the largest single source of offshore demand, the UK has made up more than half of the European market, and British and US brands such as American Express, HSBC, Citigroup and British Airways have been in the vanguard of new offshoring models. Anglophone firms may dominate the current picture, and English may be the lingua franca of much of international business. But English is of course not universally spoken in Europe, either by customers or by office workers. This raises major questions about the future of offshoring – Will its expansion be limited by these global language barriers? Can European firms find a way to globalise their multi-lingual back offices, or does offshoring only makes sense in English?
The language gap Non-English language issues are above all a European problem. The US has access to a range of competitively priced Spanish-speaking populations in central and southern
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American locations such as Costa Rica, Jamaica and Argentina. Japan has developed a strong market of Japanese language providers in South Korea and Chinese locations such as Dalian. But offshore options for many European languages such as Italian, German or Swedish are less obvious, and capabilities in the market leading location - India - as are at best patchy, at worst non-existent. Languages with a colonial past, particularly French and Spanish, are an exception to this and do have some emerging offshore location options. But the primary challenge of offshoring of non-English work is not in terms of finding specific locations to service a given language, but rather in finding locations to supply multiple languages. Most major businesses in Europe are panEuropean to some degree, and it is not unusual to see firms operating in 20 or more countries, using 15 different languages. there are few options to provide this multi-lingual skills base without setting up a multi-location offshore model. In such circumstances the challenge is clear – how can the firm address this linguistic diversity, without building a new organisation so convoluted that it undermines the cost and flexibility advantages of going offshore? Despite this challenge, a growing number of European companies (or US/UK firms with
pan-European operations) are keen to start offshoring, in areas such as customer care, IT, business processes such as finance, human resources or research & development. As a result predictions for the acceleration of offshoring in Europe indicate 20%-50% compound growth rates for the next 3-5 years. In an effort to attract this growing demand, most offshore suppliers are keen to tout their linguistic abilities. But when you visit the facilities on the ground, the reality can be surprising. Far from fluency, language skills are often limited to simple ‘cheat sheets’ of key words. In the leading Indian locations, most service providers will privately confess to only having capabilities in English. The fact is there simply aren’t enough French, German, or Italian speaking accountants, web developers or claims agents to satisfy demand in Europe. The problem applies equally to ‘inhouse’ operations, where the offshore ‘user’ plans to set up facilities via an internal subsidiary, rather than through a third party outsourcer. Language skills shortages are an issue for insourcing and outsourcing alike.
Tackling the issue So for companies operating across Europe that are considering back office sourcing, what can companies do to address the language issue? Fortunately, there are a number
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of examples of offshoring success by panEuropean firms, and their experience can be distilled to reveal a few essential steps for overcoming the language challenge: 1. Understand the language requirement Companies first need to realise that offshoring requires different levels of language capability depending on the task in question. Some data processing or IT development tasks may require only very simple language skills, research and report writing may require intermediate skills that could be supplemented by native language speaking support onshore, whereas customer support typically requires fluency and cultural awareness. Any programme needs to start with a detailed breakdown of the processes to be offshored, mapping onto this the level of language skills required at each stage. Offshore planning also needs to take account of the fact that there are different levels of language skill required at different stages of the programme – for example, a knowledge transfer activity may require excellent language skills to ensure that the task is fully understood, whereas following training and transition the operational role may not involve such a detailed level of linguistic ability. 2. Only offshore customer care where the capabilities are excellent - It is often extremely difficult to find the linguistic skill, appropriate accent and cultural awareness to deliver customer services from an offshore location. Where offshoring has failed in the past, it usually occurred in customer support activities, often offshored to India, that have not met the expectations of users. Recent examples of where work has been brought back onshore, such as Powergen in the UK, suggest that in many cases offshoring customer care doesn’t make sense. There are of course counterexamples, but the track record indicates that true back office activities (with minimal or no customer interaction) are less language intensive, and therefore less prone to significant language issues. 3. Simplify the language requirement – Companies can aim to minimise the nonEnglish element of work done offshore. For example, it is possible to set up processes to manually or automatically translate materials (e.g. when invoices are scanned), so that the offshore component of a task requires only limited language skills. This process needs to be well planned to ensure
that it is robust enough to handle the exceptions, errors and contingencies that arise during the course of normal business. Where linguistic skills are taken out of the back office, the company must understand and manage the risks accordingly. 4. Assess the ‘farshore’ options – For specific European languages there is a growing range of options, particularly as previously noted for languages with a colonial past. French-speaking back office work can be conducted for example out of Senegal and Ghana in West Africa, Mauritius, or Goa and Pondicherry in India. A number of Dutch companies are making use of historical ties to do the same out of South Africa, and Spain can similarly tap into South America. These pairings can be highly effective, but tend to be single language, rather than providing pan-European coverage. 5. Consider the ‘nearshore’ options – For multi-lingual offshoring, there are several locations in Eastern Europe where a wide range of European languages are available at relatively low cost. Prague, Bratislava and Warsaw have multi-lingual concentrations based on their young, cosmopolitan and well-educated populations. Significantly, as a result of economic and political factors, the list of nearshore options is steadily moving eastwards. 10 years ago, cities such as Dublin, Brighton or Barcelona were commercially attractive for pan-European shared service facilities. Today, outsourcing providers are starting to promote Bucharest, Sofia and even St Petersburg as prices further West continue to rise. Companies should factor this dynamic into the long term business planning for any nearshore investments.
Looking forward For pan-European projects, language still remains a complex issue, and non-English language skills come at a premium. In the short term, because they can tap into the largest pool of offshore resources, English-speaking back offices may therefore enjoy a slight operational cost advantage. This may continue the long term trend for global and pan-European firms to take the strategic choice of establishing English as their standard back office working language. But the picture is not static, and as demand grows it is likely the market will continue to develop European language capabilities. For example, on a tactical level, a number of Indian
outsourcers are addressing short term spikes in demand for language skills by recruiting Europeans to live and work in India for 1 or 2 year postings – it is not unusual to see French or German students working for offshore projects in Mumbai or Bangalore. A longer term strategic change is taking place in India and China, where state-sponsored and businessdriven language training programmes are seeking to overcome language gaps (in nonEnglish and English skills respectively). For example, last year the Chinese government announced plans to spend an extra $5.4 billion on language training to target the BPO market, whilst Indian states such as Karnataka and Tamil Nadu are also taking measures to promote non-English language skills. Looking forward only a few years, we can expect rapid developments both in the supply and demand for European-language offshore services. In 10 years time, we could even see English-language sourcing no longer making up the majority of the offshoring market. In so doing the offshore market will be continuing to do what it has done so successfully for 20 years – adapting to the needs of its customers. Language may be a barrier, but the offshore market will find a way around it.
About the Author Paul Morrison is a Managing Consultant at Alsbridge, specialist advisers on outsourcing, shared services and offshoring. Paul’s work focuses on helping clients to develop sustainable offshore sourcing strategies, including business case development, location assessment and supplier selection. Paul’s advisory work covers a wide range of sectors, including clients both in the private and public sectors. Amongst other clients Paul has recently acted as an advisor to the UK Cabinet Office on BPO strategy. Paul is a member of the Outsourcing and Offshoring Committee of Intellect, Trade Association for the UK’s High Tech Industry, and he writes and speaks on a range of offshoring issues, most recently in ‘Technology and Offshore Sourcing Strategies’ (Palgrave, 2005). Paul can be contacted at paul.morrison@alsbridge.com.
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SOLUTION PROVIDER
www.siemens.com/sbs
Outsourcing with Siemens Business Services – Maximizing your Enterprise Performance Siemens Business Services is a leading IT service provider and with revenues of euros 5.4 billion is one of the world’s top 10 outsourcing providers. As a subsidiary of the Siemens Group, we stand for trust, innovation and quality. We offer all services along the IT service chain from a single source – from consulting and systems integration, right through to managing IT infrastructures and business processes.
Outsourcing has a Strategic Role to Play
www.siemens.com/sbs Siemens Business Services is one of the world’s top 10 outsourcing providers serving over 200 major clients in 44 countries. Christoph Kollatz – CEO Christian Oecking – Head of Global Outsourcing
Siemens Business Services Otto-Hahn-Ring 6, 81739 Munich, Germany Tel: +49 (0) 1805 44 47 13 Email: sbs@siemens.com www.siemens.com/sbs
Business Contact Sigrid Zeisz Head of Marketing, Operation Related Services Tel: +49 89 636 55601 email: sigrid.zeisz@siemens.com
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Outsourcing is a strategic tool for managing change and leveraging greater value. The choice of an outsourcing partner has become a critical issue, involving far more than quality or cost. This is because outsourcing is first and foremost a human partnership. Identifying an organization to share your business with, whether that means your infrastructure or your operational processes is far from easy. That organization needs far more than technical expertise and industry experience. It must be capable of understanding your culture and be willing to share risks and responsibilities. Siemens Business Services has been involved in complex outsourcing relationships across multiple sectors from the start with unique expertise in the public and private sectors. As outsourcing now forms a central component of any value-driven strategy, our vendor independence along the entire IT service chain is a definite advantage. Our greater technology bandwidth also generates additional returns for our customers. With innovative delivery and commercial models which embrace ondemand and off-shore efficiencies, we combine quality outsourcing with competitive economics. Our global delivery capabilities and proven governance skills provide consistent service excellence wherever needed. Perfect your business performance by concentrating on your core activities and leave the rest to us.
At Siemens Business Services each and every day over 39,000 employees serve 10,000 customers around the world in our operational areas of Business Solutions, Outsourcing and IT Infrastructure Services. Our customers grant us an insider’s view of their processes and trust us with projects affecting their core businesses. Each project is unique. We adapt ourselves accordingly – with individually developed solutions and services and a concept of partnership with long-term perspective. We give our customers the freedom to excel, providing them with best of breed when it comes to technology, supported by worldclass industry know-how and continuous innovation. Siemens Business Services recognizes the unique situation of each of its customers and offers them a business partnership built around their distinctive culture. No two service relationships are alike. Listening to your people with an open mind is absolutely crucial. Being a pure service company without an IT product agenda helps us listen to them properly. Ongoing dialog is the basis of any successful relationship and a service relationship is no exception. Understanding culture – not just corporate cultures but national and regional ones – is another key challenge to be addressed. This open approach, based around intense dialog, is reflected in our flexible business models offering customers innovative financing options. As the sourcing spectrum grows from individual IT activities to complex and volatile business processes, building on trust is the key to success.
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Why Outsource? Outsourcing is now a strategic alternative that is established in many businesses. Enterprises are looking for innovative ways to create added value through IT outsourcing. Companies that outsource their IT functions seek greater innovation from service providers. CIOs are challenging service providers to help bring IT and business goals together through technology advancements and deliver transformation through a structured approach. As an example, Siemens Business Services was able to identify competitive advantage for one of its clients, the BBC. In 2004, the BBC became the first in the media marketplace to adopt an outsourcing approach to technology service provision. By focusing on strategic initiatives, the BBC is transforming the industry by connecting customers with anywhere/anytime content and leading the creation of a fully digital Britain. Sectors may also decide to outsource for different reasons – regulatory change in the financial services market or skills shortage in the public sector – all continue to feel ongoing
cost pressure coupled with rising customer expectation. At the same time, the growth of utility computing is shifting technology from an ownership to a usage paradigm. Global outsourcing can optimize information management and decision making. It can realize a steady supply of technology and business expertise to match the fluctuations of a dynamic environment. This can reinforce the competitive advantage of the customer. As with other aspects of outsourcing, however, a host of issues need to be carefully addressed when off-shoring. These include cultural requirements as well as cost pressures. Language skills, education and security are other issues which need to be fully addressed. The best sourcing strategy, finally, is one which blends the complementary benefits of local and global service delivery.
Driving IT Excellence to your Business Advantage It is a complex task to manage the various elements of IT, including IT Governance, Engagement Management and Service
Delivery. The management of this is our core competence. By navigating you through the various value transformation stages, we can increase the value that an outsourcing partnership can add to your business.
Value transformation stages with examples: Improve service quality – value increase achieved by higher performance but minimal cost savings Increase productivity – substantial value increase fulfilled by IT transformation combined with significant cost savings through IT rationalization Evolve enterprise – significant value increase by process simplification together with significant cost savings gained by process transformation Add competitive advantage – major value increase by strategically aligned business and IT development plus major cost savings derived through process change, global sourcing and the strength of a Siemens partnership. Improve your business performance by concentrating on what you do best and leave the rest to us. Whether it’s a question of individual activities such as desktop services, complete infrastructure operation or the management of your finance or HR processes, you will find Siemens Business Services is a partner you can trust. We bring 155 years of Siemens heritage and stability, making us the right people to share your future with.
www.siemens.com/sbs
Cornerstones of successful Outsourcing
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SECTION 1 Strategy
KNOWLEDGE PROCESS OUTSOURCING (KPO) – OPPORTUNITIES AND CHALLENGES
Marc Vollenweider Evalueserve – Austria
Alok Agarwal Aditee Khale Murali Kumar N Evalueserve – India
What is KPO?
Estimated Size and Growth
Knowledge process outsourcing (KPO) refers to the outsourcing of high-end complex tasks and processes to specialised service providers. Unlike business process outsourcing (BPO), KPO delivers higher value in the knowledge process management value chain through domain expertise rather than process expertise. Figure 1 compares the services offered by the BPO and the KPO markets. Outsourcing opportunities and benefits exist in all knowledge domains and for companies across all segments. These include Fortune 500 companies, small and medium enterprises (SMEs), and professional services companies providing consulting services, for example.
It’s predicted that the revenues from the global KPO market will grow from the 2005 estimate of USD 2.5 billion to USD 17 billion in FY2010, implying a compound annual growth rate (CAGR) of 46.7 per cent for the global KPO market. In addition, we estimate that low-cost destinations, such as India and China, will be the most attractive geographies for outsourcing and will have a majority market share by 2010. Furthermore, the Indian KPO market will also grow to USD 12 billion in FY 2010, as represented in Figure 2. We forecast that out of the estimated USD 17 billion revenues in 2010, data search, integration and management services will have the maximum market share. Furthermore,
Insurance
Consulting
I-Banking
Industry Telecom/FS/Retail
Underwriting & Asset Management
Systhesizing Reports
Equities Research
IP Portfolio Analytics
Strategy Research
Claims Analysis
Global Research
Financial Analytics
Patent Design
Analytics
Contact Centres & Customer Support
BPO for Clients
Settlement
Contact Centres & Customer Support
Contact Centres & Customer Support
KPO
BPO
Figure 1: Comparison of Services Offered by BPO and KPO Source: Evalueserve
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other sectors witnessing key growth by the year 2010 will include biotech and pharmaceuticals, engineering and design, remote education and publishing, and animation and simulation services.
Opportunities and Associated Challenges for Outsourcing Clients
The important drivers for the growth in the KPO market include: • High productivity among executives as a result of a decrease in their turnaround time. • Flexible access to a highly specialised talent pool with domain and geographic expertise. • Access to global reach without bearing the expenses of setting up a captive unit. • Cost efficiency for client companies.
Cost Efficiency
Opportunities for Clients
A decrease in margins and stagnant revenue growth in developed countries have forced companies to undertake cost-reduction measures. We estimate that client companies can reduce their costs by 40-70 per cent by outsourcing them to low-cost destinations which have significant opportunities for labour arbitrage. There is a significant salary difference between professionals in developed markets,
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17.0 USD Billion
15
CAGR - 45 -50%
5
70 % market share
2.5
1.2 0 2005 (E)
2003 KPO Market - India
2010 (E)
KPO Market - Others
Figure 2: Expected Growth in the KPO Market – India and Others (2003-2010)
Defining Outsourcing Strategy (make vs buy)
Establishing a Captive Unit
Partnering with a KPO Vendor
Flexible Access to a Highly Specialised Talent Pool We estimate that there will soon be a shortage of skilled professionals in developed markets such as the US and the UK. According to estimates, the US will require 5.2 million professionals by 2010 while the UK will have to face a shortage of 0.7 million professionals. To overcome this, companies in developed countries will need to focus on low-cost countries with talent pools. Partnership with KPOs provides client companies with flexible access to specialised talent pools in developing countries, resulting in a reduction in both turnaround time and complexity, especially during peak loads.
24/7 Access and Geographic Expertise
CAGR - 45 -50%
10
such as the US and the UK, and low-cost countries such as India, China and the Philippines. For example, the average annual salary of an MBA in a developed country is USD 85,000, whereas it is USD 12,000 in a low-cost country.
Duel Sourcing (captive unit and KPO)
KPO vendors are expanding their operations beyond their local boundaries to enable a global presence and to tap opportunities arising from globalisation in services economies. KPO vendors not only facilitate companies to work 24/7 across time zones but also enable them to utilise the vendors’ geographic expertise.
Reduced Time to Market Companies can tap into new markets and opportunities by their quick responses to rapidly changing market requirements. However, this can only be made possible by reducing both their product cycles and their turnaround time. Outsourcing non-core activities to low-cost destinations specialising in these activities will help companies to accelerate their product cycles.
Challenges for Clients Defining Outsourcing Strategy (make versus buy)
Choosing the Right Partner
Project Mode (short-term projects)
Ensuring Effective Communication
Outsourced Research Centre (ORC)
Figure 3: Defining Outsourcing Strategy (make vs buy)
Hybrid Mode
While considering an outsourcing option, client companies first need to define their long-term outsourcing strategies. They also need to define the objectives and benefits they wish to achieve from these outsourcing strategies. After defining strategies, companies need to determine their outsourcing methodologies for which the following options are available: • Setting up a captive unit: In this approach, client companies can set up their own
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•
•
research units in low-cost destinations. However, companies need to employ a minimum of 200 resources in each captive unit to ensure profitability on the large investments that are made with regard to facilities, infrastructure and human resources. Many companies, such as JP Morgan, Ford and Motorola, have set up their captive units in low-cost destinations. Entering into a Partnership with a KPO vendor: In this approach, a client company enters into a knowledge partnership with a KPO vendor. In such a partnership, both partners share resources and information to achieve the client’s business objectives. For example, many companies, such as Microsoft, General Motors, Johnson & Johnson have partnered with KPO vendors in India for achieving their business objectives. Dual Sourcing: This is the most preferred way of outsourcing for major client companies that have decided to substantially outsource their workloads. In this approach, a company can choose one of the following two options: - It can partner with two or more KPO vendors to distribute the assigned work and put competitive pressure on each other. For example, Wachovia has entered into a partnership with Genpact, Infosys and Cognizant Technology for different projects. - It can set up a captive unit and then partner with a KPO vendor. This would put both parties under considerable pressure to enhance their respective performances. In fact, this is the methodology that is being adopted by most captive centres in low-cost destinations.
Determining the Outsourcing Mode After the client company decides to partner with a KPO vendor, it needs to have complete clarity about the expectations and results of this venture. Subsequently, the company is also required to determine its mode of partnership with the vendor. There are three different modes through which a company enters into an outsourcing partnership: • Project Mode: This mode involves one-off requests in which both partners work together to achieve a short-term business objective. • ORC (Outsourced Research Centre) Mode: In this mode, the client company enters
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into a partnership to outsource a long-term business project. Hybrid Mode: This is a combination of the above two approaches, where three or more analysts of a KPO vendor are permanently dedicated to a client company, working on its diverse project requirements.
Choosing the Right Partner As KPO vendors provide inputs on analysis, technical knowledge, strategic decision making, value creation and innovation, choosing the right vendor is a client company’s most significant challenge. While choosing an appropriate partner, a company should consider the performance of the pilot project completed by the vendor as it will be an apt reflection of the vendor’s scope, capabilities and quality standards. However, the company should opt for an extended piloting phase. For example, a three-month pilot will be ideal for a company to assess a vendor’s suitability. A short-turnaround pilot might not always present a true picture of the vendor’s skills. The confidentiality and data security measures adopted by a KPO vendor are two other significant selection criteria that need to be assessed by a company before entering into a knowledge partnership with the vendor.
Ensuring Effective External and Internal Communication A client company and a vendor need to ensure an easy flow of information between them in terms of both knowledge and data. Key factors that determine smooth processes include appropriate communication infrastructure and protocol at both ends, proper meshing of office timings and prompt responses. In addition, the company needs to promote confidence in the vendor within its own organisation. However, along with this, the company must also assuage all fears among its employees of losing their jobs.
Opportunities and Associated Challenges for KPO Vendors Opportunities for KPO Vendors Increasing Market Opportunity and Size The KPO market is poised to grow at a staggering CAGR of 46 per cent and is estimated to grow to USD 17 billion by 2010. This
market growth will be a combination of new sectors being outsourced and a growth in the current sectors.
Moving Up the Knowledge Management Value Chain The growth in the market has provided an opportunity for vendors to move up the knowledge management value chain. They can shift towards higher value-added work in areas such as intellectual property (IP) asset management, plant design, rapid prototyping and data analytics.
Small and Medium Enterprises (SMEs) Solutions SMEs will gain maximum cost savings by outsourcing work to low-cost destinations. These SMEs with small establishments can improve their bottom lines, as outsourcing will reduce their overhead costs. Therefore, vendors need to tap into these SMEs to ensure consistent growth.
Challenges for KPO Vendors Myth of Abundant Labour in India KPO vendors will face a major challenge while hiring the best talent in the country. We estimate that a country such as India will face a paucity of talent in the next five years. To counter this challenge, KPO vendors need to spend significant time in training employees and developing in-house skills and expertise.
Retaining Trained Personnel Another challenge the KPO vendors face is of retaining their trained and skilled workforce. With the boom in the KPO market, many new KPO vendors have started setting up operations in low-cost destinations. This has resulted in lucrative job offers for existing employees, thereby increasing the challenge of retaining trained personnel within each KPO. In order to overcome these challenges, the KPO vendors need to cater to employee requirements of learning, career growth and other benefits.
Ensuring Quality of Delivery Quality is most important factor fuelling KPO growth. Maintaining high quality standards across all services is the only differentiating factor for vendors in this competitive environment. KPO vendors need to maintain quality while scaling up their operations, recruiting new employees along with ensuring multiple levels of quality assurance.
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KPO Vendors in Different Segments Segments
KPO vendors
Pharma Research and Development
Biocon, Shanta Biotech, Vimta Labs, Ranbaxy, Dr. Reddy’s Lab, Sun Pharma
Business and Technical Analysis
McKinsey, Deloitte & Touche, AC Nielsen, PWC
Learning Solutions
ACS, Accenture Learning, Career Launcher, IBM Learning
Animation and Design
Toonz Animation, Maya Entertainment, Color Chips
Business and Market Research
Evalueserve, Scope e-Knowledge Center, OfficeTiger, McKinsey Knowledge Centre, WNS
Writing and Content Development
Techbooks, Innodata, Thomsondigital
Legal Services and IP Research
Evalueserve, Philips Research, Atlas Legal Research
Data Analytics
Evalueserve, Inductis, Accenture, Marketics
Investment Analysis and Equity Research
Evalueserve, Amba, Copal Partners, Adventity, WNS, OfficeTiger
Engineering and Design
L&T, Thermax, Mahindra, Hero Global Design
Captives of Global Organisations
JP Morgan, Deloitte, Goldman Sachs, McKinsey, Ford, Motorola, Texas Instruments
Source: Business India (August 29-September 11, 2005)
Ensuring Confidentiality
Global Footprint and International Marketing
As a KPO vendor deals with a client company’s confidential data and is responsible for data security, it needs to have stringent physical as well as network and electronic security measures to maintain confidentiality. Therefore, a KPO vendor needs to align its security practices to international information security standards such as BS7799 (ISO17799 / ISO27001).
To ensure a robust KPO market share, it is important that KPO vendors maintain a significant international presence. Setting up international offices also helps vendors to bridge cultural and time variations substantially. Vendors also need to have local representatives in international locations to understand local business needs and cultural differences. In addition, KPO vendors should focus on marketing themselves in both domestic and international markets as reliable international brands. This will help them attract new clients and employee talent.
Removing Geographical and Communication Barriers KPO vendors need to develop multilingual capabilities and geographic expertise to conduct research in various geographies. They might even need to employ foreign nationals who can provide them with multilingual capability with geographic know-how. As the vendor is serving a global client base, its employees need to be open to operating in an environment that accommodates all time zones.
valuation research, investment research, data analytics, patent filing, legal and insurance claims and processing. Therefore, there is a significant increase in the number of companies worldwide that are seeking knowledge partnerships with KPO vendors to develop environments in which they can share their resources and work together for their common objectives. The stagnant growth in the global market, and decreasing margins due to competition have also encouraged companies to forge such knowledge partnerships. This has given rise to a situation where most companies are gravitating towards seeking the services of KPO vendors to cater for their diverse business requirements. Therefore, companies today are in no doubt about whether they require the services of KPO vendors; most of them have only to decide how soon they need to use these services.
Disclaimer The information contained herein has been obtained from sources believed to be reliable. Evalueserve disclaims all warranties as to the accuracy, completeness or adequacy of such information. Evalueserve shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.
KPO – When and Not if Today, the benefits of outsourcing have been accepted by companies worldwide. This is because of the significant contributions made by KPO vendors in carrying out high-end complex tasks and processes which include
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EMPLOYEE TRANSITION
An outsourcing contract is never simple. Complicated issues such as scope, pricing and service level agreements, amongst others, are involved in every contract that is drawn up and launched into action. Employee transition is one of the most complex issues and is particularly acute in European contracts. How well a service provider and buyer engineer the proper buy-in and support of affected employees, and how they handle the various dynamics that come into play, can make or break a deal.
Rebecca Scholl Director of Market Strategy ACS Europe
First, let’s clarify that not every outsourcing contract comes with a transfer of employees from the client to the service provider. Depending on the scope of work and required transformation, some contracts involve transfer of employees to the service provider, while others involve a transfer of work without transfer of employees. This paper discusses the model under which employees do transfer to the service provider. Three years ago, under a contract ACS signed with a global manufacturing client, employees employed in HR functions in 5 countries across Europe and the Middle-East transitioned from the buyer organisation to ACS. In a panel discussion, three of these employees portrayed their individual experience of this transition. During the panel led by David Kirkwood, himself a transitioned employee from the deal, Anne Legallais, Anne-Marie Nunn and Gerald Clausen identified and discussed what they felt to be the top 5 lessons learned from their transition from the client to the provider. These lessons can serve as a guideline for employee transition in future contracts between buyers and service providers.
Top 5 Lesson Learned 1. Have a clear set of expectations for the outsourcing deal that has been well communicated to affected employees 2. Address fears head-on. Don’t allow the rumour mill to run wild!
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3. Identify and communicate potential for professional growth within the new organisation 4. Have a clear implementation plan that has been well-communicated and ensure that proper structures are in place to manage change/transition 5. Realise that transformation is ongoing throughout the lifecycle of the outsourcing contract
Panelist Profiles Anne Legallais is currently based in the ACS office in Toulouse in the south of France. She transitioned two and a half years ago. Although she has kept the same title (International Location Manager) within ACS’ Global HR division, the scope of her job has expanded to involve local management within the Toulouse office as well as business development Anne-Marie Nunn is based in East Kilbride, Scotland and had been with her previous employer for almost 20 years when transitioned under the terms of the outsourcing agreement. Anne-Marie previously served as the Training Administration Services Supervisor for EMEA operations with the buyer organisation. Upon joining the service provider, like Anne, the scope of her job widened. After the transition, Anne-Marie was no longer merely in charge of training administration services, but took on a further role and now manages the entire Employee Service
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Centre in Scotland and all HR transactional services for UK-based clients. Gerald Clausen is located in Brussels, Belgium. He worked for the buyer organisation for eight years prior to his transition. During the transition, Gerald coordinated the activities of all affected employees in Germany. Today he works in Belgium as an European IT Project Manager for ACS, with a primary focus on the implementation of SAP Payroll.
day, they will come to you, as they came to me, and say, “I never figured it would be possible, but I feel like a part of this team now.” It’s all about communication.
Highlights from the Panel
Gerald (Germany): When a company is transitioning, communication on all levels about all things is absolutely necessary. It is important to anticipate that many ‘little things’ will become the most contentious issues. Obviously we knew that it was important to communicate changes in contract terms and conditions, holiday entitlement, bonuses, pension, and health insurance and we explained each of those aspects in full to affected employees. I did not, however, anticipate that other things, the small things, the things not included in the standard package, would become such huge travesties. For example, could employees still use the local canteen? Did they still have access to the sports facilities? And did they still have free use of the water supply? The employees I personally assisted throughout the transition became very emotional about these things. I realised then that although these issues might seem small, they should not be forgotten. The small issues need to be addressed just as much as the larger ones to ensure that each employee has a comfortable transition.
David: Your first three lessons learned in employee transition revolve around steady communication. Why do you think this is so important? Gerald (Germany): No employee ever voluntarily chooses to be outsourced. For this reason, the employer has the responsibility to consider the outsourcing venture not just from a business perspective, but also from that of an affected employee and to keep them in the loop. Both the service provider and the buyer organisation must consider the ‘what does this mean to me’ factor, and address the ramifications the deal would potentially have on an employee’s professional life. Then once the deal is officially signed, both service provider and client must strive to maintain this same level of communication during the rest of the transition. If employees are aware of what is going on, fears and uncertainties are reduced. David: So would you say that the transition was easy? Anne-Marie (UK): Not exactly. In the 70s, when you joined a huge, global company…it was for life! The idea of outsourcing is a scary one for most employees, and all have an emotional response when they learn their department is being outsourced. Many in my department were very upset and felt that the company had betrayed them! For this reason, we worked hard to help integrate each employee into the new culture in order to facilitate an acceptance of, and adaptation to the new employer. We tried to be as patient as possible with each employee and to address each of their concerns on an individual basis. During employee transition, a manager must be unfailingly open and honest. Only when you treat those transitioned with respect, by acknowledging their fears and addressing them head-on, can you achieve success. One
David: Gerald, you discussed keeping employees in-the-know. What was your experience in Germany? Did you feel that change management and communication under this contract was handled with efficiency?
David: As well as addressing employees’ fears, you three, who were in large part transition leaders, devised several other methods to ease transition. You mentioned that one of these methods was showing affected employees within your organisation how the transition might positively contribute to the growth of their professional careers. For instance, transitioning to an outside provider often provides an employee with the chance to expand his or her job description, to be part of a larger team, to participate in new client pursuits, and to become more engaged in the new organisation as a whole. Did this have a positive affect on your team? Anne, your transition brought you opportunity for further professional growth, isn’t that right? Anne (France): Yes, though I didn’t see this potential at first. At the time we in France transitioned, it was difficult for us to see how we
fitted into the grand scheme of things as we are in the business of Relocation which is a very “niche” market. However, soon after the transition we became involved in many new HR pursuits within the service provider organisation. This has proven to be an important learning experience for me and others in my department. Clearly today my role has expanded as I can now operate outside of a ‘one size fits all model’ and I can use and improve my expertise in other areas of HR and with other clients. David: Not all employees had such an easy time identifying career opportunities as Anne. What was your experience in the UK? Anne-Marie (UK): In the UK, many of the transitioned management team immediately saw the benefits of becoming part of a new organisation from a career perspective; this was not so clear for many other employees. When a decision was reached to offshore data entry work to Asia, there was an initial panic. Would there be redundancies? Rumors spread like wildfire as you can imagine. The management team, who was also being transitioned to the new employer, reacted swiftly. We pulled everyone together and explained that rather than initiating layoffs, the management team saw this as an opportunity to invite all affected employees to apply for four new roles within the East Kilbride operation. Suddenly employees had a chance to use their other skills, such as language proficiency and SAP knowledge, and move into more diverse roles – all because of the transition. Employees gradually became aware of opportunities beyond the ones they had been used to considering as fit for them. David: It is certainly important to address the emotional aspects of transition. But the three of you also stressed the importance of having a clear, implementation plan and adequate resources to execute the transition. What technical structures would you recommend to facilitate a smooth transition? Anne-Marie (UK): First, it depends on whether the European Acquired Rights Directive (ARD) applies to your situation or not. In order for the ARD to apply – your operations have to meet certain qualifications and these qualifications differ from country to country. As a general rule, the ARD applies to functions run with assets and employees that are clearly separate from the clients’ other
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lines of business. In principle, it provides a legal framework to protect employees, but since it is a rather rigid framework it does not allow for employees to choose where they want to work. It is my understanding that many outsourcing contracts do not involve a transfer in the context of ARD nowadays. It depends on the scope of work, the number of employees in each country, and the chosen delivery model. For our transition, we followed the ARD rules. Since the application of ARD differs from country to country, my situation was different than the one in France and Germany. Anne Legallais (France): In France, the ARD is regulated by the L-122-12 Law. This obliged both the old and new employer to follow an ARD legal calendar and set up consultations with the appropriate unions and work councils throughout the process. While this provided for a sort of hand-held process for affected employees throughout the transition, ARD did not address all employee concerns. David: Was your experience with ARD much different in the UK? Anne-Marie (UK): A little bit, yes. In the UK, ARD is better known as TUPE, the Transfer of Undertakings. Under TUPE, employment automatically transfers from past employer to the new employer on a designated date of transfer. In our case, the transition time was two years. Most people in East Kilbride saw TUPE as a good thing. The two-year time frame gave them a feeling of protection and allowed them time to adjust to their new employer at a comfortable pace. While there were still concerns about redundancies, knowing that a legal measure such as TUPE was in place helped ease many into their new roles. David: Outside of the law, however, there must be other structures in place within the buyer and service provider organisations to help facilitate a smooth transition. What was done in addition to what you have already mentioned to facilitate transition within each of your organisations? Anne (France): At the time of the acquisition, our French operations were already set up as a shared service centre operating as a client/provider. This was very helpful when we transitioned as it meant there was less of a culture shock. Since we had already had some
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experience in viewing our employer as a client, the transition felt much more natural than it otherwise might have. Even with ARD, the service provider was responsible for creating and communicating its own guideline for continued transition after the legal timeframe. The more clearly defined the process was, the easier it was on affected employees. David: Gerald, what structures did you feel were put in place to help smooth employee transition? Gerald (Germany): Contrary to the situation in France, our employer became a client under the terms of the outsourcing deal and our working relationship changed from performing an internal service for them to being an external service provider. During the transition phase, we needed to define and formalise our new service delivery relationship through a SOW (Statement of Work). This SOW proved very important in setting and understanding the parameters within the operating model of our new employer. Since the deal, we have continued to move further into the service provider model. Although it was not exactly easy or entirely comfortable, overall I would say that our transition was a success. David: How are things in your organisations now? All three of you agreed that you felt the 5th top lesson learned was to realise that transformation is ongoing. Anne-Marie (UK): Initially, everything felt slightly strange. We left the office building one Friday afternoon being employees of one company and reentered the building the next Monday as employees of another. I had the same desk, phone number, email address and used the same canteen that I had used previously. All that had physically changed was my badge. But since then, we have moved into our own office and have gradually gained our own identity within our new company. All of us ACSers are together in one building and are now feeling the effect of the new culture. And we are all doing great. We see our previous employer as a client now, and what’s very exciting is that we are gaining new clients and more professional experience than we ever have before! Anne (France): In France it was slightly different, but no less strange. Our previous employer is very well known global manufacturing company in France and throughout
Europe. When I started talking about my “new employer” to my friends and family, it was strange having to introduce the company completely as no one knew who the company was! Since then, I have come to realise that the organisation I am a part of now is one of the largest worldwide BPO companies, and a company I can feel pride in working for. Also, I have since understood that there is a lot of opportunity for me within my new company. I feel that my transition is ongoing. My job identity has changed, albeit positively, and I assume it will continue to transform as I grow within my new organisation. Gerald (Germany): I agree with both AnneMarie and Anne. My role changed after my transition, and it was hard to make a switch from my old mindset to another. I moved from a non-core business of my previous employer to a core business of my new employer. That was quite a difference. It was an exciting one. My role has already grown exponentially since my transition, and I am sure that it will continue to transform over the next few years. Transition is ongoing. It’s important to realise that. Luckily, in my case, I have gained the opportunity to achieve a management position and a higher level of responsibility through this outsourcing deal and my consequent transition.
Conclusion Employee transition is arguably the most complicated issue in an outsourcing contract. An outsourcing deal is not just the migration of systems and the transformation of processes, but it often includes the migration of people from one organisation to another. As we have seen through this panel, employee transition is something that must be handled with delicacy and care. A company can only truly be successful if it has happy, healthy, satisfied employees. Thus, it is important to gather feedback from those who have lived through such a transition. The experience of such individuals and the lessons learned they share assist us in the development of best practices which guarantee the success of future outsourcing contracts.
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INLAND REVENUE’S ASPIRE PROCUREMENT EXPERIENCE
Don Brown Former Commercial Director Inland Revenue
Background
Commercial Strategy
The Inland Revenue’s prevailing contracts with IT partners, EDS and Accenture, were due to expire in 2004 (although there were some limited options for extension). The IT services were critical to Inland Revenue business functions so replacement for those suppliers was essential. The replacement options for providing on-going IT services were examined and that of bringing the IT services back in house was discounted as sub-optimal for such a large scale and complex technology requirement. External suppliers were to be selected in an open competition badged ASPIRE (acquiring strategic partners for Inland Revenue).
Based on successful experiences with the partnership relationships developed in the original outsourcing contract with EDS signed in 1994 and subsequently with Accenture when the NIRS2 contract was inherited from DWP in 1999, the preferred commercial strategy agreed with Inland Revenue Board was for a strategic technology partner to take responsibility for the totality of the technology services supporting Inland Revenue business. That partner could not be expected to provide all of those services directly and would need to engage significant levels of industry parties and specialist skills. In order to provide the opportunity for a successful relationship and delivery programme and to encourage investment in improved productivity and efficiency the term of the contract was set at 10 years with possible extension(s) up to a further 8 years. This would provide some flexibility to Inland Revenue in the timing of the next procurement. This proposal controversially conflicted with the H M Treasury commercial preference for short term (3-5 year) IT contracts using regular market competitions to obtain best price. Inland Revenue successfully argued that these were inappropriate for their scale and complexity and that other mechanisms such as benchmarking and co-partnering clauses should be used to retain the advantage of market movement. Any short term super profits beyond proposed margins for the technology partner would be shared with the Department under a contractual performance gain sharing process. The commercial strategy needed to be compliant with H M Treasury Public Finance Initiative (PFI) strategies and directives whilst
ASPIRE Procurement Process And The Lessons Learned Objective of the Competition The object of the competition was to appoint a strategic technology partner capable of meeting the Department’s needs for a period of 10 to 18 years. Changes to Inland Revenue business direction prompted by H M Treasury initiatives encapsulated in the Gershon and O’Donnell reports had led to a revision to the requirements of the technology partner. These were: • to provide technology enabled change and innovation to facilitate business transformation • to continuously improve performance, providing a flexible source of supply that delivered value for money • to ensure rapid access to up to date skills and technologies • to ensure continuity of Inland Revenue operational services at all times.
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fully supporting collaborative partnership working between the Department and supplier(s). To this end Inland Revenue decided to move towards a contract where the payments for IT services were to be on the basis of the outputs delivered – an output based contract, and to be prepared in the course of the 10 year term to move to business outcomes base when achievable. This presented a particularly arduous exercise to the Department in defining the output measures and applying appropriate control mechanisms so that meaningful output statistics could be supplied in the Invitation to Tender (ITT) in alignment with the costing analyses. The procurement was let in accordance with EC Procurement Regulations using the negotiated procedure so that the best practices from the market place could be taken into a process designed to achieve the most advantageous commercial proposition and encouraged bidders to parade their innovative solutions. At the bidders’ request an element of demonstration was introduced into the competition. This ‘Design and Implementation Study’ presented a real business problem to three bidder teams who in two stages analysed the problem, designed and implemented the preferred solution in the Inland Revenue environment using Inland Revenue business contacts. The exercise was onerous to manage but gave invaluable insight into the engagement processes of the bidders.
Risk Management Project Management was underpinned by an active risk management process that was regularly and routinely reviewed. The major risk to the procurement was that two world class suppliers had been engaged in successful delivery of IT services for up to 9 years. This position as well-established incumbents was recognised as a major inhibition to open competition. The IT industry were predictably suspicious that the existing suppliers would be impossible to remove and press speculation contended that Inland Revenue were locked into prevailing contracts and that it was a futile exercise to purport to be willing to appoint new suppliers. Inland Revenue’s strategy needed to determine the differences required in the new contract and to actively engage in ‘making the market’. ‘Making the market’ took the form of an initial series of meetings with board level representatives of the top 15 technology suppliers at which the Inland Revenue CIO stressed
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the increased requirement for technology enabled change and innovation to support business transformation and attempted to understand how they could be encouraged to participate in the competition. Inland Revenue’s policy was to ensure as far as possible that the competition was fair and open to all major suppliers and was committed, as far as possible, to ‘levelling the playing field’. The commitment to provide such a level playing field was challenged by the suppliers’ concern that in addition to establishing that replacement suppliers could provide better service than the established incumbents the extra cost of transition (of perhaps £50m) would have to be absorbed in their price offering. As a consequence Inland Revenue agreed at the outset of the competition to fund separately the unique costs of transition and take it out of the price comparisons. Throughout the procurement exercise Inland Revenue intended to apply the partnership relationship ethics enshrined in the commercial strategy in all dealings with the bid teams. In this way we expected to build the collaborative spirit that would be the foundation of the long term delivery relationship. Such a relationship would be especially critical in the event that a new supplier was appointed in order to foster the necessary cooperation required in the period of transition to the new contract. A possibility that was to come to fruition. Inland Revenue were aware that there was significant interest in ASPIRE as a major government second generation procurement. A communication strategy needed to be established to engage stakeholders outside the Department, especially Ministers, HM Treasury, Office of Government Commerce (OGC) and Partnerships UK. Managing the politics was recognised as a significant component of the project and considerable effort was required to persuade those parties that the commercial proposition represented the most effective IT service solution and that the risks of transition to a new supplier were manageable. Alert to the high degree of interest and speculation in the press, IR created a communication management strategy that incorporated a website for the project. On this website we attempted to demonstrate progress on a professionally managed procurement exercise and to address the major distractions and speculations that were arising in the media and threatening to undermine the competition.
Evaluation of Offers The intention was to award the contract to the bidder with the most economically advantageous offer, this being the best combination of price and ability to fit the Department’s predicted needs. In order to assess the financial value of the offers Inland Revenue created a ‘Does Cost Model’ to represent the prevailing contract charges and from independent professional advice a ‘Should Cost Model’ to represent the best industry prices available. In line with the openness and trust elements of the prescribed partnership relationship principles Inland Revenue released the ‘Should Cost Model’ to the bidders with the ITT and required access to bidders’ commercial pricing models in order to achieve confidence in their proposed prices. The successful bidders’ commercial pricing models would be incorporated into the contract. Analysis of the bidders’ pricing models provided further insight into the technical solution and the viability of their 10 year price reduction programme. In the event the ‘Should Cost Model’ showed a saving over the ‘Does Cost Model’ and both of the short-listed bidders’ pricing models showed a further saving over the ‘Should Cost Model’. In order to achieve the best outcome and to hold to timetable the Department recognised the advantages of maintaining competitive tension at all stages of the competition. However, the bidders commercial position needed to be respected and they were to be stood down from the competition if at any point they were not seen as having potential to succeed. The Department was resistant to the concept of holding a bidder in the competition just to maintain the competitive tension as it would have conflicted with it’s ethical view of a partnership relationship. In the event there were two highly effective and economic bidders right to the point of appointment. In order to keep the level playing field under active review the CIO and his senior team met regularly with all bid management teams to listen to their issues and concerns and address as many as those as possible without disadvantaging the rival bidders. Where beneficial to the competition outcome Inland Revenue made contributions towards bidders costs in accordance with OGC guidelines.
Timetable Inland Revenue wished to demonstrate professional standards for the procurement and maintain bidder confidence by publishing
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the major milestones in the timetable and by meeting those target deadlines. We were conscious of the economic and political pressures within the bidders organisations and wished to minimise potential disruption to their approval process and budgets. The timetable provided for contract signature in December 2003 allowing 6 months lead into transition for live service from 1 July 2004. Contingency for slippage could be provided by extending the EDS contract by 6 months and/or the Accenture contract by 12 months. Despite pressure on the various stages of the procurement process the approach that was taken was to ensure that the tasks were completed to adequate quality for the purpose and that the bidders had had sufficient time to respond. The timetable was not to be sacrificed to the pursuit of absolute quality. As a result the overall timetable was held and a new technology partner appointed in December 2003 - 22 months after the publication of the formal advertisement in the European Journal in February 2002. This was despite unanticipated political deliberations delaying the issue of the ITT for 6 weeks.
Resources A business plan formed the basis of plans and budgets and project management disciplines that were to be applied to the procurement. Professional advisers were engaged in order to ensure that best procurement, commercial and legal practices were employed in the procurement and in order to satisfy ministers that the public purse was judiciously protected. These advisors were fully integrated into the project in order that appropriate skills were available as required. Throughout the competition the residual managers within the Department who would be responsible for making the new contract work on a day to day basis were fully engaged
in the procurement processes. This included the construct of the operational and commercial strategies, the preparation of the ITT, the definition of the evaluation criteria, the examination of the proposals and the evidence of capability, the verification of the solution, the contract negotiations and the evaluation recommendation. As a result of their involvement the bedrock of the organisation was fully committed to the new contract arrangements and to the eventual change of supplier.
Building the Relationship It was important to recognise that from the start of the competition the client was establishing the relationship with the supplier. The desired balance of risk and reward needed to be incorporated into the commercial strategies that underpinned the ITT and eventually the contract and control mechanisms. The Inland Revenue had developed a model of partnership relationship with the suppliers in the first generation outsourcing contracts that formed the basis of the replacement contract. This relationship was based on honesty, openness and reliable ethical behaviour from all parties in addition to a recognition of and support for the main objectives of the other parties. The contractual mechanisms to incentivise the desired behavioural model included profit share, open book, joint governance and escalation procedures together with clarity anticipated from the intelligent customer role in the Department. The projected practical manifestations of these provisions were regularly tested by the bidders throughout the competition so it was important that the departmental representatives were able to demonstrate how a policy of ‘firm but fair’ would operate consistently. The carefully crafted relationship with the bidders successfully secured their commitment to the competition which eventually in a closely fought race gave rise to a recommendation for a change of supplier to Capgemini in
consortia with Fujitsu and British Telcomms. One in the eye for the cynical press speculation, which at one time had seriously threatened the competition by undermining bidders’ confidence, and a huge fillip for re-competition in government procurements overall. The final test of the relationship with all the suppliers was whether the levels of co-operation required for the transition of over 3000 staff and in excess of 200 major live systems could be accomplished. Despite the issues that inevitably arose in the course of such a complex transfer, which were routinely addressed and overcome, the new service contract started on 1 July 2004 without incident and completely unnoticed by internal and external customers and has maintained service levels since.
About the Author Don was a career civil servant who joined Inland Revenue from accountancy and who retired in April 2006 to provide a consultancy service. After 20 years in software development and project management he moved to IT contract management in 1993. He was the contract manager for the 10 year Eagle contract with EDS and, as commercial director, was responsible for running the replacement Aspire procurement that was awarded to Capgemini in 2004. He is a strong advocate of a partnership relationship between client and supplier and has been in demand for conference presentations on the subject. He lives in Shrewsbury with his wife, the youngest of his three children and two cats. His spare time interests are arts, theatre, cinema, tennis and golf in addition to armchair sports spectating.
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Case Study
ATOS ORIGIN HOSTS AND MANAGES CRITICAL BUSINESS APPLICATIONS FOR NETWORK RAIL Atos Origin hosts and manages critical business applications around the clock, helping Network Rail offer a safe and reliable service to its customers. BACKGROUND Employing over 30,000 people, Network Rail owns 21,000 miles of track and 2,500 stations in the UK. The company is responsible for all aspects of the national rail infrastructure – planning and coordinating the movement of trains, producing a workable timetable and providing access to the rail network. It is working to rebuild Britain’s railway and is spending £14m a day to provide a safe, reliable and efficient rail infrastructure for freight and passenger trains. The availability and integrity of its IT systems and business applications is critical to the achievement of Network Rail’s service obligations to the Train Operating Companies (TOCs) and for the service to – and safety of – the traveling public and the freight companies who use the UK rail network.
BUSINESS CHALLENGES Network Rail has to deliver the highest quality of service to its customers under a strict UK regulatory framework: any failure results in severe financial penalties. Its mission critical business applications support the required levels of safety and operational efficiency, but running such applications is not the heart of its business. To enable Network Rail to focus its energies and resources on the task in hand – meeting the challenging targets imposed upon it by the government – it was crucial to find a partner to manage its core applications environment. Network Rail not only wanted service level guarantees, but also the assurance that its applications would always operate at maximum efficiency through continuous improvement and innovation and that its IT expenditure would be strictly controlled.
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serviced by some 700 highly skilled personnel, it was clear that Atos Origin had the credentials. Throughout the lifetime of the relationship with Network Rail, Atos Origin’s focus has been on transforming service delivery through ongoing investment, and simultaneously reducing costs. The transformation program has included: • Relocation of mainframe services to a tier one purpose built data centre • Updating of connectivity infrastructure
Implementation of a new Disaster Recovery (DR) solution that supports a recovery within four hours where previously the recovery time was up to 28 days.
Applications hosted from the Atos Origin data centre, crucial to the provision of a safe and reliable train network, include: • Train planning applications that enable Network Rail to produce and publish workable timetables. The train planning systems provide plans for 214,000 end-to-
Network Rail has to deliver the highest quality of service to its customers under a strict UK regulatory framework: any failure results in severe financial penalties.
SOLUTION
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Network Rail chose Atos Origin because of its proven experience in running mission critical applications for the transport industry. With a portfolio of clients including Virgin Trains, National Express and Stagecoach,
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Upgrading the operating system on the mainframe therefore providing a platform for future enhancements Introduction of a new back up/storage solution that removed the need for storing data on tapes
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end passenger and freight train journeys a year which are planned through 8,726 geographical train planning points Train operations applications that monitor whether 30,000 trains a day are in the right place at the right time.
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Service charges have been reduced by 30% while stringent service level agreements (SLAs) have consistently been exceeded. “We aim to surpass Network Rail's expectations and have consistently achieved high levels of service availability and customer satisfaction,” says Jeremy Nuttall, Service Delivery Director for Transport Operations at Atos Origin. “We are 'a safe pair of hands' when it comes to operating business critical applications due to the expertise and dedication of our staff and the close working partnership that operates between Atos Origin and Network Rail.” A significant factor in that success is that the Atos Origin personnel involved have the skillsets required and have also achieved Capability Maturing Model Integration (CMMI) Level 3 and ITIL (IT Infrastructure Library) accreditations. Atos Origin is continually driving improvement through collaboration with
Network Rail. Continuous Improvement Meetings are held once a quarter and new ideas with their potential costs and benefits are discussed. One recent application enhancement proactively suggested by Atos Origin assisted users who were having difficulty identifying trains that had changed the start of their journey several times (typically for operational reasons). This was done by adding a new database key. This has significantly eased problems that Network Rail were having in their downstream performance management systems. The current service improvement program includes plans to web enable the legacy systems, so that these systems have a modern look and feel and are more familiar to new users, therefore reducing the training requirement. Both the high quality of service
and process innovation have been key factors in annual savings on operational IT costs – amounting to millions of pounds per year.
BUSINESS BENEFITS •
•
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Multi-million pound savings over the contract term due to Atos Origin’s Application Management service – together with its own working practices efficiency drives – enabling Network Rail to realize cost benefits of 30% since 2000. An improved disaster recovery service has significantly reduced the risk to Network Rail by having a faster recovery time and single recovery mechanism for all mainframe applications should a disaster occur. Atos Origin consistently exceeds required service levels for application availability, in turn enabling Network Rail to honor its service obligations to its own customers.
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CRITICISM, EMPOWERMENT AND THE GROWTH OF ORGANIZATIONS
“As has been amply demonstrated in empirical studies, (…) market outcomes are massively influenced by public policies in education and literacy, epidemiology, land reform, microcredit facilities, appropriate legal protection, etc. and in each of these fields there are things to be done through public action that can radically alter the outcome of local and global economic relations. It is this class of interdependences that have to be understood and utilized to alter the inequalities and asymmetries that characterize the world economy. Mere globalization of market relations can, on its own, be a deeply inadequate approach to world prosperity.” (Amartya Sen, Identity and Violence.The Illusion of Destiny, Norton, New York, 2006, 138)
Prof. dr Slawomir J. Magala Rotterdam School of Management Erasmus University Rotterdam The Netherlands smagala@rsm.nl
Contemporary organizations form a continuum, which begins with a group of three individuals connected by internet communications and ends with the United Nations, Catholic Church and multinational corporations. No matter what their size, nor the degree of formality in codifying and coordinating streams of interactions between their members and stakeholders, they all crucially depend on criticism, which breeds creativity and empowerment, which breeds democracy. Creativity and democracy form indispensable preconditions for desirable and sustainable organizational growth. Criticism is important, because it allows organizational members to distinguish between facts and their fictional shadows. Empowerment is important, because it allows organizational members to distinguish between fairness and its illusory substitutes. Growth is important, because it allows our increasingly complex and volatile societies to improve quality of life of many more individuals in many more locations for much longer periods of time than in any previous period of settled human societies. Having examined organizational solutions for sustaining criticism (1.Evo Devo or evolutionary epistemology of professionals), for securing empowerment (2.Crowded at the top or taming managerialist megalomania) and for gen-
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erating growth (3.Mobile multitudes or networking connected nomads), the reader is introduced to a crash course in critical and mainstream literature on organization theory (OT), organizational behavior (OB) organizational change (OC), and organizational development (OD).
Evo Devo or evolutionary epistemology of professionals All contemporary theories of organization (OT, OB) and of organizational change (OC, OD) reveal profound traces of the dominant evolutionary mode of thinking in social, behavioral, managerial sciences. Evolution and development (Evo Devo) are perceived as the core mechanisms of both biological and social change and the latest descendants of the Idea of Progress. This shift towards Evo Devo has been universally noticed and accepted and most typologies of theories on organizational change list different perspectives from the point of their relation to the evolutionary approach. However, what is being understood under ‘evolutionary approach’ also changes over time. ‘Social Darwinism’ of the early postDarwinist is still being revived as a tacit belief that survival of the fittest is the invisible hand guiding the capitalist market. Nevertheless, it
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arrives in an ideological disguise under the political formula of TINA (there is no alternative) and does not reflect the present understanding even of the processes of evolution in ‘nature’, let alone ‘society’ and ‘culture’. It is obsolete and reflects a political project, not the ‘factual truth’. The most important changes introduced to our understanding of natural evolution by the past century research in genetics are linked to the deciphering of the genetic ‘codes’ underlying biological growth of living organisms and even more importantly to the better insight into the mechanisms of ‘switching’ particular genes on and off in different molecular landscapes. Thus can the same genes produce different effects in different organisms: “genes remain intact, but under new patterns of control. Their function is altered. Complexity and variety are created, at least in part, by combining the activities of old genes in new ways.” (Israel Rosenfeld and Edward Ziff, Evolving Evolution, The New York Review of Books, vol.LIII, No.8, May 11, 2006, p.15) This complexity of clusters and collectives of living organisms’ is increased by their social learning, which results in exploratory behavior (exemplified by ants foraging for food). As a result of random search actions undertaken by individual ants, some of which – if successful establish road maps for others to follow, a complex atlas of roads leading to food emerges – as if it was put there by intelligent design (although it is only a consequence of random searches and memorization or retention of successful ones). A shift from ‘survival of the fittest’ as the core conclusion from Darwin’s biological doctrine to the doctrines of ‘facilitated variation’ and ‘organizational learning’ in ‘knowledgebased economies’ can be traced in contemporary theories of organizational change. In a recent study under the Evo Devo title of “Organizations Evolving”, the authors review six major theoretical perspectives in organization studies and compare them from the point of their evolutionary explanations of organizational change. The theories are thus compared from the point of their explanation for ‘variation’ (where does change or innovation come from), ‘selection’ (how does a change or innovation get accepted) and ‘retention’ (which changes or innovations survive and prosper). The authors distinguish the following theoretical perspectives (which one might be tempted to call ‘paradigms’):
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ecological institutional interpretive organizational learning resource dependence transaction cost economies
Summing up their review of these six perspectives, the authors conclude that organizations evolve and come to prosper as a result of two dominant, core processes; that of technological innovation (‘genetic mutation’) and that of community legitimation (‘road-mapping and learning’): “The co-evolution of organizational community depends on simultaneous processes of variation, selection, retention and struggle at the population level, aggregated across the multiple populations constituting the community. (…) Organizational evolution is intertwined with the dynamics of community legitimation. The development of technological, normative, or legal standards for a particular population has widespread consequences for the entire community to which it belongs. In some cases, innovations may represent a form of collective learning that can be distinguished from direct learning from experience by individual organizations.” (Howard Aldrich and Martin Ruef, Organizations Evolving, Sage, London, 2006, 265)
Crowded at the top or taming managerialist megalomania Six theoretical perspectives mentioned above can be reduced to two major ones and one minor. The minor group is represented by the transaction cost economies and resource dependence – both are traces of past conquests of social sciences by the economists, who imposed their model of ‘rational choice’ on theories of organizational change. The economists lost; decolonization of social sciences is taking place, ‘The Wealth of Nations’ is replaced by ‘The Theory of Moral Sentiments’. The other four perspectives can be grouped under the heading ‘population ecology’ (ecological and institutional) and ‘contructivist’ (interpretive and organizational learning). What is the difference between them? The ecologists and institutionalists claim that in order to understand organizational change we have to compare thousands of companies, offices, organizations and institutions across time and space – in order to accumulate data, from which conclusions can be
drawn as to the evolution of organizational forms. If we compare the companies involved in car manufacturing around Detroit between 1920 and 2000, one can draw some conclusions as to their becoming larger or smaller, more specialized or flexibly generalized, more centralized or decentralized, more focused or dispersed, etc. Researchers will develop this knowledge, package it and sell to the top managerial teams. Managers, who know how to ride the waves of evolutionary change, will have a competitive edge. No need to empower. The interpretivists/constructivists and organizational learning theoreticians claim that in order to understand organizational change we have to understand how people make sense of their organizations and environments, how they share, negotiate, compromise, legitimize and learn together with the others. Researchers will involve the researched in generating this knowledge, then they will facilitate spreading it throughout organizations, and top managerial teams may grasp their chance of becoming welcome coaches. Managers who know how to coach in order to exploit emergent windows of evolutionary opportunities, will have competitive edge. Empower or lose. Theoretical perspectives are not politically innocent; the ecological one is based on a view of an organization as an army under single command, while the intepretive one evokes the football team discreetly coached from behind the field, but crucially dependent on commitment and improvisation of team members in action. If criticism is essential for safeguarding the growth of knowledge, which, in turn, is essential for the evolutionary development of organizational forms, then our preference should clearly point towards a more democratic organizational form. Democracy begins at home, but should not stop at the factory door. Is the choice as simple as that? A word of caution should be sounded – empirical evidence of a major shift of organizational forms away from professional bureaucracy and toward a more flexible, democratic, coached and learning organization is contradictory. Critics warn against premature acceptance of a thesis that we had moved beyond bureaucracy: “Far from demonstrating that the direction of organizational change is uniquely or overwhelmingly towards the post-bureaucratic, epochal claims rely on scattered, contestable and anecdotal descriptions of organizational practice. The epochalist vision is one of total trans-
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formation. It cannot incorporate pluralism and forecloses any search for deeper conditions of possibility. This vision also denies the complex, diverse, coexisting and interpenetrating nature of organizations.” (Brendan McSweeney, Are we Living in a Post-Bureaucratic Epoch?, Journal of Organizational Change Management, special issue on Organizations in the age of postbureaucracy, vol.19, no.1, 2006, 31) Two possible causes of a relatively slow and uncertain shift towards less authoritarian and less bureaucratic organizational forms are the institutional expectations of accountability on the part of broader society and professional interests of managers forming a top class in contemporary organizational structures. The demand for accountability and transparency is much better satisfied by bureaucratic organizational forms (where responsibility can clearly be traced and assigned) than by more flexible and networked, open ‘adhocracies’ (improvised organizational forms). Subconscious response to this tacit demand explains in-built resistance to the dismantling of bureaucracies. Unity of command secures authority much more efficiently than coaching (which requires top managers to demonstrate and ‘prove’ their qualities in actual work with employees and to
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be ready for challenges to one’s own authority). Subconscious reluctance to submit oneself to an on-going total quality control explains in-built resistance of top managerial teams to switch to a more democratic mode of operating. However, even if we avoid choosing, a choice is there in many guises. For instance, when Microsoft, Google and Yahoo support the Chinese government’s curbing of democratic aspirations of China’s virtual communities of Internet-surfers, they are making a choice, which may influence their evolutionary chances in future. What about empowering Chinese Internauts?
Mobile multitudes or networking connected nomads Most handbooks on organizational development and change begin with praise of progress. The end of history? It makes sense to proceed more cautiously with respect to the labeling of evolutionary change processes: “in order to show the total universal progress in human history and in the nonhuman biological realm , we must show that the sum of progress in totality of all specific areas is greater than the sum of all regressions in human (and nonhuman) history.”
(Matthew Nitecki, Evolutionary Progress, The University of Chicago Press, Chicago, 1988, 22) Let us conclude by invoking the art and science of architecture, since designing and managing organizations can be compared to designing and maintaining urban spaces. Modernist designs of decent working class housing produced by European leftist architects in the 1920s promised more democratic and egalitarian interactions. New uses the European modernists found for their skills after they had been chased away from Europe and settled in the United States (a movement described by Tom Wolfe as a transition “From Bauhaus to our house”) produced corporate high-rise headquarters scraping the skies and hiding Enron’s bureaucratic labirynths. Likewise, mobile citizens, customers and employees sustaining virtual commons promise a more democratic future, but fear new Big Brothers and Matrixes on the move. What will it be, CEO’s of today? Empowering connected nomads or caging mobile multitudes? Up to all of us.
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www.acs-inc.com/emea
SOLUTION PROVIDER
Technology-based results What We Do
www.acs-inc.com/emea ACS is the leading provider of diversified, end-to-end business process outsourcing (BPO) and information technology (IT) outsourcing solutions to commercial and government clients worldwide. With $4 billion in annual revenue, a blue-chip client base, and more than 43,000 employees supporting operations in nearly 100 countries, ACS is a rapidly growing FORTUNE 500 Company. ACS makes technology work for our clients. NYSE: ACS. www.acs-inc.com Jeff Rich Mark King
– Chief Executive Officer – President and Chief Operating Officer Lynn Blodgett – Executive Vice President, Commercial Solutions Brian Stones – Senior Vice President, ACS Europe
ACS Europe Marketing
We remain large enough to keep pace with the speed of changing technology, yet we offer the responsiveness and flexibility that help our clients do what they do best. ACS delivers technology-based results through two major service lines, which support the model shown in Figure 1. Business Process Outsourcing – Our BPO group handles most back-office functions, including finance and accounting services, HR, check processing, loan administration, claims processing, customer contact centers, order fulfillment/procurement, print/mail distribution and shareholder services. These tasks are resource-intensive and contain one or more technology-enabled processes. By contracting with ACS, clients can concentrate on their key business strategies, while we manage and operate the 'non-core' business processes that may not be essential to their offerings.
Technology Outsourcing – ACS' technology outsourcing services include IT outsourcing and systems integration support. Our IT services include data center operations, network management and security, desktop/seat management, help desk services and application services. We provide technology infrastructure outsourcing services across mainframe, midrange, distributed and desktop platforms. IT outsourcing represents 25 percent of ACS' revenue. ACS' systems integration solutions include application development and implementation and integration of platforms, software and technology such as decision support systems or benefit management systems, network design and installation services. Other services include project management, Web hosting and information security.
www.acs-inc.com/emea
54 Avenue Hoche, 75008, Paris, France
Business Contact Rebecca Scholl – Affiliated Computer Services, Inc. Tel: +33 (0)1 56 60 52 64 Mob: +33 (0)6 10 44 25 37 email: rebecca.scholl@acs-inc.com
End-to-End Business Process Outsourcing
Efficient Information Technology Outsourcing
Security Services
Application Services
Help Desk Services
Desktop Management
Network Management
Data Center Operations
Human Resources
Finance and Accounting
Administration
Sales Marketing and Customer Care
State of the Art Technology, Call Centers and Global Facilities Figure 1 – ACS Service Offerings
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EXECUTIVE VISIONS LOOK BEFORE YOU LEAP INTO OUTSOURCING
An interview with Robert L (Bob) Carlson Former HSBC Global Head Of IT Operations and Telecommunications Currently Visiting Industry Associate at the Oxford Internet Institute (OII) at Oxford University
TYING SOURCING DECISIONS TO YOUR ORGANISATION’S STRATEGY I am pleased to have the opportunity to present some ideas I have developed during my decades of experience with world wide sourcing decisions as I participated in the global automation of the international airline, manufacturing and financial services industries. The last decade of my executive career was virtually a case study in getting sourcing decisions sorted at HSBC bank. When I was head of technology in Asia for HSBC in the mid 1990’s we were forced to open an ‘offshore’ processing centre 200 miles north of Hong Kong in China because Hong Kong was booming and we could not get sufficient Hong Kong staff or space to process each days customer instructions on time. We learned many lessons that have since been used to replicate the offshore processing model around the world. The key lesson learned is that you need to look carefully before you leap into any outsourcing or offshoring activity – or you risk making a bad decision that will be difficult and expensive to fix. It is always essential to tie any sourcing decision to your organisation’s strategy – your overall strategy should always drive your sourcing policy – not vice versa. This will help you avoid doing anything particularly stupid and it may actually keep you focused on overriding business issues rather than falling prey to vendor hype or unrealistic cost saving promises. Frequently the worst thing you can do is become very efficient at performing tasks that you shouldn’t be doing at all. The first rule of outsourcing is: Never outsource a problem. Streamline your processes internally and eliminate unnecessary activities before you consider outsourcing. Question every activity and every process. Why are you doing it? Does it add customer value? Do your customers care, or even know you are doing it? Would your organisation come to a screeching halt if you stopped doing it? Or, might your effective-
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ness be improved if you ruthlessly streamlined your processes? You should always re-engineer your processes for efficiency before you decide how you are going to get the work done, and who will do it, and where it should to be done. Automating and integrating your processes can eliminate a lot of work and cost. If you outsource your inefficiencies you will lose the opportunity to reap the related benefits - either because your outsource partner won’t have an incentive to implement them, or because he will keep the related benefits for himself. Either way you lose. And, don’t forget that, frequently, your best outsourcing opportunity is to get your customers to do the work. Customer self service is becoming the norm in many areas and many customers prefer Internet self-service to travelling to your business site or to dealing with your bureaucracy over the phone. When your grandmother wanted a can of beans, the grocery man probably got them for her - but you simply pick a can from the supermarket shelf, or order them over the Internet. Are you still getting the beans for your customers? Your strategy needs to address the fact that bricks and mortar locations will deliver a rapidly decreasing portion of customer contacts and service delivery over time. But, you will need to make self-service easier to use. And, you will especially need to learn how to cross-sell using self-service channels and the Internet. It took most companies 10 years to evolve their call centres from cost centres to profit centres by introducing effective cross-selling techniques. Organisations that outsourced their call centres have had a particularly difficult time making this cost-to-profit-centre transition because they lost control over the evolving marketing element of their cost centre operations. They viewed their call centres as service rather than sales outlets. You should be working now to learn how to cross-sell effectively on the Internet because this skill will largely determine your future cost structure and profit margins.
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A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships
AVOIDING THE CORE VS NON-CORE COMPETENCY PITFALL Unless your business started out as a virtual operation where a small internal core team manages many outsourced operations, you will experience great difficulty in adopting a virtual operating model. The business magazines are rife with examples of organisations that discovered too late that their outsourced ‘non-core competencies’ were indeed critically core to their business profitability and their customers satisfaction with their products and services. And, increasingly, it is becoming illegal to outsource risk management activities – so you will need to maintain internal management competence even if you outsource the related processes. This will mean duplicate costs that will make outsourcing savings harder to achieve. Frequently it is a matter of whether your organisation is fully integrated or not. Do your customers expect connected and integrated services? Will they be upset, or even notice, if your products and services aren't seamlessly delivered? Is your industry and your organisation driven by integrated products? If you run a portfolio of separate organisations or divisions you may want to keep them separate and manage and reward them as individual units. Or, you may want to keep flexibility to buy and sell parts of your organisation, which will be easier if they are run separately than if they use tightly integrated systems and support processes.
UNDERSTANDING YOUR CHANGE DRIVERS Change is always difficult, painful, and expensive. So, you must have a good reason to change or your change process will inevitably fail, or fail to provide the expected benefit. Your organisation must be faced with the proverbial equivalent of Jumping off a burning oil platform in a storm, at night, where staying put is simply not an option - if you don't jump you will surely die. If you do jump you probably will die anyway but you might get lucky and survive. How compelling is your reason for changing? Is it a SURVIVAL issue like the over capacity automotive industry where standardisation and outsourcing are key survival issues? Is it a STANDARDS issue? Is your industry standardising, or integrating, or globalising so you won’t be able to compete as a stand-alone organisation? Is it a COST issue? Are your costs rising faster than your competitors? Is it a CUSTOMER SERVICE issue? Are your customers dissatisfied and if so, do you know why?
Is it a PROFITABILITY issue? Are your margins shrinking due to more efficient competitors? Is it a STAFF or SKILLS ACCESS issue? Are you having difficulty attracting the number of staff or the specific skills you need to run your organisation, at an affordable cost? Is it a SHARE PRICE issue? Do the stock analysts think your company lacks the innovative drive or flexibility to compete? Has your chief executive been listening to outsourcing ads and salesmen who promise the world to any CEO with a gullibility problem? There are many OTHER reasons to change, but the key issue is that you should understand why you want to change. And, you should make sure the reason is strong enough to drive the change programme to successful completion.
OUTSOURCING IS A PARTNERSHIP – IT ISN’T PURCHASING If you outsource you take on a partner in your organisation. Partnership is difficult because it involves relationship building that requires significantly different skills and attitudes than the traditional command-and-control management style normally associated with purchasing. Any outsourcing must be viewed as a long-term partnership commitment. And, your partner must share your objectives and your cultural values or the partnership will fail to live up to your expectations. You must anticipate continual change. People will come and go so your processes and procedures must anticipate staff and management changes on both sides. Your business and your partners business must retain the flexibility to evolve and accommodate changing customer needs and preferences or the way they use your products. And your objectives and strategy will need to evolve to accommodate or exploit competitive market developments. Your partner will change, and evolve, and grow, or merge, or get taken over, or go public based on your outsourced processes. Technology will continue to change dramatically, and your ability to leverage customer self-service through technology will probably determine your organisation’s success over time. And, the law and regulations will change in un-foreseeable ways and become more restrictive and your organisation will need to be flexible, just to survive. A key issue involves what will happen if the partnership ends. Many partnerships end, not due to the fault of either party, but because the changes noted above prevent realising the anticipated benefits. It is always essential that the contract should make effective provision to return the outsourced process and all related information and skills to your control. And, your partner should be properly remunerated to make the process as painless and smooth as possible. A real practical test of cultural compatibility is to negotiate the exit clause first. If you encounter problems with this when your partner is still in marketing mode, you can well imagine the trauma it will involve after you have committed to the partnership. Many partnerships fail to live up to expectations due to inappropriate governance structures or differing objectives. So, evolu-
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As the saying goes…‘If you don't know where you are going, any road will get you there.’ But, you may find you’re gotten to a dead end street, with no way to get to a better place. So, your overall strategy should always be the key driver. Should you automate more? Should you outsource more? Should you off-shore more? Should you concentrate on fewer product lines or delivery channels? You should always look to your strategy for the answers. Your sourcing decisions should support your strategy, not drive it.
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EXECUTIVE VISIONS An interview with Robert L (Bob) Carlson, Former HSBC Global Head Of IT Operations and Telecommunications
tion must be built into the partnership governance process. And, relationship management is essential for both parties because flexibility and good will are more important to ongoing success than initial price or service level agreements. Relationship skills are necessary to develop trust and to address the inevitable problems with a spirit of mutual responsibility for finding appropriate solutions and for sharing the related costs and benefits. Service level agreements are important, but it is critical that they accurately reflect the real needs and values of your customers and your organisation. Benchmarking is a valuable tool that can help in understanding best practices and identify areas that should be re-engineered before you before you consider outsourcing. So, if you do decide to outsource you should anticipate that contract re-negotiation and termination will probably be inevitable and these should be key considerations in every outsourcing agreement. In any event, the outsourcing contract will need to evolve; and the problem resolution and escalation processes will also be critical to your organisation’s business continuity. You should remember that the law courts are expensive and time consuming, and should only be an option if your business is already dead. A problem mediation process is usually faster and less expensive and far less damaging to the partnership. Outsourcing can never be a panacea b ecause there is a fundamental dichotomy of interests between you and your partner. In the final analysis, to you outsourcing is a commitment; to your vendor it is a transaction. This is your business and your partner must have the same outlook as you have or the partnership will fail.
SMART OUTSOURCING IS INCREASINGLY A WAY OF LIFE Every organisation outsources some activities because vertical integration is simply too unwieldy and inflexible in a fast moving and competitive marketplace. You always need to optimise internal, external, partner, outsource, insource, offshore, and selfservice resources to best achieve your organisation’s strategy. It will always be horses-for-courses and there is no one right answer that will fit every organisation. Clearly, some options will be a better fit with your strategy than others. But, you should look
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before you leap into outsourcing, because when your skills are gone, your options and perhaps your future may be gone with them. And, you must always remember that, frequently, the best way to get a big problem is to outsource a small problem. Outsourcing can be expensive, and many attempts fail to deliver to expectations; but this may not be worse than internal incompetence, or inefficiency. Outsourcing can provide access to scale economies but may entail the loss of internal management competence to control your critical business processes. If you are not competent, outsourcing can keep you competitive; but by definition it cannot give you product or service differentiation because these require specific innovation rather than ‘me-too’ purchased solutions. The regulators, and legislators, and courts aren't static and they continue to develop new proposals and to extend old ones into new areas. You must be prepared for rules changes that may render your organisation’s processing arrangements obsolete sometimes retroactively. These issues will impact your partner as well, and may render his business strategy untenable. Your partner must share your objectives and values because everything will change continually. Your organisation will need to accommodate change at a rate equivalent to drinking from a fire hose. If you decide to outsource, the only sensible structure to accommodate all this change is a flexible and collaborative partnership.
Summary In summary, you cannot stop change but you can manage your reaction to change and compete effectively. Outsourcing cannot substitute for a sound business strategy and it will always be essential to match your strategy to your capabilities as well as to your aspirations. The simple issue is to Leverage Your Strengths and get help for your weaknesses. Bob Carlson boblcarlson@gmail.com
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AGFA EUROPE SHARED SERVICE CENTRE CHOOSES A DATA MANAGEMENT CAPTURE SOLUTION TO IMPROVE A/P PROCESS EFFICIENCY About Agfa The Agfa-Gevaert Group develops, produces and distributes an extensive range of analog and digital imaging systems and IT solutions, mainly for the printing industry and the healthcare sector, as well as for specific industrial applications.
Luc Le Brun Corporate Finance Process Manager Agfa-Gevaert
Agfa-Gevaert has two large and focused business groups, Agfa Graphics and Agfa HealthCare, and a smaller business unit, Agfa Specialty Products. Agfa Graphics offers a complete prepress solution, including consumables, equipment and software. With a wide product assortment of electronic and photographic systems and consumables, Agfa is a leading player in the newspaper market, the packaging industry and the commercial printing market. Agfa HealthCare supplies conventional Xray equipment as well as a state-of-the-art range of diagnosis and communication systems. Hospital radiology departments are traditionally Agfa’s target market in the healthcare sector. Over time, Agfa has improved the quality of X-ray images and developed X-ray films for specific medical specialists, for example mammography. The company uses its experience in radiology to penetrate other clinical applications such as cardiology, ophthalmology, orthopaedics and women’s healthcare. Agfa Specialty Products focus on a number of consumables, in particular film for the motion picture industry and microfilm
Agfa’s headquarters and parent company are located in Mortsel, Belgium. The company has production facilities around the world, with the largest production and research centres in Belgium, the United States, Germany and China. This global production network enables the company to meet the specific needs of each market, to limit the risk of currency fluctuations and to reduce transportation costs. Agfa is commercially active worldwide through more than 40 wholly-owned sales organisations organised into four regional organizations Europe, NAFTA (USA, Canada, Mexico), Latin America and Asia/Oceania. In countries where Agfa does not have its own sales organization, the market is served by a network of agents and representatives. In 2005, Agfa-Gevaert Group’s net turnover was €3.3 billion. The company employs 14,000 people worldwide.
Problem positioning Agfa set up a Shared Service Centre (SSC) for its European region in September 2000, to provide financial services on a common SAP
platform to 22 legal entities. The services provided include accounts payable, accounting receivable, asset accounting, general accounting, internal reporting to headquarters, master data and VAT compliance. The roll-out took about 18 months and not much time was left to re-engineer the processes during that period. This happened in a second phase. After the consolidation of financial activities in the Shared Service Centre, different projects were started, one of which relates to the handling of vendor invoices. The re-engineering of the accounts payable (A/P) process included three major parts, each with its own foibles: 1. Vendor payments. Agfa Europe had dozens of different banking systems with different access procedures and different statement formats, often supplied on paper. An in-house banking system was developed and Agfa now works with one bank. This project was managed by Corporate Treasury. 2. The introduction of the purchasing facility of SAP has been completed in all countries by Procurement Europe. 3. The accounting process whereby vendor
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invoices were posted manually. As often accounting is at the end of the chain of events, using multiple banking systems and having no purchase order system integrated with the accounting system generated a lot of inefficiencies. These three parts were introduced at different speeds and overlapped each other, especially purchase order creation and vendor invoice handling. When the A/P process was analyzed one finding was that in most of the countries everybody could place an order, since there was no system in place to manage this activity. There was no real vendor selection procedure, and every step in the process was manual. Invoices were received on paper, circulated for approval, often lost and usually untraceable. When the activities were integrated in the Shared Service Centre invoices were parked locally in SAP, and sent to the SSC after approval. In most of the countries small, lowspeed scanners were installed and invoices were sent attached to an e-mail. This made the process even slower because each invoice had to be printed in the SSC and was manually posted. The payment was the only automated part of the process. At the end of 2001, Agfa Europe handled 120,000 third party vendor invoices sent by
15,000 active vendors from 19 countries and speaking 15 different languages. The analysis of the number of invoices per vendor showed that 50 per cent were one time invoices with an amount equal to or lower than €1,000, and that 85 per cent of the vendors sent one to nine invoices a year. The invoice rate of 3,200 per FTE was very low when compared with the other companies in the same industry segment and the throughput time from the receipt of the invoice to the booking in the system was 30 to 40 days, some way off the benchmark. The number of countries and languages, as well as the relatively high volume of vendors with a very limited number of invoices per vendor, and per year, was a real challenge for the implementation of a data management capture solution. In conclusion it was obvious that the process was inefficient and time-consuming and that it needed to be re-engineered.
Understanding the scope and the business drivers The scope covered third party supplier invoices of which 90 per cent related to services including freight and 10 per cent to goods for resale. The solution was implemented across all Agfa Business Groups for European sales organizations only. 25,000 manual inter-company invoices for non-trade activities have been added in
Approval process
es oic PO Inv out w/
Validatin
Document Management OCR/ICR
low rkf wo to s P ed ote SA link s N tu Lo
Outsourced
SAP
Invoices parked in SAP Invoices with PO processed directly in SAP/MM
Physical archiving
Figure 1:
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Optical archiving
January 2005 and the solution is being extended to manufacturing in 2006. Agfa Europe was looking at a solution that would: • Replace the manually intensive process by use of one of the best technical solutions in the field of optical character recognition (OCR) to improve accuracy and efficiency, generating significant cost reductions and dramatically increasing the number of invoices per FTE. • Automate the approval process for invoices without purchase orders and allow efficient tracking of the invoices via an electronic workflow. • Take advantage of the images archive feature to make them available to the Agfa staff anywhere, at any time, and prepare for the migration from physical to digital archiving.
Transferring to new procedures The new process is divided into two distinct flows. The first flow concerns invoices which don’t have a purchase order, created in SAP. Procurement activities and the receipt of goods or services remains a local responsibility. The paper invoices are received centrally in the SSC, scanned, read and interpreted by the OCR, parked in SAP FI and sent electronically to the local sales organization for approval and coding. When this is completed, the invoice can be posted and paid. However, the goal is a minimum of 50 per cent invoices with an SAP purchase order. The second workflow represents our best practice when a purchase order is created in SAP. It has several advantages from an accounting viewpoint : • The approval is given at the beginning of the process when the PO is created. • The financial information is available in the PO. • The charge to the Profit and Loss Statement (P&L) is booked based on goods received; it is more dynamic because it is not necessary to wait for the invoice to update expenses. • When the invoice is scanned, read by the OCR and parked in SAP MM, it can be immediately compared with the PO at line item via the SAP invoice verification functionality. If there is no difference, or if the difference is in the limit of the tolerance factor, it can be posted immediately.
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A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships
The document management starts with the opening of envelopes and ends with the delivery of a file containing the images of the invoices. When the images are delivered, they are processed in an OCR or intelligent character recognition (ICR) application called e-Flow, from Top Image Systems (TIS) that reads and interprets the information on the invoice that needs to be parked (pre-registered) in SAP. When the invoice passes this validation, step the image is stored on the optical archive and the data is sent to SAP. Invoices with purchase orders (POs) are parked in SAP MM and can be processed immediately. Invoices without POs are sent to the local organization for approval and coding. The SAP workflow is linked to Lotus Notes so that the approver gets a notification when an invoice is waiting for approval. By clicking on this e-mail, the releaser is automatically logged onto SAP. The invoice is automatically sent to the SSC after the approval is given, and the financial data (GL and cost centre) is validated before posting. The two major features in the new process are e-Flow and the SAP workflow.
Looking at e-Flow from Top Image Systems (TIS) • • •
The data capture uses OCR/ICR to: Read the scanned documents. Transforms the information into usable formats for other systems (SAP for Agfa). Deliver the extracted data to enterprise resource planning (ERP) or workflow backoffice applications.
At the moment the input is only paperbased, but an XML (extensible markup language) reader is being installed this year in order to capture input from electronic invoicing. Data can be classified into three categories : • Structured data: you can configure the OCR to find the information at a certain place, it will always be on the same place, for example, the delivery number on despatch notes. • Semi-structured data: the system always looks for the same information, for example the date of invoice, but it can be in different places on different documents. • Unstructured data, the system looks for unstructured information: free text, for example.
The Freecompletion is used for the validation of invoices. In Agfa, it was decided to check each invoice independently of the level of recognition. Rejected information, for instance low confidence characters, unrecognized fields and failed validations are resolved by an operator. From 1st January, 2005, this activity was outsourced as well. The scanning and the validation are processed by an external service provider. The FreeException contains information that need to be flagged for supervisor resolution. For instance, you may decide that all invoices exceeding €5,000 must be checked by a supervisor. The SAP Export module connects the engine to the backend application.
Below are the different main modules of eFlow 3.0 The FilePortal (ScanGate or FileGate) inputs the images into the system automatically and creates batches. Scanned invoices are the entry points and are then processed in e-Flow. The Freematch does the matching on rules based on scripts. It finds the field locations. Language scripts for 15 languages have been written to identify the fields to be recognized. The FreeProcess uses OCR engines and advanced algorithms to improve the character recognition rates. The FreeLearning is part of the installation of the new e-Flow v3.0 last year that provides learning functionality. This module receives input from the FreeProcess and remembers the fields and the layout of the invoice from a given vendor. This feature improves significantly the quality and the speed of the character recognition. The hit rate improved from 70 per cent to 85 per cent and could free up time to handle additional volume.
Looking at the SAP workflow
FreeLearning
An electronic workflow is the logic extension of the OCR and is mandatory in getting the documents circulated for approval and posting. Agfa Europe uses the SAP workflow that is linked to Lotus Notes, since most approvers (sales and service managers) tend not to be familiar with this system. When a PO is created in SAP, the invoice is sent to the inbox of the SSC accounts payable accountant, who links the two documents at line item level and makes the posting. If the quantity or the price difference exceeds the tolerance factor, the SSC A/P accountant contacts local procurement. When no PO exists, the document is sent to the SAP inbox of the local accounts payable accountant, who forwards it to the approver to release the invoice for payment. Basic vendor data, the image of the invoice, financial data (GL account, cost centre), notes history and written comments are all available on the same screen. When the document is released, it comes back automatically to the SSC A/P accountant for posting.
FreeException
Designing the technical solution
ScanGate
Start
FreeMatch
FreeProcess
FreeCompletion
FileGate FreeBuild
Figure 2:
SAP_Export
End
Scanned invoices are delivered in tagged image file format (TIFF). They are scanned in black and white at 300 dots per inch, giving good resolution, and then are sent to an Agfa file transfer protocol (FTP) server. They are uploaded in e-Flow. After validation, the metadata are transferred to SAP via batch input and the images of the invoices are stored in the electronic archiving system.
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•
The enthusiasm and willingness of the team to succeed were the fuel of the engine that led to a successful implementation.
Users’ feedback and project benefits Due to its simplicity and reliability, the project was accepted by the users. They rated the project 4 on a scale of 5 and commented on its ease-ofuse, simplicity and user friendliness, as well as the outstanding image resolution of the invoice. From a functional standpoint it is a lowrisk project with limited complexity while it offers a strong and reliable solution. Agfa Europe is now able to track efficiently the invoices from scanning to posting via specific reports and through key perofmance indicators (KPIs) on a higher level. Most vendors cooperated by sending their invoices directly to the SSC in Belgium and by adding the required information such as purchase order number or the SAP vendor code on their invoice. Figure 3:
The project delivered what it set out to do. Major implementation steps The project started in February 2002 and Germany, the pilot country, went live in June the same year. It was rolled out to 19 countries and the project was completed by December 2003. This project was challenging for various reasons: • Agfa closed a distribution contract with Top Image Systems (TIS) in 2001 and it was its first e-Flow installation. • No SAP workflow knowledge existed inhouse. • The project was developed by a more or less virtual team, working in their spare time. • The solution includes many interfaces, which increase the risk of failures. • It was the first business process outsourcing experience within Agfa Europe.
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Several factors helped to contribute to the success of this project: • A European Key User (A/P team-lead) was appointed from the first day (Project Kick Off meeting) as well as local coordinators. • A kick-off meeting was run in each country, and rolled out with the backing of managing directors, accounting managers, and heads of department at purchasing and logistics in order to support the change management. • Good planning and respected due dates brought credibility to the project. • A clear-cut overview was in place and SAP authorizations were adapted. • Vendors were informed about the change by mail or by phone and from start-up, a local call centre was set up to deal with any possible questions. • Achieving an adequate level of user understanding of the process was key to the success.
There is one A/P standard process in Europe implemented in all legal entities independent of their size and volume of invoices. The project brought a significant costreduction: over €1 million per year, mainly related to headcount reduction with a payback period of 25 months. There is a drastic improvement in efficiency from 3,200 to 10,000 invoices handled per FTE. However, Agfa is still looking for improvements to bring it closer to best-inclass averages. This will come from further reengineering, supported by the extension of eFlow 3.0 functionality. Invoices can be tracked at any stage in the process and the solution provides a reasonable average throughput time of about 20 days. Agfa in Europe managed to reduce vendor calls by paying more often on time.
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EXECUTIVE VISIONS BENCHMARKING OVERVIEW
An interview with Tom Olavi Bangemann Vice President Business Transformation The Hackett Group, World-Class Defined.
TB: No, not really. And the point, in my view, is that the question is wrong because that is the perception of many people, when you show them the benchmark metrics their perception is that sure we can cut costs but then we will lose quality. That is a common perception of how things work but in reality it doesn’t have to be that way because that will only happen if you do cost-cutting. Cost cutting is that you take off 30 per cent of the resources without doing anything else and that’s assuming that you’ve got some leeway. And if you don’t then the quality goes down. Re-engineering is thought to be something where you change the focus and, if necessary, you change the technology and organisation in line with that to get the same output with lower cost and even better output with lower cost. So when you do a reengineering project, and any solution project is supposed to be a reengineering project, it should not have that relationship.
And that’s what we think the discussion is evolving to. It’s not possible to have the discussion anymore with the CFO saying “Well, of course we can cut cost but it will then reduce quality.” CFOs today will say “no, I want to be in a competitive position in the cost area without losing quality, or at least the quality required to run the organisation. Maybe not the highest possible one but one that is sufficient.” That is the task that is often given to the finance function: increase quality and decrease cost at the same time. And that’s what makes their lives so difficult because that’s a hard job. Therefore, I think sourcing options have come into the game because many finance functions just aren’t able to do that based on the fact that they are in a certain framework situation and they demand certain drivers which they have to live with. But somebody from the outside might have different demand drivers and could offer something better and for lower cost.
EXECUTIVE VISIONS
CxO: Is it ever wise to sacrifice quality for lower costs?
CxO: Are we focusing too much on efficiency and cost and neglecting effectiveness?
It’s not possible to have the discussion anymore with the CFO saying “Well, of course we can cut cost but it will then reduce quality.” If you look at how Hackett measures world class, which in our terminology is a two-dimensional metric, it’s companies who are all about core size efficiency and effectiveness that we would describe as world-class. You can be as cheap as you want and be really good on efficiency but if were not so effective, we would call that cheap and useless. You are basically doing it at lowest possible cost but there is no useful output and the target obviously is to have good quality output at the lowest possible cost.
TB: We were focusing a little bit too much on efficiency. Let’s say we were driving it too fast on the timelines without being able to do all the reengineering on the effective side. You could also say we did not put enough resources into the effective side to keep it up with the speed so it’s not necessarily true that the speed was too fast, but the focus was, perhaps, too one-dimensional. Now the focus has shifted to two-dimensional and we get a lot of companies announcing that they have a world-class target based on the Hackett benchmarking they have done. Either in a certain function or across the functions.
CxO: As a thought-leader in this market place, what are the Top 10 benchmarking practices? TB: The highest one is a delivery model which looks like a sourcing grid when you think of the components of how you provide services in which area, and in what way. The discussion is not about shared services versus outsourcing, or good and bad,
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EXECUTIVE VISIONS An interview with Tom Olavi Bangemann, Vice President Business Transformation, The Hackett Group, World-Class Defined.
but it’s about all these components working together in a network that delivers an overall optimum solution. The delivery model is the key solution, the other big driver is an enterprise resource planning (ERP) platform. Still the metrics show us that if you have one common platform in place it provides a major advantage and if you don’t it is a major disadvantage. Both of these run at around 40% benefit. So if you are neglecting those two then you’ll have difficulty in achieving good performance. To look at it another way, we know that we can achieve medium performance without having those two factors, but after that, that’s it. Those are the major ones and within them I think there are a lot of best practices on different levels. You can say that if we looked at how world-class companies do things, obviously best practices are based on what companies are doing that are really successful. We would see that in addition to using these platforms, they are simply more productive - they design processes in a way that makes them more productive. They have higher productivity with fewer errors. That means that getting that done requires having very good processes designed and needs the right people in the right place. You could say if you looked at worldclass companies and their people management techniques they typically invest significantly more in people, whether it’s hours of training per staff or a retention strategy that they have in place, or whether it’s technology per employee, especially in finance. You can see that companies invest more in technology than an average company.
Another best practice is self-service. It spans all functions but is especially effective in finance and HR. Another best practice is self-service. It spans all functions but is especially effective in finance and HR. The key there is that selfservice is good but the requirements on usability of those processes are higher than the process which is serviced.
CxO: What are likely to be the best practices of the future? TB: I don’t think in finance the things will change too much in the next few years, although outsourcing in the finance area is predicted to double in the next three years. The captive shared service solution will still be the dominant delivery model. In three years time over half of the companies will still have a captive shared service as the major delivery platform. So the ratios will change inside the finance function and outsourcing will grow in percentages radically, but coming from a relatively small platform, at least for an overall business process outsourcing (BPO) it’s not going to take over. It might take over in 10 years, but within the next three years we think we will be dealing with the same
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issues. By then however, standardisation and globalisation will be taken much more seriously and you will see companies reduce service levels in certain areas. This will be painful in the beginning and people will be screaming and yelling because they don’t understand what the benefit of that is, but that will take place. Then there needs to be more reliance on technology running these things because a larger proportion is automated and as we will have a dwindling number of people in finance in general, as more of it becomes automated and more of it is done by a third party. I think the key question for the finance people is how will they keep their positioning inside the company, which has typically been the most important support function in most companies. In many cases the CFO is one of the strongest contenders for the CEO jobs. If the CEO does not come from the business, which is probably the first priority, then he or she will come out of the finance function. It’s very rare that a HR director or IT director makes it to CEO. Finance will struggle in keeping that role and that requires them to move firmly into the decision support areas and get rid of the transaction work which they have been doing for 10 years. But they should also re-examine how they reposition themselves, because often they still think in terms of armies of people they control, or locations they have and the number of entities they are responsible for. They need to change the model of thinking about the mergers and acquisitions activity that they have contributed to, and given support for or made decisions on, and mergers that they have helped to make successful, businesses they have given material to help improve. All the CFO surveys, in terms of what is relevant for the next few years, always come up with the same kind of thing. If you summarise very briefly then you will see that the CFO will always be responsible for: 1) helping the revenue increase, 2) reducing costs, and 3) staying out of jail. After that you have a long list of things that constantly change, depending on what kind of markets they are in, as sometimes people are number four, or technology is more important.
CxO: How has the Sarbanes-Oxley act affected shared service and outsourcing governance? TB: The Sarbanes-Oxley act has, in certain ways, helped shared services to become successful because a platform of consolidated process is more suitable for defining key controls in a successful way. On the other hand, if you’ve got your services in place you spend significantly less on compliance with the Sarbanes-Oxley act and world-class companies in general spend 57 per cent less than a medium company. The effect is positive in both ways. The effect on the CFO’s work life is not perceived by them to be positive. Some of them say they have a certain understanding of why some of that was necessary and if you ask a European CFO most of them still have the view that it was something that was necessary for the US because they didn’t do their homework and it’s just a nuisance for Europe.
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CxO: What major mistakes have companies recognised and learned lessons from? TB: The biggest mistake has been not to give the shared service organisation sufficient scope and autonomy to run more or less like a business and be able to make those improvements that you are expecting from them. I think it depends on the organisation, but as a trend, companies are not trusting the shared service solutions enough, even if you go through the evolutionary path to increase the scope fast enough and give them autonomy, especially in dealing with customers and outside vendors. Instead most companies are utilising the shared services centre as a transaction centre or factory to deal with sub-processes that they don’t want to deal with themselves. That will never lead to a real change in delivery model. It reduces costs but it doesn’t change the operational model… and that’s the biggest mistake. Looking at the shared services purely as a distant world of centralisation and consolidation and not really utilising it to its fullest extent. And companies that have facilitated more autonomy are significantly more successful inside their finance function and even more so to the outside because the real benefits reach the outside world based on the finance it delivers to the rest of the organisation, not just based on the internal cost reduction.
CxO: What advice would you give to those looking to set up a shared service or looking to outsource their finance function? TB: The advice would be do not jump to any conclusions before you have thought about the options. It would be wise to have some sort of a sourcing strategy research, either internally or by an outside body, to get transparency, on what it is that you want to achieve. If you are not clear about the target then you are not going to have the right solution in place. The biggest mistake in any shared service, offshore, outsourcing project is to select a solution based on something but it does not link up with your actual target. In simple terms, a company’s benchmark results indicate a real need for reducing cost, but when they do a location search they go by a totally different criteria, suddenly emphasizing criteria such as existing presence and quality issues and so on. The cost factor, which was the main driver for it, gets diluted and you land in a location that won’t enable you to achieve your primary goal. The key advice is to be clear about the main targets you want to achieve, then align the approach and the delivery model to achieve them. The other bit of advice would be not to look at things in terms of benchmarking being bad and outsourcing being bad but look at all the options that are out there. Put together a sourcing grid with all the functions and all the processes on one axis and all the solutions on the other. Just have an overview of what makes sense of what. For example, payroll – maybe local outsourcing is the right solution for payroll.
EXECUTIVE VISIONS
I think they have come to terms with it now because they went though the work that was necessary, and it’s probably a little bit overdone, but they have put a good platform in place to take up new requests when they come around and there will be European countries coming out with similar ideas. France has developed something like this already.
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Case Study
ACHIEVING SIGNIFICANT COST REDUCTIONS THROUGH DATA CENTER CONSOLIDATION FOR STANDARD CHARTERED BANK Atos Origin and the Standard Chartered Bank have entered into a seven year international outsourcing agreement covering the managed operations of the bank’s Data Center infrastructure. Atos Origin will deliver an improved level of performance and reduce costs through the deployment of new technologies and greater standardization and consolidation. The new relationship and framework will also allow Standard Chartered Bank and Atos Origin to explore other areas of cooperation.
BUSINESS CHALLENGES Standard Chartered Bank was looking to achieve greater leverage of its IT resources for the business across the Asia Pacific region. It also wanted to move from its current technology and mode of operations in the Asia Pacific Data Centers to a new technology base and mode of operations that would delivers higher service and quality levels to its customers at an improved Total Cost of Ownership (TCO). There was also a desire to improve the resilience of the services and to be better able to support the future growth plans of the business. And, as one of the world’s leading international banks, achieving this with a partner they could trust and with the minimum risk to both the business and their customers was a top priority.
SOLUTION Together with Standard Chartered, Atos Origin developed a Transition Program to prepare for and deliver this major change which has involved around 34,000 end users, 650 servers and 190 applications across 19 countries. Central to this was the migration to a new mode of operations. This included consolidating the data center from 4 locations to a twin Data Center location based in Hong Kong and integrating with the bank’s own IT
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service centers. From these centers, Atos Origin now runs the majority of the banks core consumer and wholesale banking platforms, as well as systems linked to ATM's. Services include mirrored disaster recovery facilities, and new storage and service desk facilities. Another feature of the solution has been technology refresh (hardware and software) covering nearly 95% of the mainframe, midrange and storage platforms for Standard Chartered’s business operations. New processes, procedures and supporting tools for Data Center operations have also been deployed. This includes Atos Origin’s own ITIL-based Continuous Service Delivery Model which ensures globally consistent processes and service delivery and
The first Phase of the program to establish the new infrastructure (facilities, technology and process) began during 2004 with the second Phase, completing in 2005. This was structured as a series of migrations in which individual country’s processing facilities moved to the new location in Hong Kong and which also involved the decommissioning of 3 other facilities.
BENEFITS Standard Chartered was looking to achieve greater leverage of its IT resources for the business across the Asia Pacific region. Its new twin Data Center mode of operations now has higher resilience and disaster recovery
In terms of TCO, the Standard Chartered has been able to realize a 50% reduction in cost of mainframe operations and a 30% reduction in cost of midrange operations. Global Enterprise Management System (GEMS) tool, which enables distributed monitoring as well as technical and service support from region-wide service centers.
capability across all production systems and Atos Origin has agreed to, and is delivering, higher performance targets within the Service Level Agreements (SLAs). Furthermore, there
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have been no single points of failure within the supported infrastructure. In terms of TCO, the Standard Chartered has been able to realize a 50% reduction in cost of mainframe operations and a 30% reduction in cost of midrange operations. And as part of this long-term agreement, Atos Origin has been able to offer more flexible and scalable pricing, giving even greater economies as the business grows. “This is a long term partnership that will leverage the latest technology to deliver significant cost and capability benefits to the Bank.” Peter Sands, Finance Director of Standard Chartered Bank
About Standard Chartered Bank Standard Chartered is one of the world’s most
provides credit cards, personal loans, mortgages, deposit taking and wealth management services to individuals and small to medium sized enterprises.
international banks, employing over 40,000 people,
Wholesale Banking provides corporate and
representing 80 nationalities, across its network.
institutional clients with services in trade finance,
Standard Chartered operates in over 1,200 locations
cash management, lending, securities services,
(including subsidiaries, associates and joint
foreign exchange, debt capital markets and
ventures) in more than 50 countries in the Asia
corporate finance.
Pacific Region, South Asia, the Middle East, Africa, the United Kingdom and the Americas. Standard Chartered serves both Consumer and Wholesale Banking customers. Consumer Banking
Standard Chartered PLC is listed on both the London Stock Exchange and the Stock Exchange of Hong Kong and is in the top 25 FTSE-100 companies, by market capitalization.
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OUTSOURCING RELATIONSHIPS AT WORK: SETTING GUIDELINES FOR BEHAVIOUR
Leslie Willcocks London School of Economics
Sara Cullen Cullen Group
Introduction In trying to identify what makes for success in outsourcing, practitioners invariably hig light ‘relationships’ - but there are few precise findings on how such successful relationships should be developed. Successful relationships don’t just happen. Our most recent research into over 500 organizations (Cullen, 2005; Willcocks and Lacity, 2006) demonstrates that overall strategic business intention must determine the nature of the relationship and the contract. A detailed design is essential to build effective relationships throughout the life of the deal. This determines the key underlying drivers of behaviour, and whether powerbased or trust-based relations emerge. Positive intervention by top management is vital to make the ‘chemistry’ work (Willcocks and Cullen, 2005). In this paper we also point to the criticality of establishing targets, and of proactive assessment. In particular we highlight how a relationship values charter can set a benchmark for behaviour, and how regular health checks and contract card monitoring to assess the success of the relationship are crucial throughout.
Diagnosing The Outsourcing Relationship Relationships are not just about subjective feelings - ‘feel-good’ or ‘feel-bad’ factors. Establishing outsourcing relationships, keeping them on track and getting the most out of them means measurement. All parties will benefit from negotiating and clarifying a relationship values charter at the beginning of the deal, from regular health checks during its
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course, and from monitoring - using a contract scorecard - the alignment of strategy, service, relationships and financial outcomes. But getting the right culture between the parties has proven to be one of the most difficult aspects of an outsourcing agreement.
The Relationship Values Charter For this reason, experienced outsourcing clients have adopted a form of agreement, called a ‘Relationship Values Charter’ or a ‘Code of Conduct’ that describes and agrees the behaviour to be demonstrated during the course of the relationship. Modelling the desired behaviours at this stage is invaluable as it significantly contributes to selecting a supplier that best ‘lives’ these values. Getting the right value and culture between the parties has proven to be one of the most difficult aspects of an outsourcing agreement. A relationship values charter agreed between a communications manufacturer and its Tier 1 IT infrastructure supplier is shown in Figure 1. This charter was designed and applied early on in the outsourcing lifecycle and was used throughout to evaluate the relationship on a bi-annual basis. As a result, the client selected a supplier who had demonstrated the behaviour with other clients, and the parties had a mechanism for gauging the degree to which the behaviour was exhibited in their deal. Clients that do not specify the behaviours they seek must work with the behaviours they get, as well as the behaviours the client itself exhibits.
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• Service - We do not desire to apply penalties. The Services will be of a consistent high standard, comparable to market standards, and customers will be delighted. • Financial - We will achieve our financial goals: o Client – reduce cost over time and have competitive pricing at all times o Contractor – reasonable profits • Communication - We will communicate frequently, openly and honestly with each other. • Meet Needs - We will be both proactive and reactive to each other’s needs. • Creative Solutions - We will constantly search for better ways of doing things. • Conflict - We recognised conflict as natural and will focus on solving the problem, not apportioning blame. We will resolve conflict at the lowest level. • Fairness - We will be fair to all parties. • Time - We will provide each other time and management focus. • External Relations - We will project a united front and will not discuss sensitive issues outside of the relationship. • Industry Model - Our relationship will be seen as an industry model. • Enjoyment - We enjoy working together and respect one another. • Added Value - We will both derive more value from our relationship than just the exchange of money for services. • Works Seamlessly - The services value chain will appear seamless. • Technology Leadership - We both wish to have recognised technology leadership
Figure 1: Example Behaviours in a Relationship Values Charter
Case Example In one case, the spiraling adversarial behavior initially occurred from the client. A property company and a supplier agreed to an ‘outsourcing alliance’ – a partnering style of relationship. They all worked very well together during negotiation and planning the transition. Then, on the first day of the contract, the supplier walked into the client’s office asking where the relationship manager would be accommodated (expecting an office next to the director in the spirit of ‘partnering’). The director was quite surprised - he had expected the supplier’s staff to be offsite and certainly was not going to provide free office accommodation. Reluctantly, the director gave the supplier an office in the basement. The supplier was wounded by what it thought was an overt gesture normally found in a ‘master-slave’ relationship. Rather than discuss expectations of partnering behaviours, the supplier went on the defensive stating that “if that’s how they’re going to treat us, fine.” The supplier instructed staff to
perform only the letter of the contract and rely on the client’s instructions as opposed to introducing the potential innovation ideas that were enthusiastically thrown about during negotiation. The client then interpreted this behavior exhibited by the supplier as ‘typical: say anything to get the deal, then run it the way they like’ and the adversarial relationship began.
Client-Supplier Relationships Diagnostic Given the importance of the relationship, a ‘health check’ diagnostic is vital for determining whether an outsourcing relationship is exhibiting vital signs of health. Figure 2 provides an abbreviated diagnostic as used in one successful arrangement we studied.
Case Example An electric utility evaluated the relationship every quarter, and had an improvement agenda to focus on the key gaps. In fact, the relationship was deemed so unusually superi-
or that an independent consultant was brought in when a new general manager took over at the client. This was to verify that it was, in fact, arms-length (no collusion, etc) and good governance was in place. Nothing unseemly was found. Only minor ‘tweaking’ of process transparency (forms and signoffs) was recommended, stating ‘the commercial relationship and behaviours exhibited were what parties everywhere aspire to’.
The Contract Scorecard Outsourcing is not a goal in itself, but a management technique for achieving any number of business goals - and whether outsourcing has achieved these goals cannot be assumed, it needs to be monitored and kept on track. Organisations that are veterans at the outsourcing game know that the success of a deal is more than a single dimension. They know it is not just the cost, but also the quality of the service that matters. They also know it is more than just getting what you pay for, but whether the relationship is productive or dysfunctional. Further, they know outsourcing is not just an operational exercise; there are strategic goals to achieve, or at least not to disable, as well. It is very unwise to assume that goals are achieved inherently upon signing an agreement. Since outsourcing is rarely a reversible option and can consume a large part of the budget, management’s ability to drive and demonstrate success has become a basic expectation. To assess the myriad criteria that an outsourcing deal may need to demonstrate to be deemed ‘successful’ - we regularly find organisationspursuing five or six major objectives, and some up to 17 - the industry is now recognising the value of applying a balanced scorecard approach. Our own contract scorecard is a method used to evaluate the success of the arrangement in a more holistic manner than just meeting KPIs (key performance indicators) (e.g. availability) and reducing cost. The contract scorecard helps the parties to establish how the quality of the service will be evaluated, but also how the financial outcomes will be judged, how the relationship is conducted and if the outsourcing deal is achieving its strategic aims. In sum, it provides a valuable senior executive dashboard for representing the overall success of the deal from a holistic perspective. The four quadrants for assessing an outsourcing deal are service quality, financial, relationship, and strategy.
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Service Quality Service quality embodies the operational metrics representing the fundamental outcomes of service delivery. Examples include: • Accuracy – the degree information is correct (e.g. data entry error rate, processing exceptions, record audits). • Reliability/availability – the degree services are accessible (e.g. uptime/ downtime, abandon rate, outages) • Completeness/compliance – the degree activities are done in full, typically determined via compliance or verification checks (e.g. processing, documentation) • Efficiency – the speed of activity (e.g. cycle time, processing rate) • Response rate – the speed of reactions (e.g. service initiation, turnaround time, resolution rate) • Timeliness – the degree deadlines are met (e.g. processing, payments, reporting) • Satisfaction – the degree customers are pleased.
• • •
Industry model – the relationship seen as an industry model. Positive interaction – enjoy working together, mutual respect. Integration – the supply chain appears seamless.
Strategy
•
Strategy embodies the high-level metrics that go beyond the letter of the agreement. Examples include: • Objective achievement – the degree to which the reasons behind the outsourcing initiative are being met (e.g. core focus, standardisation, knowledge transfer). • Innovation – the introduction of better
When an organisation uses the contract scorecard, it will tend to publish the results on a very high-level dashboard. This is then sup-
Category
Diagnostic Questions
Behaviours Exhibited
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Financial Financial embodies the monetary metrics comparing current costs to different fiscal points. Examples include: • Historical – current cost compared to previous periods. • Baseline – current cost compared to an agreed baseline (typically costs under insourcing or under an earlier supplier). • Budget – cost compared to an agreed budget. • Competitiveness - current cost compared to market rates (typically assessed through some form of benchmarking). • TCO (total cost of ownership) – contribution towards reducing entire function/asset costs.
Relationship Relationship embodies the perception metrics assessing behaviours exhibited by one party in the eyes of the other. Examples include: • Communication – frequent, honest. • Meeting needs - proactive and reactive. • Creative solutions – continuously search for better ways of doing things. • Conflict resolution – focus on problem solving, not apportioning blame. • Fairness – act even-handed to each other. • Management time – provide time and focus to each other. • External relations cohesion – project a united front.
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•
practices, enabling applications and business improvement initiatives. Business contribution – what the parties have achieved out of the deal above just the exchange of cash for services (e.g. joint product offerings, R&D initiatives, knowledge transfer). Corporate alignment – the extent to which the supplier conducts business in line with the client’s wider corporate goals (e.g. SME use, workforce gender balance, environment).
Perceptions of the parties regarding one another
12. 13. 14. 15. 16. 17.
Investment in the relationship
Communication
Relationship processes
18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31.
Do both parties display ethical behaviour? Is there an “us” vs. “them” mentality? Are both parties proactive? Does either party blame the other when problems arise? Does either party misrepresent the relationship to others? Do the parties give each other recognition when it is due? Are there key individuals who dislike each other? Do both parties respect one another? Do both parties think the other party is a good listener? Do both parties believe the relationship is a role model for the industry? Do both parties use the relationship as an example of good practice within their respective organizations? Are both parties reliable? Are there unfulfilled promises by either party? Does either party think the other party is not pulling their weight or living up to their accountabilities? Do the parties think of the other party as trustworthy? Does either party display the NIH (not invented here) syndrome (i.e. “it’s not our problem, it’s their problem”)? Do both parties understand each other’s business, underlying drivers and motivations, politics? Are both parties investing management time and effort? Are there solid relationships at all appropriate levels? Does each party get the management attention it needs from the other? Is the client organization an enthusiastic customer reference site for the supplier? Is there regular communication? Is there regular feedback? Do the parties provide early warning to each other? Do the parties suggest improvements to one another? Are there clear protocols between the parties? Does each party assess the satisfaction of the other party? Do the parties plan together? If the contract has financial rewards for superior performance, have such awards been applied? If the contract has financial consequences for poor performance, has such recourse needed to be continually applied? Do the parties continuously seek better ways of doing things?
Figure 2: Relationship Health Check Diagnostic
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ported by a comprehensive performance report describing, at a minimum, the detailed metrics, root cause, and actions to be taken. Whether you choose to use a balanced scorecard approach to evaluate the overall success of an outsourcing deal will depend upon: (1) how actively you intend to ensure the myriad of desired outcomes are achieved and (2) what the key stakeholders to the deal want to know on a regular basis. There are four stakeholder perspectives that an organisation may adopt when assessing success using a contract scorecard:
Contract Value For Money Perspective The ‘value for money’ perspective represents what you get for your money (service quality + financial). Ideally, an organization is getting the minimum service metrics agreed to in the contract at a price that meets its financial expectations. This is base expectation for most stakeholders, but particularly for the user business groups that receive the service and end up paying for it.
Contract Context Perspective The ‘context’ perspective represents the setting surrounding how the contract is delivered (relationship + strategic) regardless of what is delivered and how much it costs. Ideally, the contract outcomes are being conducted in such a way that the parties work together very well and, by virtue of having the particular supplier providing outsourced services, you are in a better position than had you
not outsourced. This is of particular interest to the CEO and senior management.
Contract Operations Perspective The ‘operations’ perspective represents how the contract is conducted in practice (service quality + relationship). Ideally, the contract is being conducted such that the service outcomes are being achieved in a way that strengthens the commercial relationship and interaction (nonadversarial). This is of particular interest to stakeholders directly involved with the supplier, either as service recipients (users), part of the contract management function, or part of the retained functional organisation.
Contract Agenda Perspective The ‘agenda’ perspective represents how the contract fits in the bigger picture (financial + strategic). Ideally, the contract not only is financially effective, but is also achieving your wider corporate goals. These wider goals are often of most interest to senior management. You may choose not to use all the quadrants for all deals. For example, the only success criterion for infrequent transactions such as a desktop refresh may be price. However, as a deal becomes strategically more important and longer in duration, more of the scorecard is likely to come into play. The expectations for a 10-year whole-of-IT deal, for example, will typically be more than purely financial and success will be based on at least the value-formoney criterion if not the entire scorecard.
Once the decision to outsource has been made and the deal bedded down, it is easy for many to just let the deal run and manage it at a low level. However, such organisations will never know if they have gotten the outcomes and total value they wanted. For the CEO, an outsourcing contract scorecard is one tool that that has proven eminently successful, and is well worth implementing.
About The Authors Leslie Willcocks Leslie Willcocks has an international reputation for his work in outsourcing, IT and change. He is Professor of Technology Work and Globalization at the London School of Economics. Email - L.P.willcocks@lse.ac.uk Sara Cullen Sara Cullen is a former national partner at Deloitte Touche Tohmatsu (Australia), and is now CEO of the Cullen Group. Email - SCullen@cullengroup.com.au
References Leslie Willcocks and Mary Lacity (2006). The Global Sourcing of Business and IT Services (Palgrave, London) Leslie Willcocks and Sara Cullen (2005) Outsourcing Enterprise 2: The Power Of Relationships. (Logicacmg, London) Sara Cullen. (2005) Towards Reframing Outsourcing: A Study of Choices in Process, Structures and Success (Melbourne University, Melbourne)
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TRANSPARENCY IN OUTSOURCING
The push for more Transparency The drive to outsource has been going on since the late 1980s as companies strive to reduce their costs, take advantage of technological developments and develop long-term IT strategies. Outsourcing always involves long-term relationships and when such an agreement is made the outsourcing service provider is often selected on their reputation and a series of expectations. In any such relationship it is completely normal that problems may occur from time to time. Furthermore, there is nothing wrong in admitting that sometimes living up to those expectations can be difficult. Situations change continuously and the outsourcer can sometimes encounter similar issues as those that occur between the parts of any enterprise and their in-house IT department. Here transparency is crucial in maintaining trust and a sense of perspective. In fact the role that transparency plays in the way that these problems are dealt with and resolved will ultimately lead to a stronger and more effective partnership.
John Dain Senior Vice President Global Managed Operations, Atos Origin
Business Drivers and Responses in the IT Services Landscape The IT services market landscape is constantly changing due to a number of critical business drivers. They are pushing both service provider and recipient to respond with a number of solutions to address these issues, and these require transparency on both sides to be truly effective. Generally, the business drivers fall into three major areas: technology, business demands and regulatory compliance issues such as Sarbanes-Oxley, IFRS and TUPE.
Technology Technology changes are affecting IT capabilities in areas such as networks, bandwidth, processing power, storage, packaged solutions. They are removing any limiting factors and barriers to what can be achieved and are even pushing enterprises towards implementing certain solutions. The advances in processing power and virtualization technology that have taken place over the last few years have given extra impetus towards recentralizing IT. This enables the rationalization of enterprise IT infrastructures beyond what has previously been possible through consolidation. Virtualization technology also helps to keep costs, as regards disaster recovery and business continuity to a min-
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imum, and many enterprises use it as the first step in a move towards a Utility Based Computing (UBC) environment. Technology has also led to the development of the more flexible service-oriented architecture (SOA), with a mixed insourced/outsourced, onshore/offshore staffing model. Open-source software has become mature and accepted and is becoming increasingly important. But despite such advances, security remains a core concern within user companies and vendors. Wireless communication technologies, with RFID leading the charge, will connect objects to each other and to data collection environments. Mobile users in all but the remotest regions will be able to exploit significantly improved wireless transmission rates and seamless domain roaming, supporting the continuation of a wireless session across different networks (for example, from a wireless hot spot to a WAN). Finally the Internet has created a much more ‘connected’ way of doing business. Many service providers, including Atos Origin, can increase transparency through web-based service portals or extranets. These can enable the client to see exactly what is going on in the contract and even be able to influence it as well by indicating the changes they want. In effect, a ‘Management Dashboard’ which can grow in
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line with new developments and allow for services to be added or amended at any time. To be truly effective, work needs to be parameterized on the delivery side in such a way that the requested changes can be implemented either automatically, or with only minor human intervention. This is typically a win-win situation. It enhances the customer experience because they feel that the request for change is part of a solid procedure and not treated as exception, and on the supplier side, it both decreases cost and potentially increases turnover through making it easier to provide additional (or less) volume and functionality.
Business Demands Business demands are changing very quickly and more unexpectedly meaning that businesses must become more flexible. Furthermore, being able to link business demands and emerging technology in a transparent way demonstrates value, attracts management attention and secures resources for innovation. Businesses are more and more calling for a flexible technology infrastructure, one where business demands for IT resources can be automatically met. They want an efficient, selfmanaging infrastructure where fixed costs are replaced by variable pay-per-use costs and the enterprise can move expensive, rapidly depreciating assets off its balance sheet. They also want to take advantages of the advances in service-oriented architectures and the potential of on-demand sourcing models. A key driver for an enterprise's business strategy is its ability to adapt to a changing business environment. IT executives must create an evolving governance architecture based on an organizational structure, principles and decision making processes that can deliver the greatest advantage to the business. Traditional IS organizations must adopt new, agile and flexible governance mechanisms to support changing business processes and IT managers must understand how the business environment and technology is changing in their specific industries. Here, transparency in customer and supplier relationships is an ever-more essential part of operating a business. Finally, the ongoing need for enterprises to reduce IT spending in terms of Total Cost of Ownership (TCO) and execute change has led to the drive to harmonize IT services and operational processes, with service levels being defined across regional, international
or global organizations. Furthermore, successful commoditization and consolidation enables these services to be moved offshore without impacting on flexibility and quality even more effectively, thus delivering even greater savings.
Regulatory Compliance Compliance issues have seen many enterprises struggling with how to contain costs for adhering to regulations such as SOX, IFRS, FDA, Basel II, HIPAA etc, and it is expected that this will account for some 15% of IT budgets in 2006. This has also caused the market to recentralizing IT as a well-structured, standardized and consolidated IT environment that can make the implementation and maintenance of systems to support such regulatory requirements less costly. As the pressures of regulatory change related to enterprise risk management and the desire for information transparency intensify, managers and directors need to attain a deeper view and increased control of operational risks and compliance execution. Transparency makes the business's operations more auditable by increasing visibility into core processes and this is critical to maintaining trust and keeping performance in line with client, investor and regulatory expectations. It also provides the basis for being able to plan and carry out continuous improvement and allows for the creation of a baseline that can be used for future comparisons.
The IT Services market has reacted to the changes in these 3 areas with solutions that are moving the IT Landscape towards: • More centralization • A return to mainframes • Virtualization • Utility-Based approach • Application rationalization • Global Sourcing With so many different drivers and influences affecting the IT landscape today, it is hardly surprising that enterprises are looking for greater transparency from a service provider.
The importance of Transparency in a Relationship Transparency is important in many areas of the relationship. To begin with there is often a graduated level of dependency between the service provider and the customer. Each needs to know exactly who is responsible for what, as any ‘grey areas’ can lead to confusion and dissatisfaction. For example, some business may be concerned about a possible lack of control due to subcontracting by their outsourcers. The customer is ultimately responsible for its own business, despite certain areas or processes being outsourced, and so needs to retain full control and clarity over all information and processes. Here, transparency provides a single view of the services on offer and
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the projects being supported. This helps creates the atmosphere in which a long-term and mutually beneficial relationship can flourish. Traditionally a relationship was determined by a set of pre-defined rules that lasted throughout the duration of the contract governing that relationship. Any changes, (be they process, functionality and sometimes even volume), were seen as exceptions that needed contract negotiations to discuss and accept, and often work-groups and project teams to implement. But today there is a need for more flexibility in response to a more dynamic business world. So more transparent contracts are constructed to accommodate change and make the financial consequences predictable. This radically reduces the need to negotiate and therefore the total time to effect the required change. Changing service requirements, be it to take into account holidays, industrial disputes, sudden changes in product demand or supplier issues all mean that it is critical that the customer has a real-time and accurate picture of what IT services it is buying, and how much of it, and can vary these to fit demand through an ‘on- demand/UBC’ delivery model. Such a model also allows a customer to see if it is making the most efficient use of its IT services, and the ability to fine tune the situation adds to trust and confidence in the relationship. Finally, innovation is a much-used word today and often a key commitment from the service provider. Within an outsourcing relationship, there has to be the ability for the customer to actually openly check that the service provider is aware of the potential of any new innovation and is actually following the latest trends and doing something about it!
Transparency can provide a Win-Win Situation It might be assumed that by introducing more transparency in outsourcing that it would mainly be to the benefit of the client. However, if properly structured and managed, transparency can be of equal and possibly even slightly greater benefit to the service provider. But whatever the degree of benefit, the mutual benefits to the overall relationship are considerable.
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Client benefits include: •
• • • •
Greater control leading to better trust and a ‘what you see is what you get’ situation (See Gartner report ‘Trust and Control’). Congruency, where perception and reality are the same. Reduced TCO. Better consistency of services. Greater management/end-user satisfaction. Integrated management processes across both companies in areas such as invoicing, service orders, communication, etc.
Service Provider benefits include: • • • • •
• •
•
Improved client satisfaction and long-term relationship – Measurable/Manageable. Lower technical admin costs. Improved quality of invoicing and improved DSO (Daily Sales Outstanding). Lower cost of implementation through standardization. Improved internal communication by breaking down barriers between delivery units. Resolving the client ‘catalogue’ issue. Enhanced end-user experience allowing more one-to-one marketing and up-selling. The ‘Shared Values/Goals’ approach is a commercial USP.
Creating the Conditions for Transparency There are a number of conditions that help a service provider to maximize the benefits from transparency. An outsourcer has to have the established skills and competencies in order to be able to deliver flexibility at low cost. They need to have an application portfolio properly in place and to be able to deliver standard processes. Also they need to be able to leverage massive synergies and to be able to partner across the customers complete value chain. A clear governance model is also an essential prerequisite to achieving transparency. This is a cornerstone of Atos Origin’s approach to outsourcing and is well documented in our white paper on Demand Supply Management which was also published in the Outsourcing Project in 2005 and is available on Atosorigin.Com.
Another condition is that contracts have to allow flexible volumes and quality changes without any renegotiations. They need detailed and accurate price information to be able to order or cancel services as required in response to changing business needs. Furthermore, customers need to be able to have a real-time insight into the services they are receiving to be able to see the status of the ‘kitchen’ of the outsourcer! They need to have control over these and to be able to audit them easily. All these areas can be best facilitated through the ‘Dashboard’ model where the customer is fully empowered to drive or control the relationship to respond to the dynamics of its own particular business situation. Atos Origin has established web-based portals or extranets which enable the client to see exactly what is going on in the contract and influence it as well.
Summary Ultimately both the service provider and the customer need each other to achieve their business goals. However, in the case of outsourcing, the relationship itself is the most critical aspect. To be successful it must be long-term and open, and ideally grow to the benefit of both parties. Transparency is vital in creating these conditions and the trust required to make the relationship work. However, a service provider must not only demonstrate the intention to be transparent but must be able to actually deliver transparency in a tangible and practical way, based on a sound governance model. This can ultimately lead to the ‘Dashboard’ model where the customer is fully empowered to drive or control the relationship to respond to the dynamics of its own particular business situation. Finally, if transparency is seen as a serious element of an outsourcer’s service delivery approach, this can be a major factor in influencing a client’s decision to select a service provider as a long-term outsourcing partner.
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ESTABLISHING/LIVING A SUCCESSFUL STRATEGIC PARTNERSHIP
KarstadtQuelle AG, based in Essen, Germany, is Europe’s leading department store and mail order group. The Group achieved sales of EUR 15.7 billion in the financial year 2005. The Group’s business segments include Over-the-Counter Retail, Mail Order, Services, Real Estate and Tourism. The KarstadtQuelle Group employs around 62,500 staff.
Dr Peter Patzina CIO Mail Order KarstadtQuelle and Managing Director of Itellium GmbH
Introduction In late 2004, Atos Origin and KarstadtQuelle AG announced a long-term outsourcing agreement under which Atos Origin took over the Infrastructure Division of Itellium Systems and Services GmbH, KarstadtQuelle’s IT subsidiary. Around 900 staff transferred to Atos Origin under a business transfer arrangement. For last year’s edition of the Outsourcing Project, my former colleague Ulrich Engelhardt, then CIO, Over-the-Counter Retail, KarstadtQuelle, described how the outsourcing agreement with Atos Origin came about. Now, some 18 months into the agreement, it is worth considering where the partnership is, what lessons have been learned and what the future holds!
Meeting the challenges The original outsourcing deal between KarstadtQuelle and Atos Origin was negotiated according to a very tough schedule. As part of this, Atos Origin took over the Infrastructure Division of Itellium Systems and Services GmbH, KarstadtQuelle’s IT subsidiary and internal service provider. Here, because of the historical development of this situation, many of the services and service levels were only partially fixed in contracts. However, it was also clear that, generally speaking, Atos Origin would take over and continue to provide the services as Itellium had done before.
The key challenge for Atos Origin was to establish its services under strong and immediate cost cutting pressure while maintaining the quality. They have also had to integrate over 900 people, establish their own procedures and processes and consolidate their services and portfolio in line with other deals in order to achieve the necessary economies of scale for delivering cost reductions. Meanwhile, also as a direct result of the need to reduce costs, KarstadtQuelle closely examined all the IT services it received concerning both quality and quantity. This meant that shortly after the deal we began to change our demands for IT services at a time when both parties are normally trying to establish a stable relationship between demand and supply!
Establishing Transparency as a key success factor in Outsourcing KarstadtQuelle has also had to establish what is called ‘Vendor and Service Management’. This was in order to not only guide the transformation project, but also to establish a healthy relationship with the service provider and ensure that our business needs were met. Here we believe that establishing transparency in the relationship is one of the key success factors for achieving effective and efficient service-delivery, and therefore also for creating a stable and successful partnership. The first important task for Vendor Management was the creation of a detailed
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overview over all the services and relationships so that both parties knew exactly what was involved and their responsibilities. Based on that and the existing requirements, both sides could then work on establishing exactly what was required from the demand side and then work on delivering the necessary quantity and quality of these services through agreed Service Level Agreements (SLAs).
business units and IT-Management on the one side and the supplier(s) of IT-services on the other. Another aspect of a successful partnership is that it is normally based on two principles, trust on the one hand and ‘challenging the partner’ on the other. From our side this means that we are looking to see improvements in speed, the establishment of new processes,
When we look at where we stand after 18 months of our partnership, we can state that there has been a very smooth transformation without noticeable problems in the quality of existing services. For a successful transition process a number of project teams and steering committees on different management levels had to be established. Special importance was given to the structuring and defining of clear processes for reporting and also for the ordering and invoicing of services. Thus Vendor Management became the link between the
reduced costs, as well as system stability and quality improvements. However, we must bear our responsibility and realize that our partner has taken over a certain structure and history. Finally, both parties must accept the need to look for future opportunities to develop the relationship, be they from a business opportunity or technology innovation point of view.
Taking the partnership forward When we look at where we stand after 18 months of our partnership, we can state that there has been a very smooth transformation without noticeable problems in the quality of existing services. Of course, new applications and new services bring new challenges, but we are sure that we will be able to manage these also. Some things are always unexpected or need time and one (probably underestimated) issue was, and partly still is, the establishing of the new invoice processes and clear reporting structures. However, by maintaining an open dialog with each other we are able to not let it detract from the overall goals of our partnership. Together we have been able to achieve significant cost-reductions right from the start of our partnership. For the future we have to face the challenge that our business demands are constantly changing and therefore so are our needs for the IT support of our business processes. This brings new challenges for the partnership (e.g. outsourced services, which become unnecessary) but also new business opportunities (e.g. new services for our business or new possibilities through new technologies). And in a successful partnership, both sides need to focus on both aspects. I am clear that the basis for building a successful relationship, one that is capable of not only surviving, but also developing and growing to the benefit of both parties, is the establishment of stable services in an atmosphere of solid trust and transparency.
About the Author Peter Patzina Dr. Peter Patzina is Managing Director of Itellium Systems & Services GmbH, responsible for consultancy and systems integration for the mail-order business of KarstadtQuelle and also CIO of the mailorder business of the group. After studying business administration and completing a post-graduate-study, Peter Patzina started as a management trainee at Quelle in 1990. After several management positions in IT he became CIO of Quelle and Neckermann, the two big mail-order companies of KarstadtQuelle. In 2003 he became Managing Director of Itellium.
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THE EMERGENCE OF DYNAMIC SOURCING PARTNERSHIPS A COLLABORATIVE BUSINESS MODEL DELIVERING INCREASED BUSINESS IMPACT, AGILITY AND INNOVATION
David Moschella Global Research Director of the Leading Edge Forum, Computer Sciences Corporation (CSC)
It’s no secret that the main driver behind most traditional outsourcing arrangements has been to lower costs. Many companies have recognized that third party organizations can fulfil many of their IT requirements less expensively than they can, with as good or better quality. Third party organisations have advantages in expertise, experience and scale economies that have been successfully brought to bear on a wide range of IT projects with a generally satisfied customer base. Our research shows that the great majority of outsourcing customers are satisfied with their overall cost/delivery experience. But these days controlling costs is not enough. Having survived the fears of Y2K, the excesses of the dot.com bubble and the trauma of 9-11, businesses are once again focused on top line growth, business innovation and competitive advantage. They are also sensing rising business pressure. While it is normal for every generation to feel that its own challenges are ”unprecedented,” there is considerable evidence that business today has in fact become more turbulent. Products change more quickly; customers seem less loyal; the competition is more difficult to pin down; margins are under constant pressure; and, perhaps most importantly, information technology itself has made the boundaries between industries much less clear. In this environment of both expanding opportunities and rising challenges, it is only natural that customers should begin to demand more from their sourcing strategies
and partnerships. In particular, today’s business environment increasingly requires sourcing partnerships to address a broader business agenda encompassing business growth, agility and risk management, as well as cost control and operational efficiency. Information technology is now either driving or supporting just about every major business initiative, and therefore it can no longer be just put in a box and managed by the numbers. It requires alignment, flexibility, empowerment, creativity and governance. Few companies can fulfil their potential with a go-it-alone IT strategy that does not leverage the capabilities of business partners. However, thus far, in these more strategic areas, the outsourcing story has often been less successful, and both service providers and customers have come to realize that they need to improve the ability of the partnership to systematically add value, just as they have used outsourcing to systematically lower costs. Many major outsourcing contracts have been announced with a great deal of fanfare about long term partnerships, but making these partnerships really work for both parties has often proved difficult. When the subject of innovation is brought up, the basic reaction of many suppliers seems to be “tell us what sort of innovation you want, and we’ll give it to you.” To be fair, this problem is not at all unique to outsourcing relationships. Many business customers say similar things about the IT work they do in house. The reality is that demonstrating IT value, maintaining flexibility, and
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stimulating innovation has proven problematic in many large and complex IT environments, whether they are outsourced or not. There are often no easy solutions and answers, and the true value and power of IT often only becomes obvious over time. But since we believe that external sourcing has great potential in these areas, the reasons behind its current shortcomings are of particular interest. Most importantly, we believe that these problems do not stem from the failures of individuals, teams, or companies, either on the customer or supplier side. Rather they are often rooted in attributes inherent to the outsourcing contract experience itself. Thus, in the first half of this paper we will identify the underlying causes that explain why outsourcing has struggled with the business impact side of the equation. Only by understanding these causes can we then turn to developing the systematic response.
Understanding the Challenge While many (perhaps even most) business alliances, partnerships, mergers, and acquisitions do not achieve their full potential, there are also many specific reasons why increasing the business impact of IT outsourcing has proven so elusive. Readers can get a good sense of the challenge by thinking about the following five issues: • Customer governance. Many companies have decided to outsource because they were having problems with IT. But these problems often stemmed from the company’s internal management and decision-making culture, and such high level governance issues did not go away just because IT was outsourced. Unless they are addressed, the outsourcing relationship can easily suffer from the same underlying causes. • ‘Core’ competency. The often mistaken use of this popular business management idea allows companies to pretend that outsourced IT is not central to their business. However, the reality is that IT is now so pervasive and so essential to business operations that companies need to be competent in IT whether they outsource IT functions or not. • Tactical orientation. Both buyers and sellers have been attracted to the shortterm financial and management gains that outsourcing contracts often offer. However, the long-term strategic implica-
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•
•
tions typically get less consideration. We are reminded of the story of the CIO who was asked to assess the implications of a proposed outsourcing decision only to learn that the deal would be done before the assessment was complete. Contract rigidity. There is obviously a conflict between the desire for detailed, long term measurable contracts and the need for flexibility, innovation and responsiveness. If the relationship focuses too much on contract compliance, other priorities will suffer. Shifting bargaining power. Customers have maximum leverage before the contract is signed and use it aggressively to drive down costs. Once the contract is signed, leverage shifts to the supplier who uses the associated lock-in to restore acceptable margins. Neither situation is good for the relationship.
Our point is not to get bogged down with these formidable problems. Our goal is to set the stage for what we think is the necessary and inevitable path forward. We propose a series of steps that both customers and service providers can take to better manage the sourcing process so that customer and supplier interests are better aligned in both the short and the long term. We call this process of developing a more collaborative, mutually contributive and sustainable enterprise sourcing partnership “Dynamic Sourcing”
The Dynamic Sourcing Approach Dynamic Sourcing is our term for the overall partnering mindset and underpinning commercial, contractual and Governance processes needed to resolve these dilemmas and help realise the true potential of external sourcing relationships. Implicit in this idea is our belief that it is often the very nature of seemingly difficult problems that points the way toward the eventual solution. For example, we believe that the five problems listed above will eventually be resolved by implementing the following five changes: • Strategic and tactical governance. Ultimately, outsourcing must be about the business, not the IT agenda. Outsourcing contracts must be grounded in a clear sense of where the business needs to go and how this is related to what is asked of any outsourcing partner. This will require
•
•
•
•
top management to think past tactical concerns and opportunities, and factor in the full strategic consequences of their outsourcing decisions. Technology usage as a core competence. Companies shouldn’t waste time debating whether IT is core or not. Instead, they must decide whether outsourcing is the best way to fulfil their ongoing need for IT competency. A shift from cost saving to cost effectiveness. Most IT is not a commodity and cheap IT can prove to be very expensive, with many hidden and opportunity costs. Consequently, value, quality and innovation must be brought back into the outsourcing price/performance equation by using a much more systematic ‘balanced scorecard’ type of approach. This is the only way that meaningful cost effectiveness can be achieved, and it is the only way the capabilities of the outsourcing partners can be effectively leveraged. The alignment of customer and supplier interests. Contracts must be designed to motivate suppliers to do the right thing and be pro-active in support of the customer’s business. Close alignment of financial interests is the only proven way to sustain productive long-term business partnerships. Flexible, fixed contracts. Flexibility must be built into the design of outsourcing contracts so that they are capable of addressing changing customer priorities and objectives, without requiring complex new negotiations. Currently, this type of ad hoc work usually takes place outside of the formal contractual framework, which can be risky for both parties. Future contracts will be based around a broader set of guiding principles as well as specific service level agreements.
Of course, all of this is much easier said than done. Nevertheless, over time, we believe that most complex, long-term sourcing arrangements will incorporate these and other dynamic components, enabling a new phase of business and technology partnering. This approach to improved partnering will be beneficial regardless of the specific sourcing strategy and goals. In other words, the principles of dynamic sourcing will apply whether the goal is transformation, innovation or cost-cutting. Consider it to be a means of optimizing your sourcing strategy.
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Components of Dynamic Sourcing While the concept of dynamic sourcing is relatively new, many companies are looking at the overall challenge, and a number of approaches and techniques are emerging. In the past, companies have often used the contract to govern costs and used the relationship to spur innovation. We believe that companies must use the relationship to soften the contract, and use the contract to firm up the relationship. Among some of the key tactics we are seeing are: • Executive and board level governance of outsourcing relationships • The establishment of dedicated innovation funds and staff • Gain sharing arrangements with real benefits for suppliers • Risk/reward and other results based contracts • Codes of practice and other general behavioural principles • Trigger and refresher clauses • Continuous improvement programmes • Smaller, more focused sourcing partnerships It is our belief that the real progress in defining, establishing and proliferating these types of ideas will come over the next few
years. The history of the IT industry shows that interest in innovation tends to run in cycles which last from three to seven years. During these periods, new norms and practices become established and form the platform upon which future progress is built. Solving the problems associated with dynamic sourcing will likely follow a similar path.
Looking to the future It is important to see dynamic sourcing as part of the natural evolution of the sourcing industry. Many of the early outsourcing relationships focused on basic systems, infrastructure and support. It is hardly surprising that over time the focus is shifting toward higher level strategic and business-related issues. In this sense, outsourcing is merely following the same path as IT usage itself. We see this evolution occurring in three main phases: Phase 1 – IS improvement. Upgrading services, improving capabilities, lowering costs Phase 2 – Improving business impact. Reengineering processes, driving business change Phase 3 – Commercial exploitation. Developing new technology-enabled business products and services, and selling IT capabilities to others. In other words, companies and their IT departments will focus on these higher level
business impact issues whether they outsource their IT or not. It is simply a question of which path is right for your company. Thus far, most outsourcing has been in the IS improvement category. But now the focus is shifting toward business impact and commercial exploitation. The one thing we know for sure is that the march of IT remains relentless, and those companies that stand still will inevitably get left behind. That’s why we believe that enabling truly dynamic sourcing partnerships will be one of the defining IT challenges of our time.
About the Author David Moschella is Global Research Director of the Leading Edge Forum – Executive Programme. The Leading Edge Forum (LEF) provides clients with access to a powerful knowledge base and a global network of innovative thought leaders who engage technology and business executives on the current and future role of information technology. For more information about the Leading Edge Forum, please visit http://lef.csc.com. Computer Sciences Corporation is a leading global IT services company.
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EXECUTIVE VISIONS DOES TECHNOLOGY MATTER IN BPO RELATIONSHIPS
An interview with Bernhard Fischer VP Solution Management Business Process Outsourcing – SAP AG
Contract clauses alone are not a guarantee of a healthy BPO relationship. Leveraging the standardized deployment of technology is the key to realizing the value of Outsourcing: less risk, lower cost and better quality. Buyers are best advised to ensure that this is what they are getting.
Look under the hood A common myth once prevailed that buyers of BPO services could just rely on contractually-agreed price and service level agreements to deliver the expected business case and quality levels. Thus, buyers saw no need to worry too much about related technology implications; they assumed the BPO provider would steer these to meet the contract’s objectives. But as evidenced by numerous BPO relationships that failed to meet expectations, this does not always happen. In today’s volatile business environment, survival requires agility and control, and cost and quality can indeed spiral out of control over the course of the company’s life span. For instance, what about workforce services after a merger, or what if you want to introduce company-wide talent management or workforce analytics? We have compiled a few more examples.
The untold story about cost reduction and quality improvement Consider the overall cost structure, which is not easy to control contractually and may exceed planned levels: • A part of the process, cost is generated by the retained organization (people, process, technology) and is not controlled by the BPO contract • Not all of the outsourced cost is fixed: time and materials expenses, governance costs, one-off projects, other ’incidentals’ as well as ‘change control’ may add substantial costs • Not all savings are easily guaranteed: negotiated ‘gliding cost paths’ may be difficult to achieve if the BPO relationship is not functioning perfectly • Even if the excess cost is not explicitly transferred to the buyer, it generates a strain on the BPO provider that ultimately puts pressure on the quality of delivery
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Also, buyers should realize that service level agreements (SLAs) cannot cover all areas where quality performance may decrease. And ultimately, any BPO provider operating under duress might ask to renegotiate the contract price and SLAs. BPO is not the purchase of a commodity service: it is a partnership, and in order for it to deliver sustained performance, it must rely on sound business foundations – not just contractual clauses. Process automation and related technology should be allowed to play a role here. Unsurprisingly, in a recent SAP and Equaterra global survey of HR and Finance directors, IT systems ranked among the top 5 enablers of a successful BPO relationship.
Powerful software, its standardized deployment and full use, the software vendor’s support to the BPO Provider, and software vendor viability are necessary to capture value in an BPO relationship.
The far-reaching impact of technology To understand this aspect better, consider that software licenses typically represent no more than 5% of the overall cost structure of a BPO deal, but drive a great deal of its benefits. Software licenses, of course, impact overall IT (20% of the total cost). Think about software update costs, complexity of related overall software landscape, infrastructure cost due to solution complexity and scalability, initial migration costs and portability of IT infrastructure in case of scope change and contract expiration. All of these items can raise your project costs considerably – and unpredictably – depending on the technology choices.
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Even more importantly, software impacts the cost, risk and quality of process delivery through process standardization, automation and optimization – thanks to embedded best-in-class approaches. Smart, user-friendly and integrated employee and manager self-services determine user acceptance of the outsourced HR functionality and thus directly influence an BPO project’s ROI. Software can strongly enhance process control, governance and portability of processes after contract expiration. It facilitates efforts in case of any scope change, such as the inclusion of an additional organizational unit, country or process.
requirements. SAP has compiled best-practice examples on how the technology requirements can be made explicit. These examples are available free of charge from the author.
Locking in the value
A better BPO
In light of these observations, what technology tenets are needed to avoid value leakage? Powerful software, its standardized deployment and full use, the software vendor’s support to the BPO Provider, and the software vendor viability. 1. Powerful software that is able to serve global, country- and industry-specific processes. It must also be scalable so that peak loads, organizational growth and adoption of Web-based self-service tools can be absorbed seamlessly; Must also be integrated across processes so that adjacent functions or subfunctions can be powerfully leveraged to generate a virtuous circle (for example, HR changes communicated in real time to all relevant stakeholders: shifts planning, projects, general ledger, facilities). And in the best case, it also has a multi-tenant architecture that enables one-to-many platforms if required. 2. Standardized deployment and full use of that software, leading to best-practice processes while catering for buyer’s unique business requirements. 3. Software vendor’s BPO-specific support and quality control of BPO partners’ technology-based services in order to minimize the risks during initial migration and ongoing execution, and to safeguard state-of-the-art deployment 4. And last but certainly not least, software vendor’s long-term viability and predictability: a viable company with sustained focus on process innovation can help ensure customers’ business continuity
At SAP, we understand the critical aspects of an BPO relationship and we have aligned our solutions and services to the related requirements so that our select BPO partners can deliver better services ‘Powered by SAP’. This, in return, helps clients generate sustainable business value – by dramatically reducing risk, lowering cost and improving quality. It is no wonder that market data show SAP is the most likely choice in BPO relationships worldwide.
Standardized deployment and full use of software lead to best-practice processes while catering for buyers’ unique business requirements.
About the Author Bernhard Fischer is responsible for SAP’s solution strategy in regards to BPO. Prior to the Solution Management responsibility for BPO Bernhard owned solution strategy, solution delivery and customers support at SAP’s B2B-subsidiary SAPMarkets and SAP’s succeeding Business Unit “Marketplaces” . Bernhard has been with SAP since 1990 executing a variety of responsibilities including software development for the R/3 system administration suite of tools, R/3 implementations in Europe and North America, foundation of the Regional Support Centers in Walldorf, Singapore and Shanghai. Before joining SAP he was member of a design team for the operating software of PBX systems with German vendor Siemens-Nixdorf. Bernhard holds a masters degree in Physics at the Technical University of Karlsruhe.
EXECUTIVE VISIONS
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The importance of IT within BPO is substantial, but historically difficult to articulate in requests for proposals (RFPs). BPO RFP documents should include sections with explicit, IT-related
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SOLUTION PROVIDER
www.atosorigin.com Atos Origin is a leading international IT services
Atos Origin Headquarters
company for enterprises worldwide. Our business is turning client vision into results through the application of consulting, systems integration and managed operations.
High Tech Campus Building 52, 5656 AG Eindhoven, HTC-51-5R09 The Netherlands Tel: +31 (0) 40 21 57509
John Dain – Senior Vice President Global Managed Operations
Business Contact John Dain – Senior Vice President Global Managed Operations E-mail: John.Dain@atosorigin.com Tel: +31 (0) 40 21 57509
ATOS ORIGIN - A LEADING BUSINESS AND TECHNOLOGY INTEGRATOR Atos Origin is a leading international IT services company for enterprises worldwide. Our business is turning client vision into results through the application of consulting, systems integration and managed operations. We offer truly global solutions in over 40 countries worldwide and are one of the few companies that can provide all the ‘design, build, and operate’ elements of a business solution. More than 60% of the revenue base is recurring, deriving from multi-year outsourcing and application maintenance contracts. Our business approach is based on establishing a long-term partnership approach that encourages success through mutual benefit. We aim to develop close relationships with all our clients through either joint ventures or other forms of long-term associations. We believe that this is the most productive way of developing business today, with both parties sharing the risks and rewards of the association and helping to develop and shape the future.
World Class Solutions that Create Value across an Enterprise Atos Origin understands that it is vital for IT services and solutions to add value and to be a positive enabler for the future. As many companies today are developing into panEuropean or global businesses, they also want to focus on their core activities and drive down IT costs. We respond to these issues by unlocking the potential of new business systems – delivering competitive advantage through improvements in productivity, speed and control. We have the global reach and presence to help enterprises achieve this by providing comprehensive support, and IT services and
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solutions that add real value and act as a base for future growth. And to maximize their effect we can provide all the ‘design, build, and operate’ elements of a solution across our chosen specialist market sectors and for global or multi-national clients. We create complete business solutions, which deliver real business benefits through three balanced Service Lines – Consulting, Systems Integration, and Managed Operations. These Service Lines are the heart of our approach to the marketplace. They enable us to focus on the particular needs of our clients, providing personal service, attention to detail and true day-to-day partnership, combined with direct access to unrivalled international expertise and resources.
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Atos Consulting – A Key Enabler for Business Transformation Atos Consulting offers advice and a pragmatic, realistic approach to addressing client needs. It provides ‘end-to-end’ services
solutions with established ones can transform the complete enterprise architecture into a single, seamless business system. Our extensive experience in integrating people, processes and technologies enables us to design, build and operate practical and robust solutions. Our specialists work with our clients to
As many companies today are developing into pan-European or global businesses, they also want to focus on their core activities and drive down IT costs. and solutions, ranging from supporting strategy development through to enterprise solutions and technology decisions. This enables our clients to become increasingly effective and to generate more value through an innovative approach to business processes, well-integrated supporting technologies and strategic investments in people. Our consultants have an in-depth understanding of their clients and their businesses and a proven track record of delivering solutions in many industry sectors. By focusing on these specific industries, Atos Consulting ensures that all aspects of a client organization – people, processes, and technology – are fully aligned with business strategy.
develop, implement, and maintain systems that will support and enhance their overall business strategy. We work with a carefully selected group of strategic partners and vendors, such as SAP, Oracle and Siebel, to develop and implement end-to-end offerings and standardized packaged solutions in complex environments using best of breed technologies. We also perform projects using customized software, open source, and legacy applications, including various languages and design methods.
Managed Operations – Strategic Alternatives Addressing Cost and Risk
multi-site solutions. Our Continuous Service Delivery Methodology (CSDM) guides our clients through the process of assessment, planning, implementation, transition, and ensures consistent, high quality service delivery worldwide. We also provide Business Process Outsourcing (BPO) and specialist processing services on a global basis and are a key European player in payment and card processing services, CRM and multi-channel contact services through Atos Worldline. The combination of market expertise, innovative solutions and Service Lines is the highly successful formula that has allowed Atos Origin to become the long-term partner of choice for an ever growing list of European and multi-national enterprises.
Global Sourcing Optimizing Business Value, Rationalizing Costs Supporting and delivering these solutions, Atos Origin offers different engagement models, such as through Global Sourcing, according to the needs of your organization. We believe that partnerships are the most productive way of developing business, with both parties sharing the risks and rewards of the association by working together for future success. Successful Global Sourcing is all about
The combination of market expertise, innovative solutions and Service Lines is the highly successful formula that has allowed Atos Origin to become the long-term partner of choice for an ever growing list of European and multi-national enterprises. Systems Integration – Delivering Clarity from Complexity At Atos Origin, Systems Integration is not just about integrating new solutions, but includes getting the most out of legacy applications to prolong returns from existing IT investment. Successfully combining new
Our highly successful outsourcing operations manage core IT infrastructures for clients, including datacenters, desktop support, server farms and network communication systems. We provide 7x24 ‘follow the sun’ infrastructure and application support through our global network and the company has unrivalled experience in major enterprise programs covering complex and
getting things right first time. We can provide your organization with the right resources, at the right location, at the right time, with the right price and performance. Our offshore teams comprise true professionals and we ensure an exact match in the skills and commitment to quality that our clients require. We can offer you new offshore services beyond application development and
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Atos Origin – Atos Origin is a leading international IT services company for enterprises worldwide.
maintenance, ranging from application portfolio rationalization to full IT services. Properly implemented, Global Sourcing can bring several major benefits to clients:
Our Global Sourcing Centers (GSC) in Asia, South America, and Europe provide global coverage and delivery scale that leverage our client facing units around the world. This
Industries, the Public Sector, and Telecom, Utilities, Media. Atos Origin has a strong and balanced presence in all the major IT spending markets
When considering Global Sourcing, it is important to realize that ‘low wage’ is not equivalent to ‘cost efficient’. Many other factors combine to determine the cost performance of the service delivery such as a commitment to quality and continuous improvement. • • • • •
Sustainable TCO reduction World-class quality Flexible global delivery capabilities Business continuity Ease of working / transparency
When considering Global Sourcing, it is important to realize that ‘low wage’ is not equivalent to ‘cost efficient’. Many other factors combine to determine the cost performance of the service delivery such as a commitment to quality and continuous improvement. And implementing a Global Sourcing approach brings with it a major organizational impact. Its successful execution requires the support of a service provider with global experience, maturity, organizational and cultural alignment, as well as strong governance and delivery capabilities. Ensuring world class quality and service delivery is a key success factor for implementing Global Sourcing strategies. Atos Origin India has been assessed at CMMI Level 5 and all our Global Sourcing Centers to the highest levels of ISO 9001:2000 and the SEI Capability Maturity Model (CMM and CMMI). Furthermore, Atos Origin’s ITIL compliant Continuous Service Delivery Model (CSDM) framework provides top quality services based on global tooling and infrastructure. With currently over 3,000 staff working in centers assessed up to CMM level 5, our goal is to grow this number at least threefold in order to continuously develop our reputation for consistent worldwide service delivery.
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enables Atos Origin to provide a unique blend of customer intimacy, industry and domain expertise, high responsiveness and Global Sourcing performance.
of Europe and we provide comprehensive IT support operations in The Americas and Asia Pacific for our multinational client base.
Understanding the Issues – Maintaining the Competitive Edge
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Atos Origin knows that choosing the right partner is critical for success. You have to be able to trust your partner and a close cultural fit needs to exist between the two companies for any partnership to work effectively. Our strong values - client dedication, commitment to execute, entrepreneurship and conviviality – are reflected across all elements of our company and have often been a deciding factor in the selection of Atos Origin as a partner. In many instances, we believe that joint ventures and other forms of longterm association with clients are the most productive way of developing business, with both parties sharing the risks and rewards of the association and helping to ensure a stable, profitable and growing relationship. Our strategy is based on our proven industrial heritage and well-balanced mix of service offerings in carefully chosen market sectors. This approach enables us to demonstrate an in-depth understanding of market issues and offer comprehensive and dedicated services and solutions across all industry sectors including CPG/Retail, Discrete Manufacturing, Financial Services, Process
About Atos Origin Atos Origin is an international information technology services company. Its business is turning client vision into results through the application of consulting, systems integration and managed operations. The company’s annual revenues are more than EUR 5.5 billion and it employs over 47,000 people in 40 countries. Atos Origin is the Worldwide Information Technology Partner for the Olympic Games and has a client base of international blue-chip companies across all sectors. Atos Origin is quoted on the Paris Eurolist Market and trades as Atos Origin, Atos Consulting, Atos Euronext Market Solutions and Atos Worldline. For more information send an email to outsourcing@atosorigin.com or visit the company’s web site at http://www.atosorigin.com
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THE FUTURE OF FINANCE… USING BPO/KPO TO FIX THE BUSINESS PARTNERING PROBLEM
With the relentless march towards Business Process outsourcing it is useful to turn our attention to the question of how much of the Finance function we can conceivably outsource. While the vast majority of FAO deals to date have focused on areas such as Purchase to Pay, Order to Cash and Record to Report more innovative firms are embracing outsourcing across a much wider range of finance activities and processes. We can draw tentative conclusions of what the finance function of 2015 might look like by combining the more recent trends of leading organisations into a composite picture.
Dr. Martin Fahy Senior Lecturer in Accounting and Information Systems National University of Ireland
In 2015 the future of finance for large Fortune 500 firms will have many familiar aspects but also many new elements. P2P, R2R, T&E will be delivered by one of the large BPO delivery firms from a combination of on shore, near shore and offshore sites around the globe. Order to cash could well be delivered by E-bay who could offer channels to the market and secure collections. With the swing back of the compliance pendulum firms will become more comfortable with transferring the transactional aspects of areas such as Internal audit, External audit and local compliance to which ever of the big four firms still exist. Risk management will be handed over to the experts such as Munich Re or some other large insurance players with real experience of underwriting and risk management. Firms will rely on global service providers such as IBM, HP and Accenture to manage their global ERP capability and these providers will drive process enforcement in an ‘on demand’ world of ERP applications. The global payments cash management activities of the firm’s internal bank will have been outsourced to Citi/BOA/HSBC. The CFO role will have been split into a chief controller who manages the SSC/BPO/compliance and risk relationships and the Chief financial
strategist who manages investment financing and shareholder value issues. Smart firms will have embedded so called ‘business partnering’ in the business units and those with professional accounting qualifications will work as commercial managers with Line of Business (LOB) responsibility. Small teams of specialist ‘quants’ will support brand, product and customer analytics while corporate centre will have a small team of tax and financing/investment specialists. Strategic finance in areas such mergers and acquisitions and capital allocation will be dominated by former investment bankers and strategy consultants, from McKinsey, Marakon and Goldman Sachs. The question we must ask ourselves however is will these developments lead to the purely lower costs finance functions or can we also look to improvement in business decision support and improved value creation.
The rhetoric reality Gap in Business Partnering and Strategic Finance While ‘Business partnering and so called Strategic Finance‘ is a popular rhetoric for many finance functions it remains a scarce reality. In the last five years firms have been successful in moving routine transaction processing to sharing service centres (or out-
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sourcing it to 3rd party BPO providers) but they have struggled to refocus the remaining finance resources around the business partnering agenda. While the more demanding regulatory and compliance environment (SOX, IFRS, and Basel II for example) has detracted CFO attention wider organisational challenges continue to hamper the fulfill of the partnering model which has been advocated since the mid 1990’s. Research from Booze Allen Hamilton suggests that the obstacles to effective business partnering include: • Outmoded or missing business intelligence and forward-planning capability • Multiple, fragmented technology architectures preventing seamless enterprise integration • Inadequate resource firepower, unsophisticated processes for resource/capital prioritisation • Resource constraints • Highly customised or unreliable financial processes supported by underdeveloped analytical tools • Uneven depth of leadership and consultative smarts within the finance organisation • Inability to change a decades-old corporate culture • Strongly autonomous business units and an arm’s-length managing corporate centre • Finance bogged down in transaction processing and crises • Stature and influence of finance leadership An on going study being undertaken by the Chartered Institute of Management Accountants (CIMA) suggests that firms will look to business process outsourcing or more particularly knowledge process outsourcing (KPO) to address the issues which have hampered CFO’s in delivering on the Business Partnering agenda.
HOW BPO/KPO WILL HELP FIX BUSINESS PARTNERING Bpo/kpo providers will provide lower cost multi-shore data scrubbing/cleansing of data to support analytics. As Drucker pointed out many organisations find themselves data rich and information poor. Our study suggests that the single biggest constraint on improved financial analysis is the lack of clean reliable data. Multiple ERP instances and poor data capture have led to a situation where much of the effort by finance staff is directed not at analysis but in
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manually extracting and scrubbing data from underlying operational systems. Discussions with Finance professionals suggest that in the future they will look to outsource this cleansing to BPO providers who have in any case already taken over the transactional activities associated with the data. Under this model the aspirations of self service access to clean data for financial analysts and others in the business units will be met by teams from BPO providers who will prepare ‘Data Cubes’ and ‘Decks’ which those in the business units can then subject to analysis. Under this approach shortcomings in data and systems delivery are overcome using labour cost arbitrage.
BPO/KPO will take over the structured institutionalised analytics and reporting. In those cases where the analysis to be carried out is highly specifiable and not novel firms will seek to transfer the production of this analysis and reporting to BPO/KPO providers. Examples of this type of work are likely to include, costing, inventory accounting, pro forma scorecard production, cost budgets and other forms of traditional management accounting. Under this approach the daily weekly and monthly burden of extracting information from operational ERP applications using tools such as data marts and business warehouses will be transferred to BPO teams who will have in-depth knowledge of the technology and data architectures and they will use this to put in place slicker data to desktop reporting processes.
BPO/KPO will drive a harmonisation of Management accounting and business analytics As firms seek to exploit the service of BPO/KPO providers there will be strong economic arguments for the global harmonisation of management accounting and reporting/analysis processes and outputs. Fixed price volume based charging for these services by the providers will force firms to stop, simplify and standardise much of the current anarchy of business unit and operating site reporting and management accounting.
BPO/KPO Providers will bring the discipline of process improvement to the business partnering space Just as they have used six sigma and process redesign to achieve breakthrough process improvement BPO/KPO providers will apply these techniques to the analytics space. This
will lead to an industrialisation of many of the so-called extraction/classification/filtering and reporting activities that make up business partnering. In time we may even see the emergence of so-called world-class business partnering processes being imbedded in the emerging corporate performance management and BI technologies.
BPO/KPO is unlikely to deliver the context specific analytics close to the market While BPO/KPO providers will have a cost and size advantage in the areas outline above it is unlikely that this will extend to the context specific and more un-structured ad hoc analytics associated with optimising and configuring the business model. In the case of analytics to support brand and marketing effectiveness, strategy and product introduction the highly contextualised nature of the knowledge needed to support these decisions will erode any labour arbitrage. As global firms have discovered in the so-called war for talent, world-class business analysts come with a world-class price tag regardless of where they originate.
The high end BPO/KPO and the consulting/advisory space will be harder to distinguish While the previous point suggests that firms are unlikely to engage in the large scale outsourcing of strategic analysis they will continue to use consultants/investment bankers, and others to address shortcomings in their own decision support capability on a case by case basis. This will lead to a blurring of the distinction between KPO and consulting as consulting firms particularly the boutique firms extend their use of offshore talent for grinding the numbers and the PowerPoint.
Finance leadership Development Our work at CIMA has provided valuable insights into the initiatives to influence/transform the orientation of the finance organisation. Our investigations have highlighted three often-neglected challenges that firms must address if they are to succeed in the delivery effective business partnering using BPO/KPO
Talent. Within the new model of finance, based around the delivery of expert services and decision support above the transactional level, there is a pressing need to find and cultivate the talented finance professionals who can deliver the strategic insight and analysis
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required of a genuine business partner. Our research suggest that many finance functions will struggle to attract and retain the talented staff that have the coaching, analytical, consulting and facilitation skills which partnering requires. Our study suggests that effective business partners bring four key competencies to decision making.
beliefs. Leadership of the finance organisation needs to recognise the appropriate levers of change and make a strong case for better teaming as part of finance transformation projects.
Managers for Value: They are committed to managing for value and understand that shareholder value is the governing objective in assessing alternative strategies and options.
Where Finance has a holistic view of the business it can help ensure coherent consistent decisions across functional areas by linking processes, activities and performance in support of improved value creation. But effective business partnering can only occur where senior executives and in particular the CFO has created the climate for change. In this regard our study identified the following prerequisites to effective business partnering;
Keepers of the Business Model: They are custodians of the business model and promulgate that model across the organisation Relentless pursuers of efficiency: They are relentless in driving efficiency from the investment base particularly in such areas as working capital, cap exp, brands, R&D etc. Executors not strategists: They understand that flawless execution trumps elegant strategy every time and that strategy formulation is not an end in itself. In the absence of specific programmes to foster the necessary talent finance will continue to struggle to meet business expectations
Effective Teaming Freeing up finance’s time by removing activities such as internal control can have the effect of reinforcing the silo mentality as, expert services lose touch with business requirements. Recent moves to shared services/BPO architectures have in some cases increased the ghetoisation of finance within the organisation. A consequence of encouraging finance teams to support the business is that finance and accounting can become isolated from the business reality and become little more than a bluesky strategy group. Real business partnering requires that finance staff get their hands dirty in the business units and develop a close affinity with those they are supporting. If those finance professionals engaged in business partnering are to have an impact they need to develop effective teaming skills. Changing what finance people do where they have recently adopted, a decision support/analyst role requires changing their behaviours. This involves addressing a range of factors such as company culture and subculture, their geography, own identity and
Getting traction for the new finance delivery model – Prerequisites for Business Partnering under a BPO/KPO Framework
Perceptions and credibility - anything is possible when you have it, it is tough if you don't. Without proper management of expectations the business can end up with a very generic rather than specific expectation of what finance can/is going to do with KPO. This impacts expectations v performance assessment usually negatively. CFO’s need to be clear about where the point of articulation between external BPO/KPO providers will be and what activities will remain captive in regional shared service centres and what will be delivered in the business units. Avoid the land grab. At the outset many business managers often view the BPO/KPO ‘movement’ as little more than a strategic decision support ‘land grab’ by a powerful group-finance professionals that have been disenfranchised by technology, shared services, outsourcing and increasingly off shoring. CFO’s need to address this concern early on. Under promise – Over deliver: Finance has in the past over promised and under delivered on business partnering and is seen by business units as spending inordinate amounts of time on those ‘traditional’ areas (such as capital investment and budgeting) that do not drive the most value. In addition while they see Finance as being strong in transactional activities and expert services such as tax, treasury, internal control, and financial reporting, for a range of reasons finance has not always made a significant
impact in decision support. Managing the expectations of finance customers on the proposed new approach and selling what finance should/should not be doing High level multiple sponsorship so that the FD is not alone in driving and selling the vision. Defining a clear vision, customers of finance and expectations of the potential finance service delivery (in finance and in the client community) and securing strong leadership and sponsorship are important building blocks to the transformation process. Disciplined project management so that an overarching programme board directs and steers the project in a defined timeline with a range of defined activities Open feedback from finance’s customers gauging their performance and their customer’s perceptions of finance service delivery and challenge from the finance function on their approach. The finance function needs to agree its business model from within before discussing enabling factors such as BPO/KPO better systems and processes. Tools and techniques can be brought to the table when required and outsourced if necessary. In the light of understanding business needs and what finance customers are lacking at a particular time, finance can better judge its role. Finance has been able to shift its focus over time from merely measuring outputs to deciding on inputs and the control environment. In this context, it is imperative for senior management to set out the finance agenda and the scope of their role so to create a clearer view on the changes required. Finally remember the Anna Karenina Principle and successful KPO processes Tolstoy wrote “happy families are all alike; every unhappy family is unhappy in its own way“. In the same way successful BPO/ KPO outsourcing relationships are all alike while each unsuccessful outsourcing relationship is messed up in its own unique way.
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SHAPING RELATIONSHIPS THAT LAST – PRINCIPLES OF DYNAMIC SOURCINGSM
David Thomas Vice President Strategy and Market Development EMEA, Computer Sciences Corporation (CSC) Principles based on research undertaken by CSC’s Leading Edge Forum – Executive Programme
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Major structural changes in the global economy, coupled with new advances in technology are bringing about an increasingly complex business, technology and sourcing environment and a requirement for companies to simultaneously address the twin challenges of near term performance and value creation, whilst also adapting to meet new challenges that lie ahead. In this challenging environment there is an increased expectation that strategic sourcing needs to achieve not only “best in class” performance in specific IT or business process domains, but also enable the business itself to achieve superior competitive performance. CSC believes that any viable strategic sourcing partnership needs to embrace these wider business goals and has applied its many years of experience in successful, value-creating client relationships to develop a new and unique approach to enterprise IT and business process sourcing. CSC’s approach, called “Dynamic Sourcing”, is designed to directly address the wider business agenda for innovation, adaptation and value creation whilst also simultaneously addressing the limitations often associated with the traditional outsourcing model. Whilst Dynamic Sourcing is a new approach it draws on CSC best practice derived from successful client relationships where the ability to change the structure and content of the relationship over time to maintain alignment, relevance and contribution has been critical. We believe that the principles outlined in this paper set a real foundation for organizations seeking to develop sourcing relationships capable of dynamically adjusting to changing business priorities over time and which offer the potential to create value well beyond that associated with traditional outsourcing and conventional transformational offerings.
The Changing Context for Outsourcing Today, over half of the Fortune 500 have outsourced two or more IT functions, and the scope of outsourcing arrangements is ever broadening to encompass infrastructure and applications and a wide range of business processes and back office operations. There are many more potential suppliers than there were even five years ago, offering outsourced services in some or all areas of IT and business process activity. This supply side expansion produces a fiercely competitive market driving lower prices and more specialised or niche services. As a consequence, we are seeing a renewed interest in various forms of multisourcing, where several ‘best of breed’ providers are contracted to deliver discrete ‘towers of service’. Taken together these trends are often interpreted as signs that the outsourcing market is commoditising. However, more profound changes are also underway. The outsourcing proposition as we know it today was designed to address a business agenda dominated by the quest for operational efficiency. The proposition was attractive – transfer IT to a specialist that would apply economies of scale, scope and skill to provide services at lower cost and higher quality, with a greater degree of cost variability and enable management to focus on the core business without the distraction of running an IT department. Today, the business agenda is broader and priorities are changing more quickly than ever. Business configuration is being transformed through mergers and acquisitions, divestments, joint ventures and geographic expansion, and technology is shifting rapidly with ‘breakthrough’ changes that offer new capabilities and possibilities, now common place within the life of any outsourcing contract.
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A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships
In this new business context, whilst operational efficiency is still important it is hardly a competitive differentiator. Firms must also demonstrate that they can grow quicker than their competition in both the short and long term, accommodate a burgeoning compliance agenda (corporate governance, regulation and security), bring innovation to profit and deploy agile business models capable of reacting to a constantly changing market. In short companies must achieve near term excellence (operational efficiency) and longer term adaptation (strategic effectiveness). The traditional outsourcing model contributes to the agenda for operational efficiency but is not designed for those companies seeking a contribution to strategic effectiveness – to applied innovation, to the creation of business value beyond the scope of the services contract, to the development of collaborative solutions to business problems. Indeed, Ovum (a leading global ICT sector analyst firm) has recently reported that approximately 90% of existing IT outsourcing deals could be categorised as ‘efficient’, whilst only 10% of deals approach ‘effective’. Moreover the current trends in outsourcing towards price commoditisation, deal fragmentation and shorter terms are incompatible with the goals of companies seeking to build partnerships that address this wider business agenda. Whilst it may be true that there are now many suppliers capable of contributing to the old business agenda for operational efficiency, there remain very few who can contribute to the new agenda for both efficiency and effectiveness.
The Challenge of Collaboration Whilst the current trend towards multisourcing is producing unintended consequences in terms of coordination cost and risk, it is clear that across the wider sourcing landscape (infrastructure, applications, business process, operations) all environments will be ‘multi-partner’. These multi-partner models raise significant questions. How do you deploy end-to-end delivery processes across multiple providers? How do you transfer accountability and liability as well as responsibility and to whom under what circumstances? How do you optimise the role of each partner, determine the scope of their activities and, more problematic still, change roles and scope over time? Increasingly for those clients that wish to address the wider business agenda, the sourcing strategy must look beyond cost reduction and performance improvement to understand how different combinations of partners might be woven together into a collaborative arrangement that maximises business value. Understanding how to design a sourcing strategy to be a collaboration of compatible partners working together to innovate, transform and create measurable improvements to the overall business, rather than a collection of contracts offering price/performance gains within each specific domain, is therefore becoming a hot topic. In this new business and sourcing context, it is increasingly acknowledged that traditional outsourcing arrangements and the contracts that define them often struggle to provide the
Organisations today are pursuing a wider business agenda Traditional Context for Outsourcing Business Strategy
Business Focus
Sourcing Agenda
Today’s Business Context Portfolio of Initiatives
Big Bang
Operational Efficiency
Transition + Operate
Operational Efficiency
Growth
Compliance /Risk
Transform + Realise Value
Agility
required levels of value creation, multi-partner collaboration and relationship flexibility. With regard to the issue of “innovation”, for example, it is fair to say that traditional outsourcing arrangements have not generally been successful in addressing client expectations for “value-creating” innovation.
"Sourcing strategy must address how combinations of partners can be woven together into a collaborative arrangement that maximises business value." Fundamentally these difficulties arise because traditional outsourcing agreements are designed to be “transactional” and assume that much of what may happen in the next five to 10 years can be envisaged and captured in contract. Secondly, because they deal mainly with improvements to the existing environment rather than with the transformation and maintenance of a desired “competitive position” over time, they do not directly address the “strategic effectiveness” agenda. Also problematic is the intrinsic focus of traditional outsourcing models on legal remedies against non-performance and attainable penalties, rather than on the required “behaviours” that each party will exhibit when faced with changing circumstances and the need to address new opportunities, threats or regulatory requirements. This often results in situations where, despite the service provider discharging its obligations under the contract, the overall relationship fails because the mechanisms to maintain alignment in priorities and objectives are flawed or lacking. The real issue here is that the contract no longer reflects the needs, priorities and required competitive position of the client and moreover that the contract actually disincented the supplier from meeting the real, rather than the contractual, needs of the client. CSC’s Dynamic Sourcing approach is expressly designed to address these challenges and seeks to create a new type of sourcing model that is adaptable to changing business
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Characteristics of Dynamic Sourcing Improving efficiency
Achieving growth
Better Faster Cheaper
Innovation Transformation Agility
Key Characteristics: Results-Driven Collaborative Flexible Sustainable Process-Centric priorities and which provides a mutually beneficial basis for long term partnership for client and service provider(s) alike.
Principles of Dynamic Sourcing Increasingly, CSC and its clients are taking a new approach to sourcing relationships: accommodating and exploiting change; weaving innovation and continuous transformation into the fabric of a long-term relationship; and designing and facilitating multi-partner, collaborative business models. This new approach can create extraordinary value, well beyond that associated with traditional outsourcing and conventional transformational offerings. Whilst Dynamic Sourcing is a new approach, it is highly pragmatic - based upon CSC learnings and best practice from many successful client relationships in which the ability to change the structure and content of the relationship over time to maintain alignment, relevance and contribution has been critical.
1. Focus on Business Outcomes Increasingly, the technical goals and measures within outsourcing contracts are becoming secondary to the business outcomes that the overall sourcing strategy aims to accomplish or support. These higher-order objectives are better understood by the business and have the advantage of greater longevity. The overall business objectives define the intent of the contract, specific business capa-
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bilities and outcomes associated with each stage of the transformation plan, and charges are associated with business improvement and capability rather than with narrow technical measures. Sophisticated processes are used to link business strategy to IT and process strategy, so that changes in business needs, priorities or even configuration are captured and form the basis of a revised forward plan. As a consequence the relationship is dynamic, changing in line with the business and remaining vital over an extended period. By means of an example, one of CSC’s clients SAS, the Scandinavian airline, has a key goal of automating non-flight activities wherever possible. Many of these services are purchased on a transactional basis, so it is critical for both SAS and CSC therefore that automation projects are successful. In order to achieve this, all projects are now subject to a technical transformation plan that deploys the required IT capabilities as well as a jointly developed business transformation plan that measures effectiveness and ensures that the desired business results are delivered. Differentiated charging strategies are deployed to encourage behavioural change in both supplier and client organisations.
2. Create a Collaborative Business Model In CSC’s most recent market survey, many of the respondents said that they were pursuing multisourcing strategies and that supplier integration and collaboration between suppliers was a key challenge.
Most organisations are ‘serial outsourcers’, optimising each transaction with little regard for the target ‘sourcing model’ and with almost no regard to the eventual collaboration between the portfolio of partners that they are creating. This approach raises strategic as well as operational issues. From an operational perspective, technology needs to be managed on an end-to-end basis. Traditionally, business users are concerned with availability, performance, cycle times and of course cost, although they are entirely unconcerned about the state of affairs at the component level. When there is a problem they do not care why they can’t trade or in which partners’ domain the blame lies, they only care that they cannot trade. Transferring risk is more complex in a multi-partner environment. Suppliers are generally willing to accept both responsibility and liability for matters within their direct control. In a multi-partner environment, it is highly unlikely that any one partner would accept responsibility, let alone liability, for ‘availability’ in the broadest sense. From a strategic standpoint a traditional sourcing approach leads to a collection of competitively advantaged contracts. However, when later business improvements are contemplated, they require the co-operation of many partners to achieve the planned outcome and once that outcome is achieved there are likely to be winners and losers amongst the partners. As the attention turns from technical efficiency to business effectiveness, improvement programmes range across and beyond technological boundaries. For example, one of CSC’s current clients is facing a regulatory requirement that calls for a step-change in capability. Applications will need to be re-engineered or replaced so that infrastructure can be simplified and better integrated, following which the business process can be re-engineered to deliver the new capability. From a supplier perspective, the partners delivering application development, network and data centre services will see volumes and revenues rise, those delivering application maintenance, end-user and midrange services will see falls. Unsurprisingly, the client concerned is seeing varying levels of enthusiasm from its chose partners, collaboration being difficult to retrofit to the existing outsourcing arrangement. Suppliers’ assumptions about risk, volume, future business and required investment drove the commercial offer that they made, underpinned the future commitments that they offered and shaped the contract itself.
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Governance SECTION 2
The Outsourcing Project – Achieving Competitive Advantage through Collaborative Partnerships
Dynamic Sourcing acknowledges the need for each sourcing transaction to be designed to fit into a collaborative sourcing model as well as to be optimal in its own domain. These considerations are made explicit in the solution, transition, transformation and governance, as well as in the commercial and contractual approach.
3. Align Client and Supplier Behaviours Dynamic Sourcing aims to accommodate and exploit change as opposed to simply mitigate it. There is an explicit recognition that many of the assumptions that underpin the initial transaction will change, as will the required performance levels and economic expectations. The key is to focus on the real requirements from a business perspective and to be realistic about the supplier’s need to recover investments and make profit. For example, setting a target service level of x% for a service delivered for $y and consumed at a given volume may represent the best view of the requirements in year three of a relationship but is unlikely to be realistic across the fullterm of the contract. It may be more appropriate to suggest that: • Service performance and costs will be maintained in the top x% relative to the clients competitive peer group; • Service performance and costs will remain competitive with other suppliers of similar services etc. Such definitions are more likely to endure than traditional metrics. Dynamic Sourcing takes a similar approach to other areas of change, envisaging business scenarios (merger and acquisitions, disposals, regulatory requirements, new product launches etc.) and making explicit the behaviours and actions required of both partners and the client. It makes specific provision for innovation – identifying how ideas will be generated, tested and funded. It also makes it clear how both investment and benefits will be realized and shared. Designing this level of alignment is highly rewarding but challenging - requiring high levels of trust, collaboration, transparency and disclosure, between all parties.
4. Build Mechanisms for Sustainable Transformation Traditional outsourcing envisages a single period of aggressive transformation to improve services and deploy supplier processes, followed
by a sustained period of continuous improvement. This however is no longer sufficient to maintain market-leading performance. CSC’s Dynamic Sourcing approach envisages sustained, or iterative, transformation throughout the life of the outsourcing relationship and makes extensive use of Business Process Management (BPM) techniques and tools. BPM enables the capture, representation, optimisation and deployment of business processes without reference to the underlying or supporting technology. As a consequence, the business process itself can be transformed, improving business performance and capability, and thereafter optimising the technology environment. The fusion of BPM with more conventional outsourcing approaches enables CSC to make the interaction between technology and business transformation explicit, and to make the vision of an arrangement based upon business outcomes rather than technical aspirations, a reality. The potential now exists to move from continuous improvement to continuous optimisation – maintaining the optimal business model and technology environment in real time, as the business needs, priorities and configuration change.
haps equally capable have in the past produced very differing results. Ultimately, the success of this approach is more to do with the combined capability of all suppliers and the client itself rather than the sum of its parts. When we move from a collection of contracts to a cohesive, collaborative model combining the skills, resources and capabilities of some of the world’s best suppliers in pursuit of the client’s goals the results can be extraordinary.
CSC’s Five Principles of Dynamic Sourcing
1. Focus on business outcomes
2. Create a collaborative business model
3. Align client and supplier behaviours
4. Build mechanisms for sustainable transformation
5. Ensure shared governance/processes
5. Ensure Shared Governance/Processes Dynamic Sourcing assumes that from the outset there will be a multi-partner environment providing end-to-end service delivery, management and improvement processes. Dynamic Sourcing embodies these ideas in an innovative operating model and a radically different approach to governance. In short, Dynamic Sourcing is a new approach to designing, shaping and managing outsourcing relationships that focuses on business objectives and outcomes rather than on technological goals. It is designed for a flexible multi-partner environment that accommodates and exploits change so that the relationship remains vibrant and contributive over time. As such the model advocates a new way of working, but one which sets a real foundation for collaborative value creation and addresses the simultaneous challenges of near term operational efficiency and longer term strategic effectiveness. To date, many of the issues that CSC has encountered with this approach are cultural and behavioural. Some suppliers find these approaches come naturally, others don’t. Different combinations of suppliers, all per-
For dynamic, results-driven sourcing solutions, talk to CSC Email: dynamicsourcing@csc.com Contact: Simon Knowles Marketing Director European Business Development Tel: +44 (0)1252 536871
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Dynamic Outsourcing
SOLUTION PROVIDER
www.CSC.com
For dynamic, innovative, results-driven sourcing solutions, talk to CSC As the third largest outsourcing company in the world, CSC's mission is to provide customers in industry and government with solutions crafted to meet their specific challenges and which enable them to profit from the advanced use of technology.
Enabling the Results Driven Enterprise
www.CSC.com Computer Sciences Corporation Founded in 1959, Computer Sciences Corporation is a leading global information technology (IT) services company. CSC Corporate Headquarters: 2100 East Grand Avenue El Segundo, CA 90245 USA Phone: +1.310.615.0311
CSC European Headquarters: Royal Pavilion Wellesley Road Aldershot, Hampshire GU11 1PZ United Kingdom Tel: +44(0)1252.534000 Fax: +44(0)1252.534100
Business Contact Simon Knowles Marketing Director, European Business Development Tel: +44 (0)1252 536871 E-mail: sknowle2@csc.com
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Business needs and priorities are changing more quickly than ever before. Products change more quickly; customers seem less loyal; the competition is more difficult to pin down; margins are under constant pressure; and information technology itself is making the boundaries between industries much less clear. Business configuration is being transformed through mergers and acquisitions, divestments, joint ventures and geographic expansion. Technology is also shifting rapidly and it is now common for 'breakthrough' changes that offer new capabilities and possibilities, to occur within the life of any contract. CSC provides innovative solutions for customers around the world by applying leading technologies and CSC's own advanced capabilities. These include systems design and integration, IT and business process outsourcing (BPO), applications software development, Web and application hosting, and management and technology consulting. The company's spectrum of end to end services includes: • Outsourcing Improving business performance, service levels and reducing costs. Our outsourcing capabilities include business process outsourcing, application outsourcing, infrastructure outsourcing and hosting services.
•
•
Systems Integration - Our 45-year heritage of technology leadership includes building some of the world's most complex mission-critical information systems. From front-end consulting and planning to integrating and managing technology solutions, CSC has the expertise and experience to respond to unique challenges and opportunities. Consulting - Our portfolio of industryfocused solutions spans the full life cycle from strategy and business process design to technology services, systems integration, application outsourcing and hosting.
New Business Context for Sourcing Business needs and priorities are changing more quickly than ever before. Business configuration is being transformed through mergers and acquisitions, divestments, joint ventures and geographic expansion. Technology is also shifting rapidly and it is now common for 'breakthrough' changes that offer new capabilities and possibilities, to occur within the life of any contract. Fewer clients are now prepared to award all infrastructure and applications-related services to a single vendor. Indeed, when the wider view of business process outsourcing is included in the sourcing strategy there are no single supplier outcomes. These multi-partner models raise significant questions.
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SOLUTION PROVIDER
How do you deploy end to end delivery processes across multiple providers? How do you transfer accountability and liability as well as responsibility and to whom under what circumstances? How do you optimise the role of each partner, determine the scope of their activities and, more problematic still, change roles and scope over time? Finally, clients are pursuing a wider agenda than cost reduction and performance improvement, and hence demanding and increased contribution from their sourcing partnerships towards the broader business agenda of growth, agility and risk management, as well as in improving operational efficiency. Accordingly, while discrete outsourcing transactions may still be focused on operational efficiency, at the sourcing strategy level, the goal is focused upon business effectiveness. Understanding how to design a sourcing strategy to be a collaboration of best-of-breed partners working together to innovate, transform and create measurable improvements to the overall business, rather than a collection of contracts offering price/performance gains within each specific domain, is therefore becoming a hot topic.
The Principles of Dynamic SourcingSM Increasingly CSC and its clients are taking a new approach to sourcing: accommodating and exploiting change; weaving innovation and continuous transformation into the fabric of a long-term relationship; and designing and facilitating multi-partner, collaborative business models. CSC calls this collaborative and flexible approach to enterprise IT and process sourcing “Dynamic Sourcing�. In essence the concept is built around five principles that address the aforementioned issues.
order objectives are better understood by the business and have the advantage of greater longevity.
2. Create a Collaborative Business Model: Most organisations are 'serial outsourcers', optimising each transaction with little regard for the target 'sourcing model' and with almost no regard to the eventual collaboration between the portfolio of partners that they are creating. Dynamic Sourcing acknowledges the need for each sourcing transaction to be designed to fit into a Collaborative Business Model as well as to be optimal in its own domain. These considerations are made explicit in the solution, transition, transformation and governance as well as in the commercial and contractual approach.
3. Align Client and Supplier Behaviours: Dynamic Sourcing aims to accommodate and exploit change as opposed to simply mitigate it. There is an explicit recognition that many of the assumptions that underpin the initial transaction will change, as will the required performance levels and economic expectations. The key is to focus on the real requirements from a business perspective and to be realistic about the supplier's need to recover investments and make profit.
4. Build Mechanisms for Sustainable Transformation:
processes. It assumes that the objective is to harness the combined capabilities of the various partners into a cohesive whole working to meet client goals whether those goals are driven by opportunities, threats, market requirements or innovation. Dynamic Sourcing embodies these ideas in an innovative operating model and a radically different approach to governance. Above all, Dynamic Sourcing is dependent on a trust based relationship and a willingness to adapt as we learn. As such it is not for everyone but it will richly reward those who do embrace it. CSC has a variety of collaborative methods and approaches, ranging from value discovery techniques to collaborative solution environments, which enable us to engage with each client to determine the true potential of Dynamic Sourcing in their own unique business environment. For dynamic, results-driven sourcing solutions, talk to CSC. Email: dynamicsourcing@csc.com For further details please refer to the accompanying CSC whitepaper "Shaping Relationships that Last - Principles of Dymamic Sourcing" on page 96.
www.CSC.com
Traditional outsourcing envisages a single period of aggressive transformation to improve services and deploy supplier processes, followed by a sustained period of continuous improvement. This however is no longer sufficient to maintain market-leading performance. CSC's Dynamic Sourcing approach envisages sustained, or iterative, transformation throughout the life of the relationship.
1. Focus on Business Outcomes: Increasingly, the technical goals and measures within outsourcing contracts are becoming secondary to the business outcomes that the overall sourcing strategy aims to accomplish or support. These higher-
5. Ensure Shared Governance/Processes: Dynamic Sourcing assumes that from the outset there will be a multi-partner environment providing end to end service delivery, management and improvement
CSC at a Glance Year founded: 1959 No. of employees: 79,000 FY05 revenue: $14.6 billion
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SECTION 2 Governance
RETENDERING & RENEGOTIATION COMPANIES OFTEN MISS SUBSTANTIAL COST SAVINGS BY RUBBER STAMPING THE RENEWAL OF EXISTING DEALS
Stephen Dunn Managing Principal Europe - Everest Consulting Group
Executive Summary The outsourcing market is changing constantly. As a result, there are often significant opportunities to improve service or reduce cost by applying those market changes to existing contracts. In our experience, contracts are typically renewed at a nominal discount of ~10% on no other basis than leverage / suppliers desire for renewal. Unfortunately for suppliers this often equates to a 50% or more margin reduction. What often ensues is a power struggle without any grounding in real market change or mutual interest. Primary analysis of Everest Group constructed deals suggests that that a ‘good deal’ can look more like a reduction in excess of 20%, with both parties (buyer and supplier) benefiting. We believe that the reason for the difference is that the vast majority of contract renegotiations are either purely a rubber stamp OR the buyer focuses on price reduction in a confrontational way, without properly collaborating with the supplier on cost reduction ideas. The supplier sees this as a bald attempt at margin reduction and renegotiations becomes a difficult and painful process. Whilst this paper will draw upon examples from a number of process areas including Human Resource Outsourcing (HRO), Information Technology Outsourcing (ITO) and
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IT Infrastructure Outsourcing, the concept is the same across the board. In this paper I will first look at how to assess the existing relationship with the supplier. Are you looking to improve the relationship, improve pricing or do both? Then, in order to successfully renegotiate or retender, I will describe how to understand and model cost and the process of supplier engagement.
‘Health Checking’ your Current Outsourcing Deal At Everest Group we use The Everest Health Checksm to conduct a comprehensive deal diagnostic. This is as opposed to benchmarking, which focuses purely on the cost of service. The Health Check is designed to achieve positive outcomes for both the buyer and supplier. It results in recommendations that the buyer and supplier can individually implement in order to improve the relationship. By placing significant emphasis on identifying and harnessing the value drivers, interests can be realigned. A Health Check can be carried out at any point in the outsourcing deal lifecycle. Indeed many outsourcing contracts allow for either party to end the contract at several pre-defined points in time. Ensuring that your deal continues to perform at an optimum level is worth
exploring whatever the likely outcome. I have outlined a few key questions that you may want to ask to get an early ‘feel’ of the deal strength:• How much has the outsourcing deal reduced the costs of retained and related business processes compared to the annual outsourcing deal charges? • How aligned are the buyer’s and supplier’s management teams? • How consistent are the aims of the buyer’s management team? • How extensively do you use risk-reward pricing metrics for the achievement of your business objectives, as distinct from penalties and bonuses for service performance? • How flexible is your contract with respect to modifying contract pricing and service scope with changes in business conditions? • How active is the vendor in your planning processes?
Collaborating to Improve Deals and Relationships There are many reasons why a deal may not be operating as effectively as it could be. It includes inappropriate deal construction, ill defined process boundaries, irrelevant service metrics, inappropriate pricing metrics and lack of contractual flexibility.
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Governance SECTION 2
A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships
Relationship problems can exist for reasons including:• Adversarial procurement process • Poorly executed or non-existent governance • No alignment of interests • Micro management by buyer • Inadequate planning / incorrectly scoped deal resulting in unbudgeted expenditure • Inadequate business participation in the relationship • Political agendas dominate the actions of the parties • Inability to communicate effectively All of the above are aggravated by the passage of time. Collaboration and mutual alignment are necessary to address them. Also, perhaps surprisingly, renewing with the existing supplier can be just as cost effective as changing suppliers altogether (if the deal is restructured well).
Why Assess the Relationship?
In our experience, rubber stamp rollover or pure price negotiation renewal without supplier collaboration typically saves just 10%. However, we have found that buyers who employ a specialist advisory firm, can often realise savings in excess of 20%, see Chart 1.
• •
•
Key Levers Driving the Savings There are 6 key levers that account for most of the achievable savings that can be produced from a renegotiation / retendering of contracts. • Increased use of offshore resources • Improved technology • Increased scale • Capture of productivity gains • Demand management • Increased competition However, the relative importance, size and substance of each of these levers will vary by process and client.
•
There is increasing buyer acceptance of moving some or all work abroad Savings not only vary by country, but also by city. In fact city selection is even more important than country selection Just 5 years ago, very few HRO contracts had an offshore element built into the deal. Now all of the key players have made significant investments in offshore locations The labour arbitrage should last 20+ years in the most significant source-destination pairs (eg US / UK to India / Philippines)
Improved Technology Whilst offshoring is a powerful lever, automation can be even more powerful (i.e. it is better to reduce cost to £0 than by 50%!). However, it can be extraordinarily hard to do. But suppliers are getting more sophisticated everyday. Take HR as an example; employee and manager self-service combined have the potential to dramatically reduce cost of the HR service.
Increased Scale
There are typically 2 main reasons for assessing the existing relationship: • To improve the relationship • To improve pricing • To improve the relationship AND improve pricing
Increased use of Offshore Resources Contracts with an offshore element drive the biggest savings. In our experience, 87% of offshore programmes achieve 30%+ savings. Clearly this is an extremely important lever.
Buyers Achieving Given Savings After Using Specialist Advisory Services Nearly 80% of buyers reported savings of over 20% Older deals taking advantage of offshore for the first time
Relationship fix was focus (not cost savings)
31% 25% 19%
Outsourcing has long been predicated on the idea that suppliers can bring scale and process experience to bear in a fashion impossible for internal departments to replicate. In many areas of BPO this promise, with regards to scale, is finally bearing fruit. Whilst in the past suppliers might not share any resources across clients (except security guards!), suppliers have been able to leverage technology and process investments in BPO across smaller clients leading to a cost reduction. • In HRO, increasing supplier scale, particularly over the past 2 to 3 years, is creating substantial economies of scale (as suppliers gain critical mass in industries and geographies) • Equally, increased scale and better standardisation offerings are allowing large suppliers to support smaller deals
19%
Capture of Productivity Gains 6%
0 - 19
20 - 29
30 - 39
40 - 49
50+
Range of savings (Percentage) Note: Based on Everest Group experience in advising clients in the restructuring of over 40 contracts
Chart 1
Suppliers typically set 5%+ annual productivity gain targets. After 5 years, redistribution of these gains is often a sizeable opportunity. Everest Group has observed that productivity changes range from 0 to over 30% improvements depending on the execution success.
Demand Management Buyers governance is often focused on management of the contract and delivery, but does not pay sufficient attention to demand
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Server Consolidation Opportunity # of servers
Resulting Cost Structure £million
30
1000
Average price comparison: <25K segment €per employee per year
Average price comparison: >25K segment €per employee per year
€ 902
20
50% decline
€ 450
€ 448 34% decline
330
1998-2003 (n=28)
Preconsolidation
Post consolidation
Preconsolidation
Post consolidation
2004 onwards (n=29)
1998-2003 (n=23)
€ 298
2004 onwards (n=18)
Sample size : n = number of transactions; 98 transactions Note : Similar trend is observed with adjustment of data for scope differences Source : Everest Research Institute
Source: Everest Group client experience
Chart 2
management (eg for an IT Infrastructure Outsourcing deal - project work, number of servers and numbers of MIPS installed). A lack of demand management often results in insufficiently constrained expenditure of resources. Example: Chart 2 - IT Infrastructure Outsourcing Server Consolidation.
Increased Competition •
•
Many of the offshore suppliers (eg Infosys, Wipro and TCS) have opened offices in the UK and US and have aggressive marketing plans. With a large percentage of their staff offshore they are often able to offer significant savings There is still substantial room for growth in all of the outsourcing processes. For example, the HRO market comprises only 5% of the overall HR outsourcing market.
For example, the factors above have contributed to a substantial drop in unit prices in HRO. Anyone renegotiating a deal now should seek 30%+ price reductions – see Chart 3.
Successfully Renegotiating Contracts Around 75% of contracts under going renegotiation end up being renewed with the incumbent supplier. Moving to a new supplier does not necessarily achieve greater savings than renegotiating with the existing supplier
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Chart 3
We have found that that the adoption of the following actions is useful in ensuring the successful renegotiation of contracts: • Engage with the supplier to understand the contract from their perspective - Identifying constraints that are hindering their performance - Understand other opportunities that they have identified to improve performance • Review the applicability of the contract renegotiation / renewal levers for each particular contract • Evaluate service levels and other qualitative data • Review the financial performance of the contract against any original business case • Update business case • Understand the flexibility and constraints of the existing contract However, the actual renegotiation/ retendering process adopted and detail of methodology will be dependent upon: • Overall satisfaction and success of the outsourcing strategy • Whether or not the client is limited to renegotiation with incumbent supplier • The flexibility to pursue a competitive approach with a number of suppliers • Existing contract terms and supplier relationship
Conclusion In this article I suggested that buyers should seek to get a good understanding of how the market has changed and the appropriate application of ALL the key value levers. This will invariably lead to greater value being delivered in either existing or renewing the outsourcing deal. In other words, simply rubber-stamping a deal renewal is likely to be a costly decision!
About the Author Stephen Dunn is a Principal with Everest and leader of our European practice based in London. He has a strong blend of IT, process and business experience built on nearly two decades of experience with suppliers and as a consultant and strategic advisor for companies in the U.S., U.K, China and Spain. Whilst he has worked in many industries, his primary focus has been in financial institutions, energy and transportation industries. In addition to his client responsibilities, Mr. Dunn is Research Director for Everest Research Institute’s offshore sourcing practice.
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EXECUTIVE VISIONS DISPUTE RESOLUTION
An interview with Mark Appel Senior Vice President International Centre for Dispute Resolution
MA: The International Centre for Dispute Resolution was founded in 1986 and is the international arm of the American arbitration association. It is essentially a private courthouse. Its not for profit organisation and we think of it as a place to go to for assistance and education. We are the largest provider of dispute resolution in the world. Arbitration and, increasingly, mediation are the best ways that commercial and transnational commercial interests can use to resolve their disputes quickly, efficiently and fairly.
CxO: At what stage of the dispute do companies most commonly ask you to intervene? MA: Right at the beginning. The issues for business, for example the outsourcing industry or business in general in a transnational setting, are that we are dealing with business changing rapidly, today’s competitor is tomorrow’s partner. One of our colleagues, who was a councillor to a major multi-national corporation, came to a conference and summed it up: “We don’t have commercial contracts , we have strategic commercial relationships, non of which we are willing to leave to the courts of any nation state”. So acknowledging first what you have got in hand, which is the maintenance of a strategic commercial relationship, and then acknowledging that disputes happen, problems happen, is a very modern, mature and professional way to approach the process. Right at the beginning of the relationship is when you should start anticipating issues. Problems will arise and that’s when we need to establish systems and contracts which allow us to bring problems to the surface quickly, resolve them quickly and move them up the chain of command as necessary. When it’s necessary, the use of a thirdparty mediator to facilitate communications and facilitate settlements is the best form of problem-solving and the resulting best solution is all your own - and it’s a business solution not a legal
solution. Business solutions are not constrained by law or contracts as you can tear up a contract and re-draft it. You can find other ways of satisfying interests as opposed to filing briefs and spending time in courts. In a transnational context it is always better to provide an arbitration clause with the contract. It’s about recognising that commercial relationship change and that they are dynamic and that it’s worth the effort to preserve them, acknowledging that problems will probably happen and the time to address that is the beginning of the relationship. It’s worth taking the time to establish protocols, policies, systems and contracts - a real contract language that establishes a systematic way of problem resolution. Bring problems to the surface and resolve them at the lowest possible level, with the least amount of fuss. Then move them up the chain of command only if necessary, but move them instead of letting them sit unactioned. Business problems don’t age well, unlike some fine wines, problems tend to get worse.
EXECUTIVE VISIONS
CxO: Can you give us some background information on The International Centre for Dispute Resolution?
When it’s necessary, the use of a third-party mediator to facilitate communications and facilitate settlements is the best form of problem-solving So a critical issue for business is identification and resolution and then recognising that on a occasion, because of human dynamics being what they are, and because communication between parties who have previously been in an adversarial position tend not to be successful, people in conflict talk past each other, they don’t talk to each other. Sometimes it’s appropriate to involve third parties, and most appropriately, a third party mediator, who can listen and hear effectively, who can
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EXECUTIVE VISIONS An interview with Mark Appel , Senior Vice President, International Centre for Dispute Resolution
translate in a much more global way about what one party’s needs are to the other party, someone who can assist in the problem-solving process who can move parties from a very adversarial stance to one which is more focused on needs and interests and problem-solving. You can literally feel the temperature change when this process works, and when people stop arguing and start solving, and it’s a remarkable process. It is common now in substantial commercial contracts to include a dispute resolution procedure called a ‘step clause’, which allows the partners to try to resolve the problem themselves. It might be a series of steps, negotiated
It is common now in substantial commercial contracts to include a dispute resolution procedure called a ‘step clause’, which allows the partners to try to resolve the problem themselves. internally, followed by the use of a third party whose only role is to help or assist in settlements. And, if that doesn’t work, by a decision-making process of arbitration. Specifically, that should be a process which is enforced by convention and treaty as opposed to any nation state laws. Frequently, business people don’t understand that when they get a judgement from a particular court, it’s like many of our football teams, it doesn’t travel well. And most of the time it can’t be enforced, or it can only be enforced with considerable difficulty. There’s a great bit of legislation - the United Nation’s treaty on the ‘recognition and enforcement of foreign arbitral awards’. I think it has the second biggest number of signatures on any United Nations treaty. There are about 135 nation states who have signed this convention. What that means is that you can have an arbitration award in England, and you can take that award to Brazil and you can enforce it in the courts of that nation state, which has signed that treaty and agreed to be bound by it. It is arguably the most successful commercial legislation ever drafted. I’ve been merely setting the stage about why this is important in the outsourcing industry. It might be useful to have a look at the American Arbitration Association’s substantial ‘Dispute-wise Management’ survey (visit www.adr.org) which was based on a sample of 254 companies. It interviewed the corporate general council, or associates and persons charged with managing the legal affairs. The sample included three different sizes and types of companies: 101 from Fortune 1000 companies, 103 from midsized public companies and 50 from private companies. And what they found was that it is possible to identify companies that describe themselves as having dispute-wise business management practices. Essentially they talk about involving their legal
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planning in their business planning. Legal staff also contribute to solving highly complex and technical issues. It’s no surprise to find that these companies don’t go ballistic at every opportunity when they have a dispute - they are less focused on aggressively litigating on every matter that comes to them. The second major survey finding was that these companies have stronger relationships with their customers, employees and partners. They have the smaller legal budgets and but better utilisation of legal resources and higher profit-to-earning ratios. And that suggests that they are better run companies. Most of this stuff is just good business. Due to the demands of modern business, the law department is increasingly looked to for the provision of a councillor role as opposed to a ‘warrior’. It’s really a change of mindset, but an appropriate one, considering that everyone is now expected to add value to the company. Where we [The International Centre for Dispute Resolution] provide value, is through providing best practices now, in other words what other companies are doing and, beyond that, providing neutral services. Where appropriate we provide highly trained, competent individuals who serve as helpers, mediators or arbitrators. We would be at home with substantial transnational disputes.
CxO: Have you been asked to arbitrate between two companies involved in an outsourcing arrangement? MA: I am sure we have but I am not sure if we have outsourcing as a distinguished category. But I know that these relationships are quite common and they sometimes create some friction. It is the nature of business that that’s going to happen. One of the things that we have to get past is despite all the love when the contract is formed, invariably conflict arises and a sophisticated business realises it should address that right at the beginning of the process.
CxO: Using all of your experience, what advice would you give to minimise the risk of disputes occurring? MA: I think you should be very careful in your choice of partner, obviously. By the way, time does become an issue as all of us are driven to add value and add value now and make decisions quickly, which is very reasonable. But I think it’s more important to make the right decisions too, and that means picking the right partner and taking the time to get to know them, and to align your goals and to make sure you are aligned properly. Beyond that I think it takes time to integrate and one of the things that we see, especially in the international context, is that the companies have their own cultures and within those, especially in a transnational context, you are talking about different cultural expectations based on where you are. Taking the time to understand those and work with them is important. I think that even we, as an organisation, frequently want to take the approach that we have the answer, but the best businesspeople recognise that there are many answers. Find a way that works and then be realistic and recognise that problems are going to happen. Take the time to think through what we are
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The best business processes will have a mechanism for giving feedback and best companies learn from their mistakes. problem but to learn from it. The best business processes will have a mechanism for giving feedback and best companies learn from their mistakes. And then recognise, beyond that, that what we know is you can’t always get it all done yourself and once in a while you will need an expert. Certainly the outsourcing industry is an example of that - it’s recognising that your best resource may not be your own. And in this particular case there are tried and tested ways of getting things done.
CxO: Do you provide guidelines or best practices for drawing up contracts? MA: We provide standard clauses and run an industry education programme. I frequently appear at events, talk about the process, problem-solving, mediation and arbitration. I talk about what other companies are doing and appear alongside in-house experts who have come up with their own systems of resolving things. I will give you a simple instance of a critical error, which happens invariably in the contract process. The absolute final issue parties turn to at the time of contract draft is their dispute resolution mechanism. It usually happens at about three minutes to midnight. After three days of negotiation, when people are just
dog-tired, nobody wants to give it a lot of thought. As a result, somebody trots out some old, bad clause and put it into a contract. Recognising this faux-pas, several large well-known companies have changed the way they do business. When they enter contract negotiation they discuss this issue first. It’s an important relationship, we know that during the course of the contract problems are going to arise, and we care enough about this relationship to discuss the means of solving those problems. We want to put it at the beginning of the negotiations. It’s like a breath of fresh air through the proceedings, because it is an extension of an olive branch. Parties want to find a way of solving problems and start talking about that first. The rest of the negotiation actually becomes more of a problem-solving exercise as opposed to an adversarial sparring session. And that’s what often happens in contract negotiations. You literally start out with the whole basis of the relationship on an adversarial stance before it’s begun. If approached properly, taking the lead and talking about the problems first can have a positive outcome in terms of the rest of the negotiations. At least in this particular area, it does become a leadership issue. If we look at it in the context of the construction industry, when partnering often fails, one of two things can occur. Most commonly, there is no buy-in from the leadership. If you are going make it work it has to be a top-down thing. People need to know it’s important, otherwise it doesn’t count. And I think you have got to measure it. Big companies, for example General Electric, have integrated mechanisms, as part of their policy, to measure how disputes are resolved and their outcomes. It’s possible to quantify things such as how much money was saved, what the alternatives were, and what it would have cost to litigate on this. Not only should you address it, you should pay attention to it. You should measure it and hold somebody accountable for it.
EXECUTIVE VISIONS
going to do if and when it happens. That is time is well spent because you have something in place and you are not surprised when something does happens. You can say that this is something we anticipated and you have a process not only to solve the
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Case Study
INNOVATIVE APPLICATION MANAGEMENT AND GLOBAL SOURCING APPROACH GIVES PHILIPS SEMICONDUCTORS AN ADDED ‘IMPULSE’ BRINGING SIGNIFICANT BUSINESS BENEFITS AND COST SAVINGS! Atos Origin has combined its Application Management expertise with a Global Sourcing approach to deliver cost savings, a more effective way of working and improved quality to Philips Semiconductors. The agreement covers the development, implementation and maintenance contracts for the Philips Semiconductors chosen solution for PDM (Product Data Management) and BcaM (Business Creation and Management).
BUSINESS CHALLENGES To continue to meet its business targets and maintain its leading position in an increasingly competitive global market, Philips Semiconductors was looking for improvements in two key areas – operational efficiency and costs.
SOLUTION To tackle the issue of operational efficiency, Atos Origin and Philips developed an improvement program to support the management and exchange of product
In order to control costs and maintain quality, a Global Sourcing approach was central to delivering the required benefits and savings as it ensures formalized procedures and processes, as well as continuous improvement and maturity growth. Global Sourcing was implemented for the application management element and covered areas such as programming, testing, documenting changes, de-bugging, improving and correcting as well as the help-desk. Representatives from Philips Semiconductors visited Atos Origin’s
In order to control costs and maintain quality, a Global Sourcing approach was central to delivering the required benefits and savings… definition data in all stages of the product lifecycle. This is critical for Philips Semiconductors as it is the fundamental backbone of all product data.
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facilities in India to verify the offshoring capabilities and these were found to be mature and fully in-line with their requirements.
Finally, most of Atos Origin’s recurring services have been defined into a Service Catalogue for Philips and a utility-based approach to pricing introduced to determine the monthly invoice. This allows Philips to know precisely what they are buying from Atos Origin, broken down to logical service components, and to actively manage and control their IT costs.
BENEFITS This innovative approach has allowed Philips Semiconductors to realize significant cost savings without having to sacrifice quality or service. The experience of Global Sourcing has also made Philips realize that the benefits are greater than simply costs alone. Processes are more mature and this has led to a more structured and precise approach. There is more focus on deadlines and they are more often met. Services are delivered exactly as described in terms of time, content and quality and this has meant that Philips themselves have also had to become more specific in formulating their questions and requests. Furthermore, a new ‘Front Office/Back Office’ model has brought
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improved communication and greater transparency. This, coupled with better and more detailed reporting, has led to greater confidence within Philips itself as to the ability of IT to really support its business needs. In fact, this project has become a benchmark across Philips for assessing quality and cost. A greater level of trust between Atos Origin and Philips has also grown from this and both parties are now exploring new business opportunities and the possibility of moving more application management offshore. â&#x20AC;&#x153;Although it was initially about reducing costs, Atos Origin has demonstrated to us that there are also other significant benefits, such as continuous process improvements and greater pro-activeness, to be gained from a Global Sourcing approach to application management.â&#x20AC;? Henk Grootegoed, Service Delivery Manager PDM & Manufacturing solutions, Philips Semiconductors
Royal Philips Electronics of the Netherlands is one of the world's biggest electronics companies, as well as the largest in Europe, with 159,709 employees in over 60 countries and sales in 2004 of Eur 30.3 billion. Philips Semiconductors is a leading supplier of silicon system solutions for mobile communications, consumer electronics, digital displays, contactless payment and connectivity, and in-car entertainment and networking. It is one of the top ten global semiconductor manufacturers, employing more than 35,000 people, 6,000 of whom are engineers or software engineers. A global organization, it operates twenty manufacturing sites and maintains sales organizations in sixty countries around the world.
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OUTSOURCING CONTRACTS – ARE THEY WORTH THE PAPER THEY’RE WRITTEN ON?
Gill Andrews Bird & Bird
One complaint we sometimes hear about outsourcings, is – Outsourcing contracts are outof-date the moment they’re signed. And they become more and more out-of-date as time goes on. Rather than spending time on some increasingly irrelevant contract, business people should focus on the underlying customer/supplier relationship. Can this be true? Anyone who works on outsourcing contracts will know the heavy costs involved - in terms of time, manpower, professional fees, etc. Perhaps unsurprisingly, I am firmly of the view that this is money well spent. But I also think businesses deserve a clear explanation of why a good outsourcing contract is essential, and how businesses can ensure that their outsourcing contracts remain relevant and useful throughout the contract term.
Why have a contract at all? I think it’s useful to consider this fundamental question at the outset. Imagine making a presentation to your Board – you’ve found the perfect supplier to meet your business’ needs; they’ve got a great track record and the price is right. When the Board asks you about the contract arrangements, you say – Don’t worry about that; I’ve decided not to use a contract on this one. Chances are you’d be looking for a new job before the end of the day. But why? Of course, there are some legal and regulatory reasons for an outsourcing contract: for example, some regulators require this;
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and some assets cannot be transferred without a written document. But what about business reasons?
Three key business reasons for an outsourcing contract 1. Remedies: To provide an appropriate level of remedy, if things go wrong. If your supplier, or customer, does not perform as promised, your business might suffer. Without a good contract, it can be difficult to claim compensation, or to terminate, for failures by the other party. Equally, businesses generally wish to limit their liability for losses incurred in connection with the outsourcing relationship. This cannot be done without a contract. 2. Clearly establishing each party’s responsibilities: Many outsourcing disputes are over which party has responsibility to do, and (usually more importantly) pay for, particular aspects of the service. The disputes usually relate to occurrences that were not anticipated when the contract was first put in place. For example – - Who procures replacement services if a subcontractor becomes insolvent? - What information must be given to other bidders, if the customer wishes to put the service out to tender towards the end of the contract term? - Which party has the right to use valuable information generated in connection with the outsourcing relationship?
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The discipline of drafting a contract forces people really to focus on these types of matters. These matters can of course be agreed by way of non-contractual documents. However, in our experience, this generally produces a less rigorous analysis than where a contract must actually be signed off by key decision makers. 3. Regulating the legal consequences of the parties’ actions: For example should email agreements between contract managers be capable of varying the parties’ rights and responsibilities? What is the legal consequence if the customer’s contract manager repeatedly allows the supplier to perform at below contract standard? The real point I wish to make is that these key reasons (and more) are all just as important, a couple of years into the outsourcing relationship, as they were on the day the contract was signed. The challenge therefore is to make sure the outsourcing contract remains fit for purpose, and does what it is meant to do, throughout the entire contract term.
Ten Steps to Success – Keeping the outsourcing contract fit for purpose, throughout the contract term All outsourcing relationships evolve throughout their term – the services change, the market changes, the customer’s organisation changes. Unless the outsourcing contract evolves with the relationship, the contract will become less and less useful as time goes on. It will also become less and less legally effective, the more its provisions differ from the ‘live’ outsourcing relationship.
Actively use the outsourcing contract The signed outsourcing contract will reflect compromises and agreements made at sometimes the highest levels of the supplier’s and customer’s businesses. But we find that those actually operating the service often do not use the contract. Why is that? Often because they do not know what the contract says on the key issues that affect their work. 1. Make it easy: Most lawyers now use plain English drafting. But an outsourcing contract is still an unwieldy and difficult document to read. Also, an outsourcing contract is not a service manual; its primary purpose is as a legal document, designed to be
capable of being used – if need be – in a court of law. Serious thought should be given to the best way of ensuring that the people running the outsourcing relationship really understand how the contract should affect their roles. This is likely, at least, to include • Contract summaries: Someone with a detailed knowledge of the outsourcing contract should produce simple, and relatively short, summaries of the contract. These are not designed for the lawyers; they are for those operating the service on the ground. • Contract management workshops: Explaining how the outsourcing contract works; introducing the Contract Summaries; and addressing peoples’ questions about how particular issues are addressed in the contract, and should be addressed in practice. 2. Keep the contract team in place: Too often, the key individuals who develop and negotiate the outsourcing contract have no ongoing involvement after the contract is signed. Where this happens, there can be a mismatch between the negotiating team’s view of the world, and that of the employees on the ground. The most obvious way to address this is to make sure that at least some of the people who will operate the outsourcing relationship are involved in developing and negotiating the service descriptions, service level schedules, implementation plans etc. 3. Don’t make your outsourcing contract more complex than it needs to be: People actually operating outsourcing relationships often complain that their contracts are too complex. In many cases, this is simply the nature of the legal document, and their concerns can be met by well drafted Contract Summaries. In other cases, these people are right. This is a particular problem with service credit regimes - the contract negotiating team often devises a finely calibrated service credit mechanism, with appropriate weightings given to all relevant criteria. But when the mechanism is handed over to those actually working on the ground, they find it too complex, it takes too much time to administer and sometimes they are unable actually to measure the inputs that need measuring. The operational parts of the contract should always be sanity-checked with
the people who will actually be running the relationship. If those people buy into the agreed mechanisms, they are much likely to be used in practice.
Don’t accidentally modify the contract The negotiating team that agreed the original outsourcing contract will have worked carefully to allocate responsibilities to the parties, and to create the right risk/reward balance and allocation of responsibilities. Without good contract management, and good levels of awareness amongst the outsourcing teams, it is easy to unintentionally modify that balance, and to throw away hard-won rights. 4. Be careful about ‘scope creep’ – ‘Scope creep’ occurs when the scope of work entrusted to the supplier gradually increases without anyone really realising this is happening. This is a particular risk where a great deal of service definition work remains to be done when the contract is signed. Without strong relationship management, it can be tempting for the customer’s personnel to request additional functionality; often resulting in escalating costs, and delays as development time is side-lined on ‘nice-to-have’s.’ It can also result in the supplier doing work that is not properly reflected in agreed contract wording, leaving the parties in an uncertain situation if things go wrong. 5. Don’t inadvertently take on extra responsibilities – This situation typically arises where the new services are being discussed. It can be tempting for a customer to specify not only what services the supplier must deliver and the related service levels, but also to dictate the method the supplier must use. If that method turns out to be flawed, the customer may find itself without a remedy (as the supplier can argue that it was simply following the customer’s instructions, and the customer had effectively taken on responsibility for selecting the working methodology). Collaborative working can be highly beneficial to outsourcing projects, but it is important to be clear as to which party takes ultimate responsibility for the output of the collaboration. 6. Don’t inadvertently waive your rights – Most outsourcing contracts allow the customer to claim service credits, liquidated damages and other remedies for poor performance, missed deadlines etc. In practice
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(and for good operational reasons), customers often decide not to enforce these rights. However, unless this situation is handled properly, non-enforcement of the agreed contractual rights can result in them being waived, and therefore unenforceable in future. We certainly do not advocate that service credits, or other remedies, should invariably be claimed. But it is important to develop a legally-effective strategy for responding to failures by the other party, to make sure you do not inadvertently give away your rights. 7. Be aware of the impact of informal communications – The supplier’s and customer’s staff will inevitably be in regular contact, by email, on the phone, in person and in workshops, etc. Depending on the circumstances, statements and agreements made in those meetings may be legally binding. These statements and agreements might, for example, have the effect of varying the outsourcing agreement, or of creating a new, collateral contract between the parties. Good contract drafting, and effective training of those involved in the outsourcing relationship, are both key to minimising the risk of this happening.
Good contract management 8. Properly document all contract changes: Often, changes are agreed in emails and in meetings, without any clear record being kept of what was agreed. We see contract disputes where there is absolutely no consensus as to what
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changes have and have not been agreed. If the outsourcing contract is to remain a useful legal document throughout the contract term, it is vital that contract changes are properly documented. Consideration should also be given to updating Contract Summaries and Manuals, etc. Where we are asked to advise on a dispute, we are also often handed a pile of Contract Amendment documents, which would seem to have been prepared without any real understanding of what the outsourcing contract itself says. So we are faced with a series of documents that say very different things as to, for example, which party should own particular intellectual property rights developed in connection with the services. Be sure that contract changes are approved by someone with a good knowledge of the underlying outsourcing contract (ideally someone in your legal or contracting team). In that way, the changes can be made to ‘fit’ with the agreed contract. 9. Periodic contract management workshops: The team operating an outsourcing relationship will change with time. Periodic workshops are useful in keeping everyone up to speed, and are also an ideal forum for discussing possible changes. An outsourcing relationship is complex and multifacetted. What would work well from a cost profile perspective may be disastrous from an HR perspective – it is important that all members of the team have the opportunity to provide input on possible changes to the relationship.
10. Allocate adequate resources – Recognise that keeping an outsourcing contract up-to-date, and following these Ten Steps, requires work, and the allocation of adequate resources.
The question of relationship The quotation at the start of this paper draws a contrast between the effort spent on the outsourcing contract, and the effort spent on the outsourcing relationship. We see that as a false distinction. Good outsourcing contract management certainly involves investing time and effort into the relationship itself, as well as following our Ten Steps. But the face-to-face relationship and the contract relationship are both essential to a solid outsourcing. Both are needed, if the relationship is to succeed in a way that properly reflects both parties’ reasonable expectations.
About the Autor Gill Andrews is a Senior Consultant in Bird & Bird’s International Outsourcing Group. She advised on her first outsourcing in 1992, and has continued to focus on the area as it has evolved. She has worked on a wide variety of outsourcing transactions, from ‘straight’ domestic IT and communications outsourcings, to innovative business process outsourcings, insourcings and offshorings. She has substantial experience of advising on multinational outsourcings.
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Solutions Index A CxO Research Initiative â&#x20AC;&#x201C; Achieving Competitive Advantage through Collaborative Partnerships
ACS
Atos Origin
CSC
IBM
SBS
p61
p90
p100
p20
p44
www.acs-inc.com/emea
ACS is the leading provider of diversified, end-to-end business process outsourcing (BPO) and information technology (IT) outsourcing solutions to commercial and government clients worldwide.
www.atosorigin.com
Atos Origin is a leading international IT services company. Its business is turning client vision into results through the application of consulting, systems integration and managed operations.
www.CSC.com
Founded in 1959, Computer Sciences Corporation is a leading global IT services company with approximately 90,000 employees located around the world.
www.ibm.com/services
IBM Global Services provides comprehensive IT services integrated with business insight to reduce costs, improve productivity and assert competitive advantage.
www.siemens.com/sbs
Siemens Business Services is one of the world's top 10 outsourcing providers serving over 200 major clients in 44 countries.
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