The Outsourcing Project

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Achieving Competitive Advantage through Collaborative Partnerships

Business

Competitive Advantage

Transformation

through

in Action

Collaborative Partnerships

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Published by CxO Research Ltd Cover Price ÂŁ199

A CxO Research Initiative

A CxO Research Initiative

Achieving

The Outsourcing Project

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contents

A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships

Section 1 Strategy 8

The Opportunities, Threats and Challenges Facing the CFOs of Global Organisations Dr. Martin Fahy – National University of Ireland

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The Birds And The Bees: The Evolutionary Future of The CIO Gary Barnett – Ovum

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A Guide to Outsourcing Readiness Rebecca Scholl – ACS Europe

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BPO in Germany: A reality check Katharina Grimme – Ovum Deutschland

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Gales of Creative Destruction - or Looking at Outsourcing from a Strategic Perspective Juergen Weigand – WHU Peter Kreutter – WHU GRID

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Aiming High in Financial Services Outsourcing Neil Smith – Risk Management, Deutsche Bank

Taking a Strategic Approach to Sourcing: What is my Sourcing Strategy?

John Buscher – TPI

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IBM Global Services - Full Service, on Demand Outsourcing Capability IBM – PROFILE

Shaping Deals that Last - Principles of Dynamic Outsourcing David Thomas, Simon Knowles – CSC

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Finance & Accounting: The Coming Wave Of Consortia Buying Joe Vales, Gil Parker – Vales Consulting Group Rich Tinervin – Tinervin Advisors

Utilising Outsourcing Practices to Gain In-Sourced Success Robert Morgan John Clements – Morgan Chambers

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Outsourcing with Siemens Business Services - Built on Trust SBS – PROFILE

Approaching The End of The Road - Preparing for The Natural Termination of an Outsourcing Contract Geraldine Fox – Compass

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For Dynamic, Innovative, Results-Driven Outsourcing Solutions, Talk to CSC CSC – PROFILE

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Enabling Document Process Outsourcing in the Corporate Document Enterprise Brian R. Miller – InfoTrends/CAP Ventures

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Finding Inspiration in India Steven Ferrari – Prudential

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Driving Innovation by Leveraging Outsourcing Relationships Jean-Louis Previdi – Gartner Executive Programs Catherine Peyralbe – Gartner Consulting

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Innovation Sourcing: Increasing Business Value Within Outsourcing Relationships Trevor Clifton, Joe Benaroya – IBM

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Contents Section 2 Governance 68

Outsourcing Governance: A Key To Business Success Tim Cummins – IACCM

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Outsourcing Governance and Regulatory Compliance - Can they Co-exist?

Nick Andrews – EquaTerra Europe

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Turning Client Vision into Results ATOS ORIGIN – PROFILE

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Technology-Based Results ACS – PROFILE

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Building for the Future Through Outsourcing Ulrich Engelhardt – KarstadtQuelle

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Demand Supply Management in IT Outsourcing Partnerships - Governance in Action!

Erik Beulen – Atos Origin

100 Corporate Governance - Outsourcing and Operational Risk in the Financial Services and Insurance Sector Peter Brudenall Jeremy Storer – Simmons & Simmons 103 Sun's Experiences of Outsourcing its Educational Services to a Global Delivery Partner Stephan Gropp – Sun Micro Systems

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An Outsourcing Partnership Should be About More Than Just Saving Money!

Stephen Calvard – IND

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Delivering Innovative Outsourcing Solutions SIMMONS & SIMMONS – PROFILE

106 Outsourcing in Germany - Main Legal and Commercial Issues in Local or Multi-Jurisdiction Arrangements Dr. Joachim Schrey – Clifford Chance

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IT Outsourcing Governance: Implementing Core is Capabilities Leslie Willcocks – Warwick University David Feeny – Templeton College, Oxford

109 Evolving Outsourcing Through Value Chain Analysis Elizabeth Weir – Pillsbury Winthrop Shaw Pittman LLP

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The Implementation of Utility Computing within an Outsourcing Relationship Michael Symonds – Atos Origin

114 Solution Index

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The Advisory Panel A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships

David Barrett

Joe Benaroya

John Buscher

Stephen Calvard

Head of IT and Telecoms practice group, London, Simmons & Simmons

General Manager, Strategic Outsourcing, EMEA. IBM

Partner, TPI

IT Director, IND

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.

Joe Benaroya was named General Manager, Strategic Outsourcing, EMEA in January 2003 and has total P&L responsibility for the IBM IT outsourcing businesses across EMEA. Joe joined IBM in 1978. He has had wide experience and responsibilities, from marketing representative to Vice President of Global Sales for the PC Division.

Along the way he was one of the pioneers of ISSC, the predecessor to the current IBM Global Services business. During his career, he has been based both in the United States and in Europe.

He rejoined the European division in 2002 as the Executive responsible for all Global Services engagements within the Retail, Wholesale, Transportation, Airlines and Consumer Packaged Goods industries. His most recent post before this current one was General Manager, IBM Global Services Distribution Sector in EMEA.

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.

Stephen Calvard was appointed IT Director in the IND, Home Office in 2001. Before that, he was with the Ministry of Defence where he held a range of posts.

He joined the Ministry of Defence in 1970 and worked for 10 years on electronics research and development at the Royal Aircraft Establishment.

In 1980 he worked for 5 years on technical support to Naval Defence Systems before moving to London in 1985, where he was the project manager on a range of major guided weapons systems.

In 1990 he became a Scientific Advisor with the Central Scientific Staffs in MOD, Whitehall. In 1992 he was transferred to the Defence Research Agency where he held the post of Director of Engineering Services.

From 1994 to 1998 he was the MOD's IT Director in Defence Intelligence in the Old War Office, Whitehall.

In 1999 he spent a year at the Royal College of Defence Studies, Belgrave Square, London.

Stephen has one son and one daughter and lives in Guildford, Surrey.

Steven Ferrari

Stephan Gropp

Les Mara

Brian Miller

Service Development Director, Prudential

Director, Global Education Business Partners, Sun Microsystems

Head of Business Processing Outsourcing EMEA, HP

Associate Director InfoTrends/CAP Ventures

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.

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.

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.

Brian Miller is an Associate Director for InfoTrends/CAP Ventures' European Production Workflow Solutions Consulting Service. With an extensive background in content, process automation, and high technology markets, Mr. Miller has strong skills in the design and execution of research leading to actionable strategic insight.

Prior to his present role at InfoTrends/CAP Ventures, Mr. Miller managed a private strategic research consultancy. He also directed the Technology Research Centre at The McKenna Group, overseeing design and execution of strategic primary and secondary market research for a broad array of clients through the development of strategic recommendations. Prior to McKenna, Mr. Miller performed strategic and market research related roles at McKinsey & Company's Canadian practice and Razorfish. He earned a Bachelor of Science Degree in Management/Marketing from Babson College.

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The Advisory Panel Roger Arthur Cox

John Dain

Ulrich Engelhardt

Mr. Miguel Ribeiro Ferreira

Vice President Gartner Research

Senior Vice President Global Managed Operations, Atos Origin

CIO Karstadt Warenhaus AG

Group Financial Controller Electricidade De Portugal, SA

Roger Cox is a vice president and distinguished analyst, in Gartner Research where he specialises in outsourcing. Previously with Gartner Consulting, he was responsible for Gartner's Strategic Sourcing Solutions in EMEA. Prior to joining Gartner in 1998, Mr. Cox worked for IBM Global Services EMEA, and has worked in outsourcing, both in North America and across Europe, since the early 1990s. He came into the IT industry following a 16-year career as a consultant and project manager in the construction industry.

Mr. Cox holds a bachelor's degree in civil and structural engineering from the University of Sheffield, is a Chartered Engineer, a member of the Institution of Civil Engineers, and a Member of the Chartered Institute of Marketing.

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.

Ulrich Engelhardt is Managing Director of the Itellium Systems & Services GmbH, responsible for consultancy and systems integration for the Overthe-Counter Retail business of KarstadtQuelle and also CIO for Karstadt Warenhaus AG, covering some 160 department stores and sports shops.

After studying education and mathematics, Ulrich Engelhardt, in 1987 founded the company 'SHE Information Technology AG' in Ludwigshafen.

Until 2003 he developed SHE into one of the leading companies in the area of IT - Security, first as managing director and later as chairman of the board.

From 1987 to 1991, he was also active as a lecturer for mathematics and business administration at the university of Mannheim in Germany and carried out research at the chair of business administration and operations research.

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 Gest茫o and post-graduate degree in advanced corporate finance from Universidade Cat贸lica Portuguesa, Lisbon.

Jean-Luc Moles

Robert Morgan

Christian Oecking

Rebecca Scholl

Director, IT Infrastructure, EMEA Motorola

Director, Business & Brand Development, Morgan Chambers

President of Global IT Outsourcing, Siemens Business Services

Director Of Strategy ACS Europe

Jean-Luc Moles graduated in electronics at the University of Toulouse in France.

He started his career with the computer manufacturing and distributing company Sperry Univac. He then joined ITT Data Systems, working in the area of mainframe computing and data networks.

Jean-Luc joined Motorola in 1986 as Network Manager for Southern Europe and rose through the organisation to become Director, IT Infrastructure Europe Middle-East and Africa, supervising up to 400 employees and contractors with a $ 70 million budget.

This activity has been outsourced to CSC and Jean-Luc leads the Regional EMEA Governance body in charge of managing the execution of the outsourcing contract.

In addition, Jean-Luc has been appointed Managing Director of the Motorola Toulouse site and legal entity.

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.

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.

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.

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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

Richard Tinervin

Chief Operating Officer Risk Management, Deutsche Bank

Vice President, European Business Development, CSC

Founder and Managing Partner, Tinervin Advisors

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 knowledge-based 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.

Rich Tinervin has over 30 years experience in international and U.S. financial services as an executive officer of the following dominant, market leading companies. Unique to his accomplishments and vision has been the ability to manage institutional and retail services businesses; having been at the forefront of leveraging the intersection between individual and institutional investors.

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

CITIGROUP, INC., New York, NY Managing Director, Global Retirement Services CHARLES SCHWAB & CO., INC., San Francisco, CA Executive Vice President FIDELITY INVESTMENTS, Boston, MA Executive Vice President NCNB CORPORATION (BANK OF AMERICA), Charlotte, NC Executive Vice President THE BANK OF NEW YORK, New York, NY Senior Vice President Since electing early retirement from Citigroup, Rich formed Tinervin Advisors as an independent consultancy to asset management organizations to include leading the adoption of business process outsourcing. Primary clients include one of the top three global investment banks, and national recruiting and strategy firms focused on the retirement and wealth management industries.

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.net

Leslie Willcocks

Joseph Vales

Professor of Information Management Warwick University Business School

Senior Partner of Vales Consulting Group

Publishers . . . . . . . . . . . . . . . . .Tony H.Johal

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)

Joseph Vales is Senior Partner of Vales Consulting Group, and is best known in the business community for his strategic business thinking about marketing and sales, his outsourcing industry expertise, and his passion to help clients generate bottom-line results.

Vales Consulting Group is a strategic advisory firm providing marketing and business development services to the top managements of Fortune 500 companies, outsourcing service providers, and professional organizations for launching new products/services and building successful businesses. The consulting firm is widely recognized for its extensive experience in the information technology and business process outsourcing fields as well as for its leadership in the advancement of outsourcing as a management practice.

During his 30-year career, Joe held senior management and consulting positions in strategic planning, new business development, marketing, and sales with PricewaterhouseCoopers, Price Waterhouse, Citibank, Shearson Lehman Hutton, Booz Allen & Hamilton, and others. He brings clients special expertise in business/marketing strategy, professional services, financial institutions, and consumer products.

With PricewaterhouseCoopers (1996-2001), Joe was Managing Director of Global Marketing for the firm’s Business Process Outsourcing (BPO) service line.

Publishing Consultant . . . . . . . . .Ron Lawson

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Art Director . . . . . . . . . . . . . . . .David Witcomb Content Manager . . . . . . . . . . . .Emma White 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.

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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Section 1

Stratergy

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Section 1

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SECTION 1

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Strategy

THE OPPORTUNITIES, THREATS AND CHALLENGES FACING THE CFOS OF GLOBAL ORGANISATIONS

In 1992 the median cost of Finance in organisations was 1.9%; by 2004 this had been reduced to 1.08% with world-class organisations managing to push that figure down to 0.74%. Firms had achieved these cost efficiencies through process standardisation and re-engineering, implementation of technologies such as ERP, e-procurement and workflow and architectures such as shared service centers. But behind the detailed cost savings lay a reality for many finance professionals, which was very different. This was a world of continued inefficiency, shadow systems, long hours and late deadlines, where multiple versions of processes and systems are the reality and where Finance as a business partner is little more than the rhetoric of software vendors white papers. While the overall cost of finance has fallen the median Finance function still spends 66% of its time on transaction processing and only 11% on decision support activities. That's just two days in every working month.

Dr. Martin Fahy senior lecturer in Accounting and Information Systems National University of Ireland

What has gone wrong? Part of the problem lies with the increasing focus on compliance and regulations such as the Sarbanes Oxley act, IFRS and Basel II. These have placed renewed emphasis on controls and stewardship with the result that finance professionals are finding it difficult to devote time to value added decision activities, such as channel and customer profitability analysis.

With the renewed pressure for risk management, internal control and assurance finance professionals are struggling to deliver shareholder value.

Delivering Finance Services - Vision meets execution.

All of the research and thought leadership on the future of the finance function of the last twenty years, places better business partnering at the top of the wish list. Research conducted by the author over the last three years however, suggests that finance professionals have a very incomplete and poor understanding of what business executives, shareholders, and other stakeholders expect and want from their Finance Function. While stewardship, and control are key priorities for regulators the key issues for business executives centers around better decision support in the form of increased insight into

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cost causation, better understanding of the drivers of net operating cash flows, and understanding of relative competitive position.

How can we configure a finance delivery model to meet the needs of the diverse groups? Figure 2 presents a Finance Service Delivery Framework designed to highlight the challenges, opportunities and threats facing CFO's in delivering value from the Finance function.

Understanding the Customers for Finance Services The starting point for any Finance transformation project is to understand the clients/markets and customers. Finance has both internal 'customers' in the form of the senior executive team but also the different business functions that it must collaborate with on an on going basis such as R&D/Product development, Operations/SCM, HR, Marketing/Brands etc. Increasingly finance is called upon to 'partner' with these executives to help them understand; • Which parts of the firm (products, segments, customers, etc) are creating value • What's driving cash generation • How are we doing relative to the competition • How do we confirm the business model to deliver shareholder value

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Strategy SECTION 1

A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships

Getting the Right Delivery Channel.

Infrastructure

Finance Systems

Finance Structure

Strategic Decision Support

Finance Proceses

Transactional and Operational Finance

Budgeting, Forecasting Consolidation, Reporting Treasury, Asset management Project costing, Activity-based mgmt Performance Measurement Customer and Channel profitability Value Change Analysis Managing for Value

Risk, Control and Assurance

Purchase to Pay, Order to cash Fixed Assets, Inventory, Consolidation, Record to report Reporting, Treasury, Costing, Travel and expenses Payroll

Risk management Compliance and SOX Regulatory reporting Internal Audit Internal Control

Products/Services

Delivery Channel

Corporate Centre

Business Unit

Consultants

Specialist Team

Business Process Outsourcing Shared Service Centre

Virtual Self Service

Human Resources Procurement Brand & Marketing

Bank Sales

Manufacturing

Other Stakeholders

Capital Markets

Distribution Research

Customer Customer Customer

Supplier Supplier Supplier Regulators

Clients/Market/Customers

Figure 1. The Finance Service Delivery Framework

Finance must also deliver transaction processing, risk management and assurance services/products to these groups.

Finance also has a role in liaising and collaborating with external 'customers' such as the providers of capital (Investor relations), regulators, and other stakeholders (employees, society), suppliers, and customers. While some of the services offered to external groups will focus on simple routine transactions such as payables, increasingly finance professionals are expected to collaborate in improving supplier relationship management and to help supply chain partners to improve their value creation potential.

While many finance professionals would like to think that they have a full understanding of their 'customers', research

by CIMA suggests that finance has failed to address the wider needs of many stakeholders.

In understanding our 'customers' we need to; • Carry out objective fact based needs assessment across all finance customers • Assess the quality of the current service offerings including benchmarking against best in class and through customer satisfaction surveys • Identify Gaps and improvement opportunities • Continually monitor and respond to the changing customer needs.

Once we have a full understanding of customer needs we can begin to design products/services that address those needs.

Configuring the service/product mix In the past Finance Professionals have excelled at providing Transactional and Operational Finance and have in recent years used ERP, workflow technologies and structures such as shared service centers to deliver costs savings in these areas. The precise mix of product offerings will depend on the needs of the 'customers'.

In developing service offerings Finance professionals need to put in place mechanisms to monitor the demands for different services and adapt to changing market conditions. In this regard the Finance Function must continually evaluate the stream of new techniques, and tools and accounting regulations to ensure they are meeting client requirements.

Strate gic De cision Supp ort

Budgeting, Forecasting Consolidation, Reporting Treasury, Asset management Project costing, Activity-based mgmt Performance Measurement Customer and Channel profitability Value Change Analysis Managing for Value

The appropriate delivery channel for getting finance services to customers is one, which has received considerable attention in recent months. What activities should be carried out by Finance staff in the business units and what can realistically be moved to shared services/BPO? Do we need specialist teams in areas such as tax/vat etc or can we outsource those activities? Can Finance Professionals within the business units deliver all the strategic decision support or is their merit in setting up special teams within the corporate centre, or maybe we should retain consultants? All of these questions are concerned with what is the most appropriate delivery channel for our finance services.

However, with the increasing capability of BPO vendors and the success of many shared services in expanding their reach and range in terms of functionality, more and more services are being delivered from SSC/BPO facilities.

Research indicates that • Shared services are a well established part of the finance architecture • The focus is shifting to optimisation through single instance, single process and consolidation in pan regional centres • The reach and range geographically is extending • Single high volume low cost location is an aspiration for many firms • SSC/BPO enjoys a significant penetration in areas such as payables, payroll, fixed assets and T&E, split for O2C, GL invoicing and other areas • Analysis and reporting resides largely with the operating sites and Group/corporate • The benefits of SSC's are primarily operational and transactional, impact on business partnering is minor and may be negative • Workflow and e-enabled processes are emerging as standard Self-service is becoming an increasingly popular delivery channel for finance services.

T ra n sa ctiona l an d Ope r ationa l Fina nc e

Purchase to Pay, Order to cash Fixed Assets, Inventory, Consolidation, Record to report Reporting, Treasury, Costing, Travel and expenses Payroll

R is k, Co ntr ol an d As su r a nc e

Risk management Compl iance and SOX Regulatory reporting Internal Audit Internal Control

Figure 2. The Finance Service Delivery Framework

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Section 1 Strategy

Substantial numbers of organisations use self-service billing and account enquiry for clients but increasingly BI/reporting tools are making it possible for the self-service model to be extended to the more analytical application areas.

Getting the Infrastructure Right - Systems, Processes and Structures.

Many firms have spent the last ten years preoccupied with finance process redesign and single instance ERP projects. While the projects have played a role in reducing finance costs they are not an end in themselves. At present IT costs account for almost $14,000 of Finance FTE costs each year. The evidence todate suggests that those firms that implement single instance ERP, workflow and payments technologies as well as effective reporting tools are more likely to achieve world-class levels of performance for their organisations.

Threats and Trends The Finance function faces a number of key challenges in the coming decade. These can be summarised as follows.

Business Process Outsourcing and Shared Service Centers • While SSC/BPO is a well established part of finance reaping the benefits requires a proactive programme of benefits realisation. In the absence of a BR continuous improvement programme the benefits set out in the original business case will not be achieved.

• The choice of location is a complex issue requiring trademarks between labor costs, regulation/risk, tax and infrastructure.

While comparative advantage matters such as culture, distance, time, cost and other factors means that one location doesn't suit all organisations.

• Increasingly SSC/BPO projects will be increasingly 'multi-tower' with firms opting to move a number of shared business services to an SSC/BPO framework at the same time.

• The business case for SSC/BPO is increasingly around shareholder value creation through better working capital management and optimisation of the asset base rather than through purely FTE savings.

Technology and Tools • While single instance is increasingly a prerequisite for reaching best in class finance many firms seem incapable of the

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•

•

•

•

change programmes needed to make reaching a single instance a reality.

Workflow technology remains very rudimentary but overtime, sophisticated software will dramatically alter many of the SSC/BPO processes and move firms slowly towards zero touch processes.

The next wave of investment will focus on leveraging the data assets trapped at the operational level with the focus on BIU/CPM tools with particular emphasis on supporting value chain modeling, customer and product profitability analysis and understanding cash flow drivers.

Collaboration will be a key theme in emerging technologies. As global standard processes become the norm managers in different geographies will use standardised business process management tools to process transactions and carry out analysis.

Demand for best of breed finance applications will continue even in the face of consolidation in the ERP market

People and Place • The growing acceptance of the comparative advantage enjoyed by low cost locations such as India, China and Central Europe will lead to a continued migration of finance activities to these locations. However, the combination of culture and the need for the providers of strategic decision support to work closely with business managers, will see a significant amount of non-transactional finance activity staying on-shore • The current hub and spoke architectures with the corporate centre as the focus of attention, which characterise the finance function today, will gradually be replaced by a more web based peer-to-peer structure in finance. Lines of business and matrix driven structures will see the reporting to CFO's becoming more dotted line and the reporting to SBU directors becoming more solid.

• Finance literate MBAs and commercial managers will present a serious challenge to the artificial monopoly on finance decision-support which finance professionals currently enjoy. Professional public accountant's qualifications will become increasingly irrelevant in the decision support space and will become commoditised in the control and assurance 'space'.

• Finance activities are likely to become increasingly 'footloose' in the same

manner, as manufacturing has moved across the globe driven by comparative advantage, labor arbitrage and tax advantages.

• The role of the CFO will increasingly be split between a chief controller and a chief finance strategist.

Global Single Processes • Process improvement initiatives such as six sigma, EFQM and TQM will increase the pressure to deploy global single processes.

However many firms will lack the change management capability to drive home the implementation of these.

• Lights out zero touch processing will remain elusive and is more likely to emerge from the BPO vendor's pursuit of improved margins than from explicit strategies by individual finance professionals.

Customer Service and Quality of Service • Finance professionals will face increased pressure to embrace service quality and customer service driven approaches to the delivery of finance activities. The drive for shareholder value combined with the growing availability of outsourcing alternatives and the increased focus on world-class benchmarks will force finance professionals to embrace the discipline of the market place.

• Finance professionals will need to develop their relationship management skills as they increasingly find themselves in 'customer' facing roles.

• The narrow focus of traditional SLA's will be replaced by much broader performance measurement of the finance effectiveness, with the focus shifting from efficiency in transaction processing to effectiveness in delivering decision support.

Business Partnering • Finance professionals will face stiff competition in the market to provide business partnering. MBAs, consultants, finance literate marketing managers and traditional strategists will all offer insights and analysis capability.

• Those finance professionals that are uncomfortable with change will find irrelevance even more uncomfortable.

Things you can do tomorrow to deliver shareholder value from Finance.

Plant a flag - Develop a clear strategy and vision for your finance function and tell people

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what that strategy/vision is CFO's need to have a clearly stated strategy for finance in terms of the customers/markets they will serve, the products they will provide and the channels they will use to provide those services.

This vision needs to be communicated simply and clearly to managers across the organisation and to finance staff

keeping the agenda focused on the important issues and not just those that are interesting.

Too many of the finance professionals that I meet say they haven't got time to deal with the important strategic issues. You're paid to deal with the important issues.

Develop a clear understanding of finance 'customers' and get closer to your 'Customers'

In the past too many of the changes that we have implemented have seen the previous approaches remain in the shadows. We need to drop the old when we introduce the new.

Organisational learning may be the order of the day but unlearning the old ways is the first step in moving forward.

As part of the strategy development we need to engage with our 'customers'. We need to move out of the finance department and get closer to our customers, understanding their needs and responding to their analysis requirements.

Make transaction processing a non-event Too many finance professionals are fighting a loosing battle to hold on to transaction processing in the different geographies. This battle is lost and is irrelevant. Country controllers need to embrace their new role as providers of strategic decision-support and get on with it.

Automation, BPO and lights out processing will continue to create the space we need to add value.

Keep the agenda focused on important, rather than urgent or interesting, issues John Barbour a strategy consultant and academic has highlighted the importance of

In changing, drop the redundant things as well as adding the new things

Key an eye on wider strategic changes that may effect your finance transformation Strategic initiatives such as mergers and acquisitions have derailed many finance transformation projects. Be prepared to change the plan and embrace new challenges

About the Author Dr. Martin Dr. Martin Fahy is a senior lecturer in Accounting and Information Systems at National University of Ireland, Galway. He is a fellow of the Institute of Chartered Accountants in Ireland and holds a Ph.D in Business Information Systems from University College Cork. He is a recognised thought leader in the areas of Shared Service/BPO and Finance Transformation. Organisations that he has advised/consulted to include Michelin, Oracle, CODA, HSBC, and Bank of Ireland.

He has written extensively on the areas of Shared Services, ERP systems and emerging issues in Finance. His most recent books include Beyond Governance (published by Wiley 2005 ) ERP Levering the Benefits (a joint venture with CIMA and PWC), Strategic Enterprise Management Systems (also published in US by the AICPA and in Australia) and Shared Services an executive briefing(co-authored with Andrew Kris and published by FT Pearson).

Finance needs to become interesting and fun Increasingly graduate students are attracted to marketing and strategy roles because they perceive them as more interesting and fun. The finance function of the future will only work if it can attract talented people and that means making the work interesting and fun.

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THE BIRDS AND THE BEES : THE EVOLUTIONARY FUTURE OF THE CIO

CIO-asaurus Rex first appeared in the 1970's and roamed the earth, gradually growing in stature and power until reaching its peak of influence at the turn of the century as the millennium bug threatened life as we know it. However, the ecosystem has changed profoundly in the past three years and CIO-asaurus Rex is now an endangered species. The next evolution of the CIO will see the species divide into two separate families.

These families will have very different roles, very different budgets within end-user organisations, and different approaches will be required when working with them or selling to them.

Gary Barnett Research Director Ovum

The extinction of CIO-asaurus Rex The role of CIO is facing extinction as a result of a sea change in the way we view technology. This change in the environment requires this beast to evolve if it is to survive.

So what are the changes that will result in the extinction of the CIO? There are two huge drivers that are pushing the classical CIO towards terminal decline.

The age of Techno-Determinism, during which the erroneous belief that all innovation depends on technology held sway, has now been replaced by Techno-Cynicism.

Commentators like Nicholas Carr (who wrote

argued that IT is now a commodity that is only capable of delivering very short-term competitive advantage.

But Carr's early thesis missed a crucial point. While it is clear that a huge proportion of the IT that we have and use provides no differentiation at all, a small proportion of it can, if properly exploited, provide us with a very significant commercial advantage. We can use IT as a differentiator either by applying it in a better way, or using it more efficiently than our competitors. The secret lies not in giving up on IT innovation as Carr proposes - it lies in figuring out which IT is a commodity and which is capable of delivering competitive advantage.

This lumbering beast has been dimly aware for years that the key to delivering value lies in establishing much closer links to the business and in differentiating between IT as a commodity and IT as a competitive weapon. the seminal article 'IT Doesn't Matter' for the Harvard Business Review in 2003) have called time on the deeply ingrained but false belief that 'Technology = Competitive edge'. In his article, and then his subsequent book, Carr

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The only intelligent response for technology users is to embrace 'TechnoPragmatism', and not to give up on technology as a means of obtaining strategic advantage.

Instead users need to focus on business

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processes and apply technology to those processes in a discriminating manner according to the level of competitive differentiation that they deliver.

The second factor that will lead to the extinction of the CIO is the growing gulf between 'the business' and the IT department.

This is by no means a new issue. Indeed concerns about the ability of IT to properly deliver business requirements (or from the other point of view - concerns about the ability of the business to properly express its requirements) have been with us since the instant the mainframe was first switched on a little over 40 years ago. For four decades we've watched this gap widen and have discussed the challenge without actually achieving any real success in bridging it. Of course we've made countless half-hearted attempts but much like the promises we make every January to go to the gym regularly, early enthusiasm quickly fades as we discover that solving this problem is going to require a lot more effort than we are willing to put in.

These challenges however, are too much for CIO-asaurus Rex. This lumbering beast has been dimly aware for years that the key to delivering value lies in establishing much closer links to the business and in differentiating between IT as a commodity and IT as a competitive weapon. But it has been manifestly unable to revise its technological view of the universe.

Enter evolution Over the next five years the genus Cioasaurus Rex is going to be replaced by two new species; Bees and Birds. Bees will be responsible for the delivery of core IT and will be solely measured on the level of service they deliver and the amount of money they spend to deliver it. Bees will be the unsung heroes of IT, playing a largely unnoticed role (unless things go wrong) in ensuring that the enterprise continues to function. Despite their value and importance, Bees are unlikely to make it to the boardroom - let alone the big corner office with a big brass plaque saying 'CEO' on the door.

Birds, on the other hand, will wear suits not lab coats. Birds will be responsible for business processes, innovation and change management. They will not be measured in terms of Cost, but in terms of Return On Investment. Birds will be allowed to spend money on innovation, provided it results in definite business results. Birds will sit on the

board, and will stand as good a chance as any of getting the top job. Bees will, for the most part, report to Birds.

Another crucial thing to know about Birds is that they don't necessarily need to have a technical background, indeed many of them won't.

Birds can and will come from commercial or supporting functions within the enterprise.

Their talent lies not in understanding the intricacies of technology - but in understanding what it is that the business needs to do in order to differentiate itself and then being able to figure out, working with the Bee, what this means from a technical perspective.

Bees buy technology, Birds buy business outcomes This splitting of the traditional CIO role has an important impact on the way technologies and solutions are going to be bought, and how they should be sold. Bees are not in the business of taking risks, they don't buy 'solutions' they buy technology. Bees have to justify expenditure within a single budget period, and they know the cost of everything.

Bees don't want advice on technology, they just want to buy the technology they've chosen.

When buying technology Bees will be primarily concerned about cost and risk. They need reassurance that the proposition is going to save them money without putting their SLA

Birds, on the other hand, are most concerned with innovation and business process change. Birds don't want to hear about technology, and they are deeply sceptical about the word 'solution' - what they want to know is how the business will benefit.

Birds make excellent programme managers, they can grasp the real issues associated with business change and care as much for the cultural questions as they do the technical.

The Bird creates a challenge for most technology vendors, the shift from a technology sale to one focussed on business outcomes is a big one. Technology companies and service providers have long used the term 'solution' when they've sought to beef up a technology sale. But in many cases they've tried to deliver a business outcome based message simply by throwing some technology into a colourful box. When selling to the bird, vendors have to understand precisely what the goals of the prospect are, and at times they'll have to do this even when the prospect isn't completely clear about his or her goals.

Every organisations needs both types Another way to differentiate between the bee and the bird is to say that bees are concerned with operating technology, while birds are interested in exploiting it. Bees are interested in 'things' and Birds are interested in 'outcomes'.

Another way to differentiate between the bee and the bird is to say that bees are concerned with operating technology, while birds are interested in exploiting it.

Bees are interested in 'things' and Birds are interested in 'outcomes'. based performance targets at risk.

When dealing with Colleagues, Bees will be uncomfortable when talking about 'business strategy' and 'change'. Bees care passionately about the success of the enterprise they support but they do it in very technology-centred terms.

At meetings Bees will be anxious to explain why technology 'X' is superior to technology 'Y'.

Some colleagues may interpret this as an attempt to demonstrate their superior knowledge and expertise, but in most cases it will be because the Lizard genuinely cares about the difference between 'X' and 'Y' - even if it means little to the business.

These two perspectives go hand in hand and smart organisations will ensure that they have both types. Bees will run the systems, be responsible for maintaining them and for procuring elements of the system (or components of it) on a simple cost/quality basis. They will have job titles like 'Head of service delivery' or 'Head of IT operations'.

Birds will be the primary interface between the business and technology, they will have job titles like 'Head of Business Process Change'.

They will employ Bees to support them from a technology perspective, and they will spend the majority of their time embedded within the

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business - thinking about it, and proposing improvements to it.

Just as both roles are essential they should both be valued equally. The fact that the Bee isn't likely to be a natural CEO should not undervalue the importance of the work he or she does. The Bee keeps the organisation running and should be well rewarded for doing so.

Successfully exploiting the relationship between the birds and the bees depends on knowing what should be stable, and what needs to change The difference in the focus and responsibilities of Birds and Bees is vested in differentiation. Bees look after processes and technologies that may be necessary but which don't help the organisation to differentiate except in terms of how much they cost. Birds, on the other hand, will look after the processes and applications that do help the organisation to differentiate competitively.

If you take the Retail Banking sector as an example; a huge proportion of the processes that retail banks need to support are completely non-differentiating except in terms of how much they cost. Almost every 'core activity' of a retail bank be it cheque processing, account management, electronic payment or tax accounting is nondifferentiating in that every bank has to do the same thing in more or less the same way.

Indeed, in many cases they have to do these things in the same way because banking regulations insist that they do so. Banks do not compete on the basis of the way they process cheques but their profits are affected by the amount of money the bank spends processing those cheques. Banks compete on the basis of the quality and breadth of the products that they sell and the way in which they manage the relationships that they have with their customers. In this scenario the Bee will be tasked with delivering those core processes either internally or (increasingly) by managing outsourcing agreements with third parties.

Birds on the other hand will be responsible for delivering the changes in systems and

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business processes that are necessary to enable the bank to deliver the right products to the right customers.

So the first step in establishing 'who does what' is to decide which activities are 'Utility' and which are 'Differentiating'. A key test is to ask 'would we ever use this process in our marketing?' - Retail banks don't advertise the fact that they're great at processing cheques they advertise the fact that they have great customer service.

Having established which activities are Utility versus those that are Differentiating the relative responsibilities of the Birds and the Bees become clear. Give the Bee control of all of the Utility activities, along with a mandate to stabilise them and lower their cost. Give the Bird control over the delivery of differentiating processes along with a mandate that is expressed in business terms - Wallet share, incremental revenue, profit.

The ability to distinguish between the processes that you 'have to have' but which don't help you compete versus the processes that make you different in the market place has long been seen as a key attribute of successful businesses. The evolution of the role of CIO takes us a step closer to formalising this process and the organisations that successfully draw a line between the Birds and the Bees will be the long-term winners.

For existing CIOs and those who aspire to one of the roles that this evolution creates, there is a dilemma; which path should an aspiring CIO choose? For most it isn't actually a question of choice, some CIOs have a natural affinity with the business while others have a great handle on technology. To a great extent natural selection will play a role, Birdlike CIOs will build a team of business analysts and bees, while Bee-like CIOs will find themselves reporting to the COO or head of business process change. The crucial thing for technically oriented CIOs is that the role of Bee doesn't represent failure, and it might be preferable to taking on the task of dealing with the business and driving business change.

About the Author Gary Barnett Gary Barnett a Research Director, with expertise in on-demand technology, Open Source, Intellectual Property, Application Development and Middleware.

Gary directs Ovum's research into open source, ondemand technology, focussing on the strategic issues surrounding technology selection, best practice, and strategy. He has written and contributed to many ovum reports, including; UK Financial Services Sector: The Market for Software and IT Services, Linux:Into the mainstream, Application Servers: Creating the Web-enabled Enterprise and Ovum Evaluates: Enterprise Middleware.

Gary has worked on numerous projects for Ovum Consulting providing advice to end-user organisations in the UK, Europe and United States on technology selection and strategy.

He has advised technology vendors ranging from the leading IT companies to start-ups on topics such as product strategy, competitive analysis and business planning.

Examples include providing advice to: • A technology start-up on business planning and pricing strategy • Clients in the finance, manufacturing and government sectors on infrastructure and technology strategy • Vendors on product strategy, competitive differentiation and product evaluation.

Prior to joining Ovum Gary worked as a software engineer in the UK and France, developing and designing mainframe and client-server applications.

Gary is frequently quoted in the worldwide trade press and writes columns for several IT related publications. He is a well-known speaker at conferences, topics as varied as 'The future of the CIO', 'IT Doesn't matter?' and Outsourcing.

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A GUIDE TO OUTSOURCING READINESS

Over my seven years of tracking the BPO market as an analyst and a service provider, I have found that the question of outsourcing readiness is more complex than it may seem. What characteristics indicate that a company or a set of companies are ready to outsource? Are there any correlations between a company's line of business, its geographical origin, its current experience with sub-contracting, its organisational structure, etc. and its readiness for outsourcing? If there are correlations, what are the factors that are most likely to influence the decision to outsource?

Rebecca Scholl Director of Market Strategy ACS Europe

The outsourcing market is generally independent of economic cycles, growing in good times and in bad times. Some of the earliest and largest BPO contracts were signed in 1999, in a high growth economy, whereas many of the recent contracts were signed since the recession, so it would be erroneous to think that BPO adoption will disappear if the economy and growth pick up. The nature of the contracts will change if the economy does pick up - we will see more deals focused on innovation and technology adoption rather than simple cost cutting initiatives. However I would consider that economic growth at a macroeconomic level does not influence outsourcing adoption in any significant way.

This article examines some of the key factors that have an impact on the outsourcing decision and analyzes the factors that are most likely to stimulate a positive outsourcing experience. For users who have been 'told' by their top management to 'do a BPO deal', it is useful to compare your own organisation with others with similar backgrounds in order to identify your readiness to outsource. This guideline is by no means meant to replace a detailed analysis of your company's sourcing strategy. It is just a brief checklist for organisations that want to identify whether outsourcing 'makes sense' for them.

The factors affecting outsourcing readiness

can be grouped in two main categories environment (macroeconomic factors) and enterprise (microeconomic factors). The sets of characteristics are outlined in table 1.

Environment factors

Enterprise factors

Competition Deregulation Geography Provider landscape Benchmarks

Size IT outsourcing Governance Shared Services Technology Champion

Table 1. Outsourcing Readiness Characteristics

Environment Factors Business dynamics vary from industry to industry - some are more regulated than others, some are more sensitive to time to market, some are facing more competitive pressure than others.

Environment factors are industry characteristic - that affect not only your own organisation but multiple companies in the same industry. The recent history of BPO in Europe has shown that it generally takes one landmark deal per industry to launch a wave of outsourcing in that sector, i.e. one large BPO contract signed by a 'market setter' that will then lead other organisations to follow.

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Typically these landmark deals have an impact beyond their industry - especially for horizontal functions such as Human Resources or Finance & Accounting - but the industry characteristics have a strong influence on the readiness to outsource.

Competition Historically, industries that are facing tough competition on price and technology are better candidates for outsourcing than industries that are less technology intensive and less competitive. For instance, competition in the telecom industry is forcing companies to operate a much leaner overhead so they can be more flexible. The search for flexibility, time to market and competitiveness often leads these industries to outsourcing. On the contrary, the education sector and the utilities industries have generally not been strong adopters of outsourcing because of the local nature and the fragmentation of their business - although that is changing through the privatisation of these sectors.

Deregulation Deregulation is another factor that has a strong impact on the decision to outsource.

Industries that are highly regulated with little new competition and low opportunity to “virtualise� business practices are usually not strong adopters of outsourcing. Privatisation and deregulation often lead to new business models and the dis-aggregration of vertical institutions. For instance, deregulation in the financial services industry is introducing new competitors for financial institutions (insurance companies entering the banking sector and vice versa) - who in turn have to react quickly with competitive pricing.

Deregulation was one of the primary factors leading to outsourcing in the UK.

Geography The country environment and attitude towards outsourcing has a strong impact on a company's readiness to outsource. In general, countries with a history of strong labor regulations, powerful unions and a large public sector have been less open to outsource then countries with flexible labor laws and limited unionisation. That is why outsourcing is more developed in the UK, the Netherlands and Spain than it is in France and in Germany.

However this picture only describes part of the reality. Nowadays, many organisations headquartered in strongly regulated countries

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but with operations in multiple countries are looking for options to outsource in order to gain flexibility in their international operations. For instance, large French and German manufacturers are outsourcing business administration services for their UK, US or Asia/Pac divisions. Interestingly, US and Japanese corporations with international operations have a tendency to develop pilotoutsourcing projects outside their home country first. That is why we are now seeing a big wave of European BPO projects emanating from US companies.

Enterprise Factors Even within the same industry, organisations have very different cultures, business models, governance structures, and so on. In addition to environmental, macroeconomic factors, decision-makers must examine the characteristics that are specific to their organisation to see if they are ready for outsourcing. These are the Enterprise Factors.

Size

An industry's readiness to outsource will also depend on the maturity of the provider landscape in the process that is considered for outsourcing. Historically, the BPO market has grown as a supply-driven market, and there is little outsourcing momentum in an industry or a process until the provider landscape is populated with at least three or four providers. End users like to have a choice, and if they do not see several providers active in the market they are wary that the market is perhaps too immature.

Today in the European market the provider landscape for HR and F&A services is just about reaching a maturity phase - and that is leading many organisations to look at outsourcing parts or the entirety of their business administration services. The growth in interest for F&A and HR outsourcing has grown significantly over the past 12 months - corresponding with the growth in maturity of outsourcing providers.

The BPO market emerged within large organisations. In order for BPO to be financially worthwhile in the early days, there had to be a significant scale to the relationship (scale can be measured in terms of number of employees for Human Resources or number of transactions for F&A). Especially in the context of offshore outsourcing, the notion of scale becomes increasingly important. Typically, an offshore initiative will not provide the appropriate return unless it involves the creation of several hundred positions in the offshore country.

However, small and mid-sized organisations can benefit from BPO services as well - they just need to focus more on the technology components of the contract (for instance, through a business process utility) and less on labor arbitrage. So companies of all sizes can benefit from BPO - but the emphasis will be different for different sized organisations. All organisations need to have a clear idea of the scale of operations they are considering to outsource before embarking on a vendor selection.

Benchmarks

IT Outsourcing

Companies will only have a good outsourcing contract if they can measure the input and outcomes of the process. This has been true for IT outsourcing for many years, and is beginning to impact the BPO market as well. The more a process is measured across an industry, the more opportunities there will be for outsourcing this process. On the contrary, lack of process benchmarks often lead to inadequate outsourcing relationships that rely solely on partial due diligence. Today, industry benchmarks exist for F&A and HR processes in Europe - although not with the same level of detail as for IT or customer care.

Over the next year or so, we can expect to see more availability of detailed process benchmarks for large European organisations - leading to stronger growth and better contracts in BPO.

A number of outsourcing providers believe that there is a direct link between a company's IT outsourcing experience and its appetite for BPO. As it turns out, this is only partially true.

Companies with experience in outsourcing at any level are generally much more open to BPO - this does not have to be through ITO, it could be simply through real estate, facilities or cafeteria services outsourcing.

It is also true that companies with ITO experience have gained insights into sourcing strategy, vendor evaluation, contract negotiations and contract management.

However research conducted by Gartner and other research firms show that there is no direct link between ITO contracts and BPO contracts, i.e. companies outsourcing IT infrastructure are no more likely to do a BPO contract than companies who do not

Provider landscape

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outsource their IT infrastructure. In addition, they will not necessarily consider their ITO provider as a logical provider for BPO. However, there seems to be a direct link between applications management (a subsection of ITO) and BPO. I.e. companies who outsource applications management are more likely to outsource a business administration process. This is most likely because business applications are the foundation for business administration processes and there are an increasing number of BPO contracts that also include applications management as part of the deal.

Governance Another factor affecting the readiness to outsource is the company's level of centralisation in their business governance.

On average, companies with a strong central governing power are more likely to do a BPO contract than companies that are highly decentralised or even federated. Companies that are highly decentralised require buy-in from multiple business units before moving forward and find it challenging to interact with a centralised shared service entity.

BPO sales cycles are already quite long (12 to 18 months), especially in Europe where country managers need to provide their input into the selection - so if in addition to the country and process complexity you add multiple business unit decision makers, then it is likely that the BPO contract will progress very slowly. In that instance, companies prefer to sign smaller scope BPO contracts and grow the scope of processes over time.

in the European market today. Others will prefer serving their clients from their existing shared service. The European regional shared services tend to be located within the EU in countries such as Ireland, Spain, the Czech Republic, Hungary or Poland. Overall, the question of investing in creating a shared service center and the question of pursuing a BPO relationship are very closely linked.

Technology Outsourcing readiness is also influenced by a company's approach to technology innovation and their current investment in technology. On the one hand, companies who have a very strong focus on innovation and want to control their investment in innovation will have a tendency to outsource the less technology-intensive components of their process (out-tasking rather than outsourcing).

Others, who want access to best-in-class technology without investing in large application roll-outs will look at BPO as a way to gain access to process and capabilities without this upfront investment.

Thus, BPO decisions and application investment decisions are very closely linked.

Overall in Europe, most organisations looking into BPO have already made a first stage of investment in ERP applications and are hoping that the BPO contract will help them gain more functionality without additional technology investments. The beauty of BPO is that companies sign up for business service levels, not technical service levels. But the technology solution is still a key component to the delivery of a successful BPO deal and must be assessed carefully.

Shared Services Today many large European companies have launched shared services projects for F&A and HR services, consisting in centralising the business administration function in one location serving multiple business units. The location can be a national location (i.e. a French shared service center serving France) or a regional one (i.e. a Spanish shared service center serving all of Europe). These projects were initiated in the mid 1990s and continue actively to this date.

On average, companies who have created a shared service center are more likely to investigate BPO options, not necessarily for the function that they put in the shared service center originally - but perhaps for an additional function. Several BPO providers are quite eager to acquire shared service centers

and that the deal will make progress, despite the inevitable delays and changes in scope and requirements. Most organisations can identify fairly quickly whether they have a champion on board - and this is usually a criterion for success. The danger lies in the fact that champions are individuals and therefore subject to change, so if champions leave the BPO project too early, the contract might be in jeopardy. That is why it is recommended to have a multi-functional sourcing team evaluating the sourcing strategy and establish the governance of the contract - not to rely on a single champion.

The above analysis only scratches the surface of what constitutes a very complex decision process in BPO. Organisations that have all the characteristics mentioned in Table 1 are more likely than others to enter a solid BPO relationship - but it still will take a lot of work and effort to build a successful relationship. This work and effort lies on the shoulders of everyone in the organisation and also on the provider team.

About the Author 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.

Champion Ultimately, a very tactical element to outsourcing readiness - but a very important one - is the existence of a champion within the organisation who believes in outsourcing.

With very few exceptions, all the deals that have been signed in the BPO market up until now have had a champion behind them, whether this champion is the CFO, the sourcing manager, the CEO or the VP of HR. Usually the champion is a senior decisionmaker, and usually he or she belongs to the finance organisation. Very often, the champion joins the organisation with experience of BPO in his or her previous company. The champion is a person who will ensure that the organisation will stay focused on its objectives during the sourcing strategy

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 CrossRoads (2002), BPO Validated: Verticalization and Aggregation Accelerate (2003).

Prior to Gartner, Rebecca was a senior consultant at BIPE in France, specializing 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.

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AIMING HIGH IN FINANCIAL SERVICES OUTSOURCING

The financial services sector has been involved in substantial outsourcing over the past decade, but it is only in the last 12 months that there has been a shift among the big players in what is viewed as 'outsourceable'. Call centres, data entry and IT were the bedrock for the growth of India's outsourcing industry, but having reaped the rewards of the initial offshoring many companies - Deutsche Bank (DB) included - are now looking to apply this further up the value chain. Some of the lessons DB has learned are common to all outsourcing projects, but others, as outlined below, are more pertinent to outsourcing knowledgebased services

Neil Smith Chief Operating Officer Risk Management, Deutsche Bank

Planning Selecting the right partner for any outsourcing project is paramount and the amount of effort required increases exponentially the further up the value chain you go. Vendor partners are in the business of selling, and in some cases there is a tendency to oversell, thus verifying all the facts is essential - and this is even more important when you are entering uncharted territory.

Selection of a vendor should be based on a variety of criteria - the cheapest not always being the best or most viable - and the more insight that you can gain into their ability to deliver, as opposed to their promise to deliver, at this vital stage the better. How do you do this? Run pilots, ask for samples, talk to existing clients, and above all, invest time. You can't afford to rush the due diligence and vendor selection phase.

The tasks and processes to be outsourced must de documented and understood in detail.

You cannot outsource something that you don't fully understand nor will you be able to pass that knowledge to a third party without detailed, understandable documentation. It may be painful to produce, but there can be no shortcuts otherwise the project will fail. An additional benefit of this work is that if

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regulatory authorisation is required, the transparency created by such detailed documentation will prove crucial when submitting a proposal for approval. You need to be able to demonstrate to the regulators that you've thought of all the potential risks and implications, and that the implementation is to be carried out in a controlled manner.

Another key to the ultimate success of the outsourcing project is how you structure the team that manages the transition. It is crucial to have a strong steering committee comprised of senior management, who have both a vested interest in the project's success, and have sufficient time to get fully involved.

Their mandate is to set the strategic direction and to sufficiently understand the detail so that

You can't afford to rush the due diligence and vendor selection phase. they can assess the ramifications their decisions will have on project processes. Too many projects fail because the steering committee set up to manage the transition

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meets once a quarter to ratify the project plan and make a few high level decisions. This level of involvement is insufficient, but it is equally important that the steering committee should not attempt to micro-manage the outsourcing, as this needs to be done by another critical component, the project manager. The most important thing about the Project Manager role is not that they have had prior experience of moving activities offshore, but that they have expertise of the function being outsourced at a senior level. Junior staff are also invaluable in the project team to provide a grass roots perspective of change implications.

Communication plays a big role in any outsourcing project from getting your objectives across to both the vendor and staff, to ensuring that both parties are working together effectively. Internally, you must ensure that management's vision for the project is communicated as widely and as clearly as possible. Outsourcing will involve redundancies and therefore is a difficult process both for the staff that remains on the payroll and for those that will lose their jobs. It is critical to the long-term success of the project that you motivate the retained staff, which will be part of your company's longterm future. This can only be done by ensuring buy-in, by being upfront about the drivers and benefits that will accrue from successful delivery of the outsourcing project. Likewise on the vendor side, you need to sell the broader objectives to senior management who need to communicate this down to the lowest levels and ensure they are committed not just to a quick profit but the long-term relationship between the two organisations.

One way of ensuring that vendors are committed is to get them to invest - the more they've got at stake the greater the loyalty to the project's success. This investment could come in many forms, such as new technology or free service for an initial period. An affinity between the vendor and client can assist in creating a one-team culture and can be established by involving the vendor in communications and events, as well as branding the vendor offices to create a collegial working environment that feels like everyone is on the same payroll and hence share a common goal.

Integration Integrating the vendor 'input' into your day-to-day business is perhaps the most precarious stage of any outsourcing project

and a fully operational pilot program is essential, running in parallel with existing onshore workflow. By the commencement of the pilot phase, the vendor recruits should already have gone through an intensive training program, led by your experts, as part of the knowledge transfer process. Training should also encompass an appreciation on both sides that there are cultural and working differences, which may need to be overcome as part of the relationship. These issues should be ironed out in the pilot stage.

Creation of an onshore service team to provide the client interface and a quality assurance and review function is key. This team is imperative to the success of the outsourcing and should be seen as a long-term constituent of the process, not as a short-term intermediary while the vendor staff get up to speed. This team also provides security and control for your knowledge base, so that all of your expertise in a particular area won't walk out of the door if the vendor relationship is unsuccessful.

Following a successful pilot, it is imperative that you move quickly to effect the outsourcing. Critically this involves ensuring the designated onshore heads are terminated or redeployed. This may sound obvious, but in practice staff reductions and cost savings identified in the conceptual phase as part of the initial approval are not always delivered to the full extent. Therefore make sure you have detailed headcount and cost reduction plan documents prepared, and review these to ensure all the projected cuts have been made and all savings have been realised.

In addition to cost savings you must ensure that the output from the vendor meets your productivity requirements by ensuring the Service Level Agreements are properly framed.

A clearly defined model is essential to ensure the project is sustainable over the long term and so that there is clear ownership of the tasks involved. There are several models that can be used, and much will be dependent on your particular venture. Beware of unit pricing; on paper, this would seem to provide an incentive for productivity, but there is a danger that companies are content to have a steady revenue stream and as long as the cash continues to flow in, do not see any reason to raise performance.

Don't be tempted to leave these agreements and contracts to the lawyers. After the considerable effort that has been put into getting to this stage you need to follow through with the deal and not relinquish

control to another department within your company to close the agreement. There is a natural tendency on both sides to drive a hard bargain, but unless the deal provides a winwin solution for both parties the relationship will have no long-term future. Get a thorough understanding of what you're signing up to, don't leave any room for misunderstandings or misrepresentations, and try to build a safety net into the deal in case things don't go as planned. For example, by including a clause that allows you to hire a percentage of the vendor's staff working on the outsourcing project. Such a clause would provide both an incentive for the vendor's staff and a training ground from which you can recruit strong performers, helping you to get the best out the outsourcing partnership. Equally, if there are good staff that is being badly managed, it affords you the opportunity to step in and take action, either by hiring them directly or by moving them to an alternative vendor.

Long term Once you have executed the plan and completed the integration, the benefits of outsourcing should become increasingly evident. But this should not be a signal to either your staff or the vendor to relax.

Maximising the partnership that you have built requires a continual investment of time.

Maintaining existing relationships requires effort and as new staff are recruited by the vendor, as a result of natural attrition, new bonds need to be formed.

It is also important that the targets you initially set don't become set in stone. Targets need to be revisited and reviewed on a regular basis to see if productivity can be improved and cost savings increased.

In conclusion, there are some golden rules to follow in achieving successful outsourcing of knowledge-based services. Firstly, don't underestimate the value of preparation, documentation and communication. Secondly, achieving the required return is heavily dependent on your level of investment in terms of time and money. Obviously, cost savings will always form part of any outsourcing plan, but don't let this be the only factor in moving business offshore. Finally, continue to look at all available opportunities and don't be afraid to push the boundaries of outsourcing to gain a competitive advantage.

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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 European Headquarters: IBM EMEA HQ, Tour Descartes, 2 av. Gambetta, 92066 Paris La Défense Cedex, France, Tel +33 1 49 05 70 00 Business Contact: Trevor Clifton – EMEA Marketing Manager, Strategic Outsourcing E-mail: tclifton@uk.ibm.com Tel: +44 (0)1256 341174

Sam Palmisano – Chief Executive Officer John Joyce – Senior Vice President and Group Executive, Global Services Joe Benaroya – General Manager, Strategic Outsourcing EMEA

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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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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FINANCE & ACCOUNTING: THE COMING WAVE OF CONSORTIA BUYING

Joe Vales Co-founder, Reference Standards Board and Senior Partner, Vales Consulting Group

Rich Tinervin Founder and Managing Partner of Tinervin Advisors

Gil Parker Director, Vales Consulting Group

INTRODUCTION Finance & Accounting (F&A) outsourcing will grow much faster over the next five years than the current predictions indicate, as a greater number of Global 1000 corporations outsource more of their F&A processes to the leading service providers that can deliver 15% to 20% cost savings as well as make significant process and service level improvements. We see accelerated F&A outsourcing growth based on our strategic advisory services and sales proposal work for service providers that are bidding on global mega-contracts each valued in the hundreds of millions, or even billions, of dollars. The number of large, high-value F&A contract awards continues to increase year over year as companies outsource more enterprisewide processes, and even entire shared services centres, to gain competitive advantage.

Moreover, the consortia buying of F&A outsourcing services is about to explode worldwide, as many of these multinationals team up with industry rivals to form buying consortia with the combined purchasing power to negotiate cost savings of as much as 30% to 40% annually. These savings are made possible by the greater economies of scale, processing efficiencies, standardisation, and advanced technologies of today's on-demand computing and business process utilities that can handle high-volume F&A transaction processing at extremely low unit costs while also meeting high-quality performance and regulatory requirements.

This is the third article on the consortia buying of outsourcing services in this CxO Research business transformation series,

based on original research that we have conducted on global outsourcing trends that are reshaping the business and management world. The research findings of these articles are summarized below.

Business Process Outsourcing Trends BPO Consortia. The first article, entitled 'Business Process Outsourcing: The Coming Wave of Consortia Buying,' was based on our research during the first half of 2004. The article traces the evolution of consortia buying from the 1950s when member-based buying groups and cooperatives were organised to obtain volume discounts on the price of goods and services purchased - to the emergence of corporate shared services centres in the 1980s which are a form of consortia buying within a company where business units and users draw on centre resources - to the rapid growth of business process outsourcing in the 1990s and mega-deal contracts each worth billions of dollars.

Given this evolution, we then examined a number of industry consortia, joint ventures, and outsourcing contracts in North America and Europe, including a financial services technology consortia, securities/brokerage consortia, banking joint venture, electronic funds transfer network, insurance processing association, airline consortia, and electric utilities outsourcing. These programmes illustrate the various ways that corporate buyers and service providers are coming together to develop innovative business models and technical solutions that will reshape the economics and business practices of entire industries.

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The key success factor for consortia buying is the basic value proposition: that is, each of the buyers must realise significant and measurable economic savings and other strategic benefits from the consortia. Buyers must share common outsourcing objectives and goals, and agree completely on such critical matters as organisation, governance, ownership, profit sharing, and contracting policies and procedures. Buyers must be willing to contribute their proprietary business, industry, and technical expertise to ensure the success of the consortia.

Also, buyers will have to give up some legacy systems in favor of using standardised processes and technology platforms to achieve economies of scale and savings.

Vertical Industry Trends Asset Management to Lead. As an extension of the first BPO article, we conducted further research in the second half of 2004, to identify which industries have the greatest potential for both business process outsourcing and consortia buying. Among the dozen major industries we examined, including manufacturing, high-technology, energy, retailing, healthcare, telecom, and utilities, we conclude that the asset management industry with trillions of dollars invested is ready for much greater outsourcing activity and consortia buying than other industries.

In our second article “Asset Management: The Coming Wave of Consortia Buying,” we present our findings and forecasts for outsourcing and consortia buying for each of the following types of asset managers: investment companies, global bank custody, insurance companies, employee benefit plans, wealth management, and alternative investments.

Asset management firms are in fierce competition with one another to attract institutional and retail customer accounts - and many are still recovering from the stock market crash of 2000-2002 that wiped out over seven trillion dollars of market value. Large and small firms alike are finding that the costs of managing their operations and service delivery are rising much faster than their revenue base, with profit margins steadily declining. These firms face serious challenges to their traditional business models, and will need to make organisational and operational changes if they are to survive as viable players and achieve their financial goals.

Many firms that we work with are now exploring new kinds of outsourcing and consortia buying arrangements that will reduce their overheads and contribute to bottom-line growth.

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Horizontal Process Trends Finance & Accounting to Lead. As another extension of the first BPO article, we conducted further research in the first half of 2005, to identify which business processes have the greatest potential for both outsourcing and consortia buying. We examined finance/accounting, human resources, procurement, supply chain management, customer relationship management, and corporate real estate - all of which processes are being outsourced worldwide today.

We conclude that F&A outsourcing lends itself best to consortia buying because it involves high-volume transaction processing that can be standardised on common platforms and companies will readily come together to take advantage of today's new computing and business process utilities to achieve much greater savings than they could outsourcing on their own. The other business processes all involve more labour content, customised services, specialised activities, and people interaction where the potential for consortia savings would be limited.

We now review the early stages of F&A consortia buying and profile several large contracts, outline the principal drivers of F&A consortia buying, and make some bold predictions about the future of F&A consortia buying.

separate accounting centres around the world into just 4 regional centres with 50% lower costs. F&A shared services centres are a good example of internal consortia buying where business units and regions draw on the resources of the centres for economies of scale, processing efficiencies, and reduced costs, the very same reasons that drive external consortia buying. F&A shared services centres are ripe for outsourcing: a few have been outsourced in their entirety; some have been acquired by outsourcing service providers; and the majority in operation today actively outsource and offshore certain F&A processes where it makes good business sense to do so.

The F&A outsourcing programmes profiled below illustrate the various ways that buyers and service providers are coming together throughout the world - from multi-client shared services centres to multi-buyer consortia contracts to industry-wide networks and solutions. These are but the first steps of the coming wave of consortia buying which will inevitably evolve into new kinds of buyersupplier relationships and F&A outsourcing contracts in the future.

Multi-Client Shared Services Centres •

F&A CONSORTIA BUYING EARLY STAGES During the 1990s, several hundred US and European multinationals established F&A shared services centres for the first time, in a wave of corporate cost-cutting and reengineering for global efficiency. Dow Chemical, for example, consolidated 400

During the 1990s, several hundred US and European multinationals established F&A shared services centres for the first time, in a wave of corporate cost-cutting and re-engineering for global efficiency.

•

F&A for UK Energy. Accenture (then Andersen Consulting) pioneered F&A outsourcing for BP (British Petroleum) by establishing its multi-client energy outsourcing centre in Aberdeen, Scotland in 1991. Since then, the centre has grown to 450 professionals in 2005 serving BP and other North Sea oil/gas companies including Britannia Operator Ltd, Conoco UK, Lasmo, Talisman Energy, and TotalFinaElf Exploration.

F&A for North American Energy. IBM Global Services manages the world's largest F&A outsourcing contract for BP in North America, a $1.5 billion, 10-year contract which it acquired from PricewaterhouseCoopers in 2002 when the accounting firm sold its BPO business for auditor independence reasons. IBM manages 1,200 former BP employees at its services centres in Tulsa, Houston, and Chicago; 350 employees in Calgary, Alberta, Canada; and 200 employees in Rotterdam, Netherlands which supports F&A operations throughout Europe. In 2004, IBM expanded its BP centres to accommodate two new F&A outsourcing contracts with Tulsa-based Williams Companies, a natural

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gas producer, and Houston-based Marathon Oil, an upstream producer of crude oil and natural gas.

Multi-Buyer Consortia Contracts •

•

•

•

F&A for UK Banking. The UK's leading retail banks Barclays and Lloyds TSB formed a joint venture with Unisys in 2000, with HSBC joining the consortia in 2001.

Intelligent Processing Solutions Ltd (IPSL) is a majority-owned (51%) Unisys subsidiary with minority interests (49%) held by the three original member banks. The IPSL consortia manages check clearing and remittance processing for the three banks, handling over 70% of UK check volume, and providing cost savings through facilities consolidation, economies of scale, processing efficiencies, and advanced technologies. IPSL also serves other banks and financial institutions as customers, including Halifax Bank of Scotland, American Express, GE Capital, and others.

F&A for UK Insurance. Lloyds of London and the International Underwriting Association (IUA) of 200 member companies signed a £400 million, multiyear consortia outsourcing contract in 2000 with Xchanging to provide a unified and centralised insurance processing and settlement service. The three parties formed an operating company called Xchanging Ins-Sure Services (XIS), which is 50% owned by Xchanging, 25% by Lloyds, and 25% by the IUA. With 500 employees, the company handles over 8 million electronic transactions and 50,000 insurance claims a year; it settles over £50 billion of insurance premiums/claims annually between over 200 companies in a global B2B customer network.

F&A for Canadian Banks. The Bank of Montreal, Royal Bank of Canada, and Toronto Dominion Bank formed a cosourcing venture called Symcor Inc. in 1996. Based in Toronto, this consortia has 4,000 employees in six cities who perform check clearing and document processing for the three shareholder banks. Also, Intria Items is a joint venture between the Canadian Imperial Bank of Commerce (CIBC) and US-based Fiserv to provide check and lockbox processing for CIBC and a new client, National Bank of Canada, won in 2004.

F&A for Australian Banks. Three of Australia's largest banks, Commonwealth

Bank of Australia, National Australia Bank, and Westpac Banking Corp., formed a consortia called Vipro Pty Ltd in 2005 which signed a $460 million, 12-year outsourcing agreement with Fiserv to provide check processing and image archive services. Fiserv is reorganising and consolidating the banks' existing F&A processing facilities into a business process utility with common operating centres and standardised technology platforms in each Australian state.

•

WHAT IS DRIVING F&A CONSORTIA BUYING? The evolution of buying groups and cooperatives, shared services centres, and business process outsourcing has given companies the lower cost structures they enjoy today. But our research indicates that a new set of economic, technology, and market forces will combine to drive F&A consortia buying to even greater savings in the coming years.

Major forces at work: • Globalisation Impact. The relentless globalisation of industries and markets, together with the commoditisation of so many products and services, are forcing companies to find new ways to grow their revenues and profits while also reducing their cost structures. High-cost industrial countries are competing more than ever with low-cost developing countries; and in every industry, high-cost companies are under attack by low-cost competitors.

Companies need to reduce their fixed costs, capital investments, and operating expenses - and one sure way to lighten up on assets is to outsource non-core business processes to external service providers.

Another way is to form consortia of likeminded buyers to leverage their combined purchasing power to negotiate even greater cost savings.

• CFO Focus on Strategy. CFOs drive topmanagement's strategic decisions on whether or not the company should outsource certain business processes. They know the economics of outsourcing, as many spend time reviewing vendor proposals for new outsourcing initiatives and overseeing current outsourcing programmes. When it comes to F&A outsourcing, CFOs know that transaction processing accounts for most of the department budget and readily lends itself

•

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to outsourcing with substantial savings. As a general rule, if the F&A department budget runs more than 2.0% of company revenues, certain processes should be outsourced to cut costs to less than 1.0% of revenues, a best practice level for most industries. For a $5 billion company, this 1% difference would add $50 million of profit straight to the bottom-line. And consortia buying would enhance earnings per share even more.

Vertical Industry Solutions. In different industries, companies are coming together to develop common industry standards, systems, and protocols for their mutual benefit instead of investing in more costly one-company solutions. Commercial and retail banks are forming consortia to clear checks; securities/brokerage firms are forming consortia to clear and settle trading in stocks, bonds, and other financial instruments; and manufacturers are forming consortia and trading exchanges to procure raw materials. Likewise, we believe CFOs will form consortia to buy common and/or specialised F&A services in their industries. While many F&A processes are similar, there are many important differences among industries that require industry-specific solutions where consortia buying would bring significant economic advantages to the participating companies.

Power of Standardisation. Companies are moving toward more standardisation of their ERP systems, and know the importance of using best-in-class business processes and common state-of-the-art technology platforms. Likewise, the economic benefits of F&A outsourcing are based on services providers using common processes and platforms, especially since most F&A outsourcing involves highvolume, policy-driven, rules-based transaction processing which lends itself so well to standardisation. This provides multiple clients with the economies of scale and processing efficiencies that no one client could achieve on its own. It also drives F&A item transaction processing costs way down for all consortia members; and as more clients join the consortia, the more they all benefit from the ever-lower unit costs among the larger member group.

Supplier Consolidation. The leading F&A outsourcing service providers are acquiring specialty suppliers to build out their portfolio of services and gain immediate

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entry into large prestigious accounts. IBM Global Services, for example, acquired Equitant for its “Order-to-Cash” business with such clients as Cisco Systems, Lucent Technologies, and Microsoft; it acquired Liberty Insurance Services to expand into life insurance and annuity processing; and it acquired Daksh eServices to gain a 6,000strong back-office operation in India. As other F&A suppliers continue to make their strategic acquisitions, consortia buying groups will have a greater choice of highly qualified service providers to meet their many needs.

Business Process Utility. The leading ITO and BPO services providers are building their infrastructures to serve as on-demand computing utilities or business process utilities (BPU) for their clients. These providers have the global data centres, hardware, software, storage, and networks to manage the high-volume transaction processing needs of major companies. They also have the people, resources, and capacity already in place to handle largescale F&A outsourcing programmes for consortia buyers. Under this BPU model, clients pay for only the business and technology resources they actually use; the model offers consortia buyers an entirely new economic value proposition for outsourcing F&A processes.

Rise of Co-opetition. Competitors are finding it more advantageous to cooperate with one another behind the scenes in sharing their back-office resources and investing in common business solutions.

They know that investing in their backoffice operations is not core to the business and gives no real competitive advantage in the marketplace. Indeed, industry leaders we work with say they can grow their business much faster by collaborating with other firms, rather than spending on duplicative facilities and capabilities. This kind of co-opetition gives companies more time and money to invest in building the core business instead of the back-office.

As a result of these forces working together, we estimate that F&A consortia buying members can achieve savings of as much as 30% to 40% of their baseline operating costs, versus savings of only 15% to 20% for individual companies outsourcing on their own.

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OUR GLOBAL FORECAST The coming wave of F&A consortia buying that we think will explode in the next few years will be driven by the forces outlined above as well as new governmental regulations and emerging market developments. Based on our research, here are several predictions to prepare for: • Risk Management. While most F&A outsourcing focuses on transaction processing, we think it will now expand into the highly visible and critical risk management area as well. Public companies need to be in full compliance with the Sarbanes-Oxley Act of 2002, which requires management to assess and document their internal control systems for financial reporting. The AICPA has published SAS-70 standards for auditing those controls within the companies and/or within the outsourcing service providers they use. So when companies form F&A buying consortia, they have an opportunity to develop world-class solutions and share best practices which will result in more effective governance and risk management. Also, the consortia can ensure regulatory compliance at reduced costs by outsourcing F&A processes to service providers whose internal controls are already certified as compliant, which will reduce each company's compliance costs even further.

• Financial Services. Consortia buying of F&A services will take centre stage in the financial services industry, and will account for an ever increasing share of the global BPO market. The players will include global banks, trust companies, securities firms, investment firms, mutual funds, insurance companies, custodial agents, and other asset managers. All want to reduce the ever-rising costs of backoffice customer servicing, recordkeeping, accounting, reporting, and administration and many firms are working together to develop industry-wide solutions to protect customer privacy and prevent identity theft. We predict that leading financial institutions will form consortia to outsource their back-office operations, either to automated processing centres or utilities in the US and Europe, or to lowercost countries like India with qualified labor pools to handle the work.

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Global F&A Transactions. Global moneycentre banks have been providing a wide range of F&A outsourcing services to their corporate customers and other financial institutions for many years. Traditional services include treasury functions, cash management, accounts payable, accounts receivable, trade financing, and foreign currencies; and these services will be expanded to include borderless banking and more integrated financial supply chain services including insurance, securities/brokerage, investments, and asset management - all delivered through their global networks and advanced technology platforms. We predict that corporate customers in given industries or regions with common F&A service needs as well as the smaller community banks, savings and loans, and other lenders - will get together and form various buying consortia to negotiate favorable service packages with volume discounts on their larger dollar-value transaction volumes.

Check 21/Item Processing. The Check Clearing for the 21st Century Act of 2003 allows US banks to substitute electronic digital images for paper checks, streamlining the cumbersome clearing and settlement process. Banks will save billions of dollars in reduced transportation costs of moving paper checks between issuing and paying banks as well as the associated check handling and manual data-entry costs. While the nation's larger banks may go it alone for now, we predict that some of them will eventually form consortia to outsource their check clearing and other item processing to transaction processing utilities. We also predict that many regional and community banks will have to participate in consortia buying to achieve the economies of scale and savings needed to offset declining check volumes as electronic payments take market share.

Also, Check 21 legislation will be the driving force that leads companies to form consortia for other item processing solutions such as insurance claims, mortgages, and loans - and we already see item processing consortia being formed around the world.

Offshoring Opportunities. US and European multinationals have been outsourcing F&A processes to lower-cost countries for over a decade; and the results

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are in that it makes good business sense to do so, as long as the contracts are well planned and executed. Based on our research, the biggest F&A opportunities are in processing insurance claims, home mortgages, personal/auto loans, accounts receivable, accounts payable, travel and expense reimbursements, and tax compliance. In financial services, the opportunities are in back-office customer servicing, accounting, recordkeeping, reporting, and administration. In retailing, the opportunities are in merchant, corporate, and retail credit/debit card processing, electronic payments, and related accounting. As offshore service providers in India, Eastern Europe, and dozens of other countries build their infrastructures and world-class capabilities with high CMM (Capability Maturity Model) levels, corporate buyers in different industries will form consortia to contract for large blocks of their time, resources, and services - and to develop common

solutions to reduce the risks of offshore transaction processing.

In summary, F&A outsourcing certainly lends itself to consortia buying as service providers want to lock up long-term contracts that meet their financial goals and rates of return on investment, and as corporate buyers want to have lower and more predictable costs through the greater economies of scale and processing efficiencies that consortia buying can achieve. And the new set of economic, technology, and market forces described above will drive F&A outsourcing and consortia buying as a way for companies to be more competitive in the global marketplace.

Biographies Joe Vales Joe Vales is Senior Partner of Vales Consulting Group, a strategic advisory firm serving ITO and BPO providers. A champion of outsourcing, Joe has 30 years of marketing and business development experience with PricewaterhouseCoopers, Citibank, Shearson Lehman Hutton, and Booz Allen Hamilton.

Rich Tinervin Rich Tinervin, Founder and Managing Partner of Tinervin Advisors, has 30 years of senior executive experience with Bank of America, Bank of New York, Charles Schwab, Citigroup, CitiStreet, and Fidelity Investments. Rich is an outsourcing visionary for financial institutions.

Gil Parker Gil Parker, Director, Vales Consulting Group, conducted research for these consortia buying articles. Gil has 30 years of marketing experience with PricewaterhouseCoopers, Deloitte & Touche, and McKinsey & Company.

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SOLUTION PROVIDER

www.siemens.com/sbs

Outsourcing with Siemens Business Services - Built on Trust Siemens Business Services is a leading IT service provider and with revenues of euros 4.7 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.

The Changing Role of Outsourcing

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.

Adrian von Hammerstein – CEO Christian Oecking – Head of Global Outsourcing

Siemens Business Services Otto-Hahn-Ring 6, 81739 Munich, Germany Tel: +44 1344 862222 Fax: +44 1344 784444 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 now 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 of all a human partnership.

Identifying an organization to share your business with, whether that means your infrastructure or your operational processes is not 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. We have unique expertise in the public and private sectors. As outsourcing now forms a central element in any value-driven strategy, our vendor independence along the entire IT service chain is a definite advantage, while our greater technology bandwidth generates additional returns for our customers. With innovative delivery and commercial models which embrace on-demand 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 36,000 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 world-class 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.

The Drivers to Outsource Outsourcing is now a strategic alternative that is established in many businesses. While sectors may decide to outsource for different reasons - regulatory change in the financial

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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.

Different Types of Outsourcing Selective Outsourcing: Spanning the entire field of operational services from desktop management to network and data center management, we can help you to get the most out of your distributed computing environment. Help desk solutions and application management cover all your customer and software needs.

Full IT Outsourcing: Full IT outsourcing demands global consistency. Our Global Delivery Backbone ensures your infrastructure meets the demands of the world economy. We help your IT infrastructure to become truly responsive to your business needs. Full IT outsourcing transforms your technology from a fixed into a variable cost. You can then control your business performance with greater precision with an infrastructure which is flexible, transparent and predictable.

Transformational Outsourcing: Transformational outsourcing involves a lot more than technology expertise, including business understanding and change management skills.

Switching the strategy from cost optimization to value generation when it comes to infrastructure requires a partner who knows how to align IT and business strategy. By transforming your IT, you increase flexibility and productivity, optimize processes, speed up the time to market and drive profitability.

Business Process Outsourcing: The management of complete processes, such as finance and HR, allows customers a long-term strategic partnership to help realize their core goals.

Unlike IT outsourcing, business process outsourcing affects everyone in an organization directly. Operational processes need to be fully understood in terms of their strategic importance, flexibility, volatility and interdependence.

Business Process Outsourcing Transformational Outsourcing

Responsibility for total customer process

Full IT Outsoucing

Transformation Management

Transformation Management

Selective Outsourcing

Total IT responsibility

Total IT responsibility

Total IT responsibility

Selective responsibility

Selective responsibility

Selective responsibility

Selective responsibility

Some facts and figures: • Half of our workforce is dedicated to serving over 200 outsourced clients in over 40 countries across all industries • Our global help desk service handles more than 20 million calls per year in 16 languages • We have over 2 million desktops and the associated distributed computing infrastructure under management • 2000 TB of computing capacity are globally available in our data centers • We provide data center outsourcing around the world to 86 countries • We operate the world's largest SAP system under Windows NT

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

Figure 1. Different Types of Outsourcing

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FINDING INSPIRATION IN INDIA

In November 2001, Mark Wood, the chief executive of Prudential UK & Europe made a bold announcement. He told employees, customers and shareholders that the business was about to undergo a revolution.

The entire insurance operation was to be restructured and refocused with an emphasis on simplified delivery of product and enhanced customer service.

Steven Ferrari Service Development Director, Prudential

Taking an international view At the time, policyholder and new customer queries were principally being dealt with at three UK centres, Reading, Belfast and Craigforth (Scotland). In order to cut callcentre and back office costs while enhancing service, big changes had to be made. In mid 2002 Prudential executives decided to look around the globe for inspiration as to how that could be best achieved and India was selected for an offshore services centre.

Why India?

The project confirmed what was already suspected - India emerged as the preferred delivery location over other locations such as Malaysia, China, Philippines, Ireland and Eastern Europe because of the following key advantages: • A large skilled English-speaking labour force with two million fresh graduates every year • Sustainable low labour and property cost • Favourable investment environment with Government support and tax incentives • Successful track record of UK and US companies in running offshore service centres An independent risk assessment also confirmed that the current political climate would not adversely impact India's attractiveness as a destination for long-term investments. Mumbai was recommended as the most suitable city based on trade-offs

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between cost and availability of high calibre employees and quality infrastructure.

Captive v. Outsource The project recommended that the offshore operation be set up as a captive organisation due to the following reasons: • Greater economic benefits • Better operational flexibility • Enables leveraging of Prudential brand in attracting and retaining staff • Significant size of investment required in initial and ongoing training and development and customer experience enhancement initiatives In September 2002, we announced our intention to set up a Mumbai offshore centre employing over 800 employees. It was expected to be fully operational by the end of 2004 and generate cost savings of £16m p.a. from 2006. The centre would initially provide call centre and back office administration services to Prudential's UK insurance business.

Swift Implementation Communicating the decision to go offshore was done quickly and a variety of initiatives were taken to minimise concerns of the UK employees, including re-deployment of employees in other business areas and supporting acquisition of new skills.

The open and honest approach with the UK people enabled us to secure very good support

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and commitment. We were pleasantly surprised by the response that we received for temporary secondment assignments to India 5 times the number of vacancies.

Programme Structure The implementation of the offshoring initiative was structured in two broad phases: • Enablement - This phase consisted of 3 work streams: • Infrastructure - Setting up the facility and obtaining the necessary legal and regulatory approvals • Technology - Designing and implementing the technology solution • HR - Designing the organisation structure and people policies and recruiting the local management team • Migration - Identifying and migrating processes to the offshore operation

Migration Phase

Feasibility

We adopted a rigorous tollgate based approach to migrations that ensured that we did not move to the next stage unless certain criteria were met. For example, we consciously took the decision not to start training unless all process and training documentation were ready. Whilst delivery quality and impact on service levels were the paramount considerations, we ensured that there was equal emphasis on costs and benefits management.

All processes were systematically evaluated using a set of criteria such as the extent to which processes could be decoupled, extent of risk associated, time required to achieve competence.

Customer experience was the most important consideration, as no activity would be transferred offshore unless we were confident that the quality of service would be maintained or indeed enhanced. The results of the evaluation were discussed and agreed with

A Steering Group consisting of senior directors from across the Prudential Group was set-up to provide direction and guidance to the programme team.

Enablement Phase Figure 1.

HR We recruited our local management team to ensure that we had local expertise on ground to assist in the set up and approval activities that proved to be invaluable in hindsight. We adapted our UK people policies to suit the Indian operating environment.

Infrastructure To accelerate implementation, we engaged a leading Indian outsourcing firm that recruited, trained and provided accommodation for the first batch of employees until our own facility was ready.

Our facility was fitted out to our stringent corporate standards within 5 months of obtaining the building.

Feasibility

• Operation Baselining • Processes identified • Risk assessment • Cost-benefit analysis • High-level implementation plan

Design

• Detailed Implementation Plan • Process Design • Organisation Design • Technology Design • Business Continuity

Build

• Process • Process documentation • Training needs analysis • Training design Technology • • Telephony & network set-up • Applications deployment • Testing

Recruitment & Training

Parallel Run

• Recruitment • Induction training • Product, systems & process training

• Ramp Up Call Volumes • Meet UK standards

• Validation of training

A smooth and seamless transition is ensured by adopting a robust and disciplined approach • Robust recruitment process; only 5% of interviewees are made employment offers

Technology We deployed 'Voice over IP' call centre technology as it is more cost efficient and provides a better quality of service as compared to other technologies. We also implemented a leading edge 'thin client' solution that ensures that we can access any of Prudential UK's thousand or so business applications without system response issues.

• Mumbai staff need to meet UK accreditation standards before they can start taking calls • Mumbai operation needs to match UK quality, accuracy and productivity standards prior to completion of parallel run • Implementation by a cross-functional project team; design, process and training documentation signed off by relevant stakeholders • Migrations are subject to periodic governance and audit reviews

Figure 2.

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All Mumbai employees have a graduate qualification, in addition 20% of people have post-graduate/ professional qualifications.

Training We have invested heavily in training to ensure that the transfer of work from the UK is as smooth as possible.

In many instances, we have retained a team of UK employees to support the Mumbai team even after a particular process 'went live' as a significant portion of learning is obtained from their interactions with their UK colleagues.

A Success Story - But Not Without a Lot of Sweat Currently we are the largest UK life and pensions offshoring operation in India with around 1000 employees, handling 150,000 calls and processing 150,000 transactions per month.

The service levels of our Indian centre in terms of productivity, grade of service, turnaround time, quality and accuracy are already at UK levels (within less than a year of start-up).

We conduct mystery shopping regularly to gauge the experience of our customers and the response to date has been good.

Our current attrition levels are below the industry average. We attribute this to our brand and reputation in the Indian marketplace, people friendly policies including employee exchange opportunities to work overseas, focus on reward and recognition for outstanding performance, constant focus on learning and development and continuous engagement of employees.

Figure 3.

Looking Ahead

Figure 4.

our UK operating managers before any work was migrated.

Risk mitigation We have identified and appropriately addressed major areas of risk while planning any migration: • Data protection - We have informed all our policyholders of the fact that some of their data will be processed outside the European Economic Area • UK regulatory requirements - Our Compliance teams have been closely

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involved in all migrations to ensure that all regulatory requirements are embedded in the work that is moved offshore. We also established a local Compliance team to provide onsite guidance and support to the Mumbai staff

Recruitment We ensured that we recruited high quality people whilst maintaining the pace of recruitment by adopting a disciplined approach to recruitment.

Despite the heady pace, we are keen to avoid moving too fast. Our approach is 'It has to be quality first, productivity second. If we ever feel the cost drive is compromising quality, we will slow down. We don't want to satisfy the sceptics.'

We are currently consolidating the learnings gained through migrations. We are working on improving the overall customer experience by focussing on conversational aspects like empathy and listening skills. We are improving the overall capability our Mumbai staff through focussed training programmes. We are also focussing on driving tactical productivity improvements.

We have successfully created a lower cost base, high service platform. In less than a year, we have created a strategic asset for Prudential our Mumbai centre is indeed a 'Jewel in our Crown'.

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DRIVING INNOVATION BY LEVERAGING OUTSOURCING RELATIONSHIPS

Jean-Louis Previdi Gartner Executive Programs

Catherine Peyralbe Gartner Consulting

Clients and outsourcers are frequently facing highs and lows in their relationships.

Ensuring that these contracts remain efficient and mutually beneficial requires adherence to a number of management best practices: • Regularly revisiting key reasons to outsource and if possible re-aligning the contract key performance indicators (KPIs) with these new drivers and requirements • Monitoring on-going performance as well as efficiency, while linking them back to client business objectives; • Deriving additional added value through the relationship.

A relatively new offer from outsourcers is on its way to becoming an additional best practice to be added to this list: the use of the outsourcer’s wider capability such as R&D facilities and business insight to drive innovation.

This paper discusses: - The drivers, limiters and intended results of innovation; - The criteria for deciding if the innovation capabilities of an outsourcer will meet what a client is looking for; - The management approach necessary to maximise success.

Technological and business innovation from your outsourcer: what for?

Innovation is business driven or cost driven Outsourcers are often providing evolutions or incremental improvements to existing services solutions within their contracts; these transformations are rooted in good

engineering practices and are implemented to deliver tangible benefits.

However, when deep technological and business process insights are combined in the right manner from both sides of the relationship, more dramatic outcomes can be obtained: • Solutions to previously unresolved problems; • Compelling alternative solutions (for instance, solutions made up of building blocks which were never assembled in this manner before); • New ways of doing business and solutions providing competitive advantage In addition to these innovations, new approaches can also be devised to drive out costs from the existing outsourced services.

Whether business and/or cost driven, outsourcing suppliers use their innovation capability to create marketing leverage and differentiate themselves from their competitors.

Innovation is best created when business and IT collaborate Innovation requires input from both business and technology experts from both client and outsourcer. Whether seeking novel revenue growth opportunities or innovating to further reduce costs, a joint approach is essential. For this reason, business process and business transformational outsourcing (BPO/BTO) contracts have a natural advantage because the outsourcer and the client’s business divisions are already collaborating for process refinement, improved agility, cost reduction and continuous evolution.

In classical IT outsourcing relationships, business input will ensure the relevance and long-term returns from technology

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innovations. A joint innovation program will also serve to strengthen the relationship between the client’s IT department and its lines of business.

Innovation is conditioned by the organisation’s behaviour toward risks Those organisations more likely to consider innovation capability within their outsourcing relationships are those which: • Wish to significantly improve business efficiency or to pursue new business opportunities; • Recognise that innovation will be required; • Have a business culture allowing them to take calculated risks.

These organisations are likely to create joint teams with the outsourcer and act as a partner in the innovation process.

Those clients with a more conservative risk approach may still draw upon an outsourcer’s innovation capability but will then leverage it within more constrained environments.

Companies with a reasonable level of risk acceptance are more likely to accept transversal innovation – the use in a new market or a new environment of a solution pioneered in another industry.

Criteria for assessing your outsourcer’s innovation capabilities A pre-requite Trust & 4 criteria - Demonstration of a track record for the R&D capabilities, for the business consulting expertise and for the combination of both - Coverage of the R&D organisation - Being both internationally and locally oriented for R&D and business innovation - Ability to make business experts, vertical market experts and technology experts collaborate

Pre-requisite: Trust in the outsourcer is key As previously mentioned, behaviour toward risk is a key factor for the decision to leverage innovation capabilities. Using the capabilities of a third party is a way to share or mitigate risks but a trusted relationship is a mandatory requirement for success.

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Criteria 1: Demonstration of a track record for the R&D capabilities, for the business consulting expertise and for the combination of both The outsourcer has to provide evidence of process and business innovation and/or of technical innovation, using both its business consultants and its R&D experts.

It needs to provide a track record for business consulting excellence – industryrecognised thought-leadership, cases studies, references – and for R&D: how many patents the outsourcer has, how many publications and presentations in international recognised channels, how many awards and distinguished employees (Nobel prices, etc.) …

Having these two capabilities is not sufficient in itself - there must also be demonstrable evidence of them being leveraged jointly to benefit outsourcing and other clients (see criterion 4 below).

Criteria 2: Coverage of the R&D organisation The size of the R&D capability is a very important criterion – how many labs, how many researchers, the domains of expertise and research covered and potential relevance to the client’s business.

Depth is as important as breadth. An R&D department with significant capacity is more likely to have greater collective expertise and also be able to support multiple clients’ assignments (and ‘cross-fertilise’ ideas).

Criteria 3: Being both internationally and locally oriented for R&D and business innovation The international focus and the capacity to adapt innovation to the local markets have to be taken into account. The client will look at the geographical dispersion of the outsourcer’s innovation teams and the different cultures they exhibit.

Criteria 4: Ability to make business experts, vertical market experts and technology experts collaborate Innovation can be at infrastructure level, at the applications level and/or at the business process level. A high level of understanding of vertical markets is needed for business driven innovation; the business consultants will have to provide references in the client market.

The R&D organisation needs to have knowledge and understanding of business in addition to its mastering of technology issues.

One indicator to assess this is the manner in

which R&D experts are internally rewarded (commissioned on the sales of their ideas, some type of measure of value to market, etc.).

The R&D function's appreciation of business issues and technology exploitation potential will also be improved by their routine engagement in mixed technical and business teams. Furthermore, the R&D function itself will regularly assess its portfolio using industry trend surveys, horizon-scanning and 'technology foresight' exercises.

In most cases, the client brings its expertise of its markets to the innovation team. The client will also want the outsourcer to provide guidance on the complete innovation approach making explicit its innovation process and the mechanisms that promote effective collaboration amongst the different stakeholders during the process.

Managing innovation Innovation can only be exploited if there is a clear business case taking risks into account Most outsourcing contracts are classically owned by the IT organisation with the outsourcer’s team working mainly with the IT people. These contracts are usually justified by means of classical ROI (return on investment).

BPO and BPO contracts usually have more sophisticated measures of business value since the business is responsible for the business case and for defining the effectiveness of the expected solution(s). In both cases, risks must introduce adjustment factors on the calculated returns and be taken into account in the decision process for innovation.

Innovation management needs to be coupled with risk limitation.

Since risk decreases the likelihood of delivering value, risk limitation has to be part of innovation management. It usually occurs at two levels: • At the contract level: Indian outsourcing companies are introducing what they call ‘de-risking’ contracts. Basically, no payment is made to the outsourcer if the value is not delivered; the service provider has to put in place all the means to have the solution accepted by the client; • At the business and process level: clearly a non-reliable solution is not acceptable.

Innovative mind-set clients with the internal culture to measure and cope with the risks are the most likely to gain competitive advantage.

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Effective governance between the client and the outsourcer is the key to risk management and getting the best value from joint investment in innovation.

improve the business case definition process and the risk adjustment factors applied in the business case.

Cultural alignment Business and IT management needs to drive innovation through the right governance and appropriate KPIs The innovation process has to be clearly expressed. As part of the process, the governance structure, the KPIs and the progress monitoring mechanisms have to leverage the experience of the outsourcer as well as market best practices.

Depending on the nature of innovations being sought, monitored indicators and their target values are typically: • Financial KPIs: cash flow improvement, margin improvement, cut costs, return on assets, return on existing investment, or NPV (net present value); • Business KPIs: increase market share, reduced time to market, etc.

Some measure of the effectiveness of the innovative solution(s) has to be put in place and tracked during deployment. These metrics should also be monitored during the pay back period in order to prove the business case,

Innovation is usually easier for enterprises with: • Mature risk management cultures – and which are not risk adverse; • Mature business case processes and measurement of returns; • Strong relationships between business and IT. A successful collaboration between outsourcing provider and client aimed at delivering innovation and value-add needs to ensure that both sides understand each other's approaches in these areas. Only then can the process be managed smoothly and mutual expectations be met.

Innovation management

Summary End-user organisations are turning away from a purely cost-reduction outsourcing agenda. Whilst cost control remains important, increasing emphasis is being placed on business value and revenue growth.

Some outsourcers are able to meet this challenge by leveraging their wider capabilities (e.g. R&D, business expertise) to drive innovation to the benefit of their outsourcing clients. Best results are obtained when there is strong collaboration across both business and IT, and the innovation process is governed by a mature approach to risk management.

For those organisations exploiting this route for innovation, there are important criteria to assess the capability of outsourcing suppliers including the range and depth of their technological and business insight. On going management of innovation processes must also be embedded within outsourcing relationship governance processes and structures.

Clear business case Risk Management Governance with appropriate KPIs Cultural alignment

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INNOVATION SOURCING: INCREASING BUSINESS VALUE WITHIN OUTSOURCING RELATIONSHIPS The leaders in tomorrow's outsourcing market will be those who can deliver the greatest business value. Excellence in low cost service delivery will be taken for granted - the winners in the market will be those with the capability and vision to help clients innovate in terms of business and technology to exploit market opportunities and overcome competitive challenges. A client entering a strategic outsourcing relationship places great trust in its supplier. Innovation Sourcing is one approach IBM uses which recognises this investment and ensures that the client can leverage the complete IBM equation: its world-leading research and development capability, industry thought-leadership and product/services portfolio. Successful Innovation Sourcing programmes with many IBM clients have harnessed the best capabilities on both sides of the outsourcing relationship to deliver business value and drive revenue growth.

Trevor Clifton Joe Benaroya Strategic Outsourcing (EMEA) IBM

"Innovation Sourcing is the term IBM uses to collectively describe the assets, processes, and techniques which it uses in its outsourcing contracts to drive innovation."

“Our Clients often tell me that their “battle is won above the line and not below it”. They are searching for solutions that will impact the revenue line and not only the cost line. They want more than just IT service from their relationship with IBM. Through Innovation Sourcing we leverage the entire ‘TEAM IBM’ to deliver greater value and assure better long term client relationships.”

Joe Benaroya, General Manager, Strategic Outsourcing, IBM EMEA

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Outsourcing - a changing market Over recent years, sluggish economic conditions and challenged IT budgets have ensured that outsourcing has been the principle driver of growth within the IT services market. It has allowed organisations to drive out costs, access specialist expertise and technologies and to refocus management skills away from non-core IT functions towards those challenges driving competitive differentiation. Outsourcing has also become widely recognised as a financial engineering instrument1 to smooth out IT spending peaks and create savings; these either fall directly to the bottom line or, increasingly, fund new business solutions.

Over the same period, the global outsourcing market has matured significantly and the number of service providers has increased. Whilst there remains a continuing stream of $1B+ mega-deals, the stronger growth in more modest contracts has provided opportunities for smaller service providers. In addition, various IT companies have turned to outsourcing either to diversify away from hardware/software portfolios or to replace the higher margin consulting and project services which suffered a significant downturn in 2002-3.

Whilst some elements of IT service have commoditised and created pricing pressure, the basic outsourcing proposition remains

one where long term relationship and business value delivered are critical. Indeed, it is a sign of the maturity of this market that both suppliers and clients have developed a much keener sense of what it takes to ensure that an outsourcing contract succeeds as a relationship rather than a simple provision of services. Gone are the days where compliance with service levels alone was sufficient to maintain high customer satisfaction and market leadership. Strong relationship governance, business value, innovation and win-win scenarios are the current touchstones.

Innovation to improve business value The level of mutual commitment and implied trust makes strategic outsourcing relationships unlike any other in the IT industry.

Beyond service excellence however, what sources of value can a service provider leverage to enrich the relationship? One answer is to ensure that the client benefits from privileged access to its wider capability - not just that part which is providing the contracted IT services.

By bringing together complementary capabilities plus the best business and technical minds from both sides of the relationship, joint projects can drive innovation to improve the base IT services and address the client's broader business growth challenges.

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Transition

Transformation

Innovation Sourcing

Outsourcing Contract 5-7 years

'one size fits all' approach. How to tap into IBM's broader capability will depend upon the client's size, skills, business strategy, partnerships and resources. From a practical viewpoint, clients may also wish to run an Innovation Sourcing programme for a limited period to match personnel and resource availability. For these reasons, IBM's Innovation Sourcing approach is tailored to accommodate different models of interaction.

A particular concept IBM has developed successfully is that of the Innovation Team, 'iteam' or Value Creation Centre. Here, IBM and the client form a joint unit and drive brainstorming and workshop sessions to identify and develop innovative solutions which create business value. Based upon priorities developed with senior management, the team then define detailed solutions, commission prototypes and carry-out risk-reduction investigations leading

Innovation Sourcing is the third of three mechanisms for developing the services within an outsourcing relationship In a company the size and diversity of IBM with capabilities and intellectual assets spread across its research laboratories, hardware, software, IT services and business consulting practices, there is huge potential for engaging with clients in innovative projects. Quite rightly, IBM's size and capability raises high expectations within its outsourcing client base the challenge is to meet these in a manner which is cost effective for both parties and builds upon, but does not distract from, the baseline services.

Innovation Sourcing is the term IBM uses to collectively describe the assets, processes, and techniques which it uses in its outsourcing contracts to drive innovation. Not only does Innovation Sourcing provide the environment to foster the necessary collaboration but it also puts in place joint governance structures to ensure that priorities are assigned to innovative ideas, scarce resources are deployed efficiently to explore them and that, where possible, they can be folded into the base contract scope at the appropriate stage with minimal risk.

Innovation Sourcing can be positioned as the third of three routes for developing the in-scope services during an outsourcing relationship: • Transition is the initial phase of an outsourcing contract whereby a client's staff and assets transfer to IBM - this is where 'quick-win' cost take-out actions will occur although the main focus is on establishing a seamless handover;

• Transformation is the longer-term process of developing the IT service through technology refresh, consolidation, process redesign and new systems implementation; the transformation plan underpins the long term cost model and services vision; • Innovation Sourcing is the on-going process of identifying and pursuing technical and business innovations jointly with the client. These may directly impact the baseline services (eg driving additional cost reductions) or might benefit the client's business in some other manner.

Making innovation happen No-one would suggest that innovation can be merely purchased - it is a creative process with unpredictable outcomes - the trick lies in putting the right multi-disciplinary teams within a suitable environment. Metrics need to reward creative, 'out-of-the-box' thinking and the portfolio of ideas must be managed and prioritised based on a balance of short-term and long term benefits.

Innovation does not occur purely at the technical level - it can focus upon novel business or organisational models. For this reason, a critical part of IBM's Innovation Sourcing process is the deep industry and process knowledge from the client's own business specialists and IBM's Business Consulting Services.

With Innovation Sourcing, there is no

Innovation Sourcing and On Demand The innovation process needs triggers to fuel the intellectual and creative juices. Whilst the immediate business challenges of the client will be a crucial starting-point and specific technologies may be able to provide quick wins, it is helpful that the IBM/client team shares a longer term vision of how successful businesses will operate in the future and how they will exploit technology to deliver business value. Many clients will already possess a view of future business scenarios and the role of IT. However, to supplement or indeed challenge these, IBM's On Demand strategy places a central role.

“An On Demand enterprise is one whose business processes - integrated end-to-end across the company and with key partners, suppliers and customers, can respond with speed to any customer demand, market opportunity or external threat.”

This vision underpins the value proposition of IBM's products, services and solutions and has guided the company's own investments with its aim of becoming an On Demand Business itself. We have found our industry-specific On Demand roadmaps an essential tool in creating a vision of the client's future operation.

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to full business case development. IBM can support the complete life-cycle, including subsequent implementation, drawing upon specialist capabilities as required through its business partners.

The Innovation Team concept has had great success with many clients like those described below and is a highly productive way to leverage IBM's research experts and solution thought-leaders. This approach is also powerful in that it provides a focus and identity for the joint innovation activity within the client's organisation. The team might be a virtual one or located at a physical 'innovation centre'.

As an alternative model, clients may wish IBM to operate in 'push mode' where the IBM team meets with the client business specialists then develops a portfolio of candidate projects for presentation and appraisal by the client.

Scope and impact need also to be considered: does the client want to focus on innovations with more direct impact on the existing outsourced services (eg new capabilities or additional cost take-out) or is a wider remit preferred? Does the client have a very specific challenge which might benefit from fresh outside thinking?

What is under the bonnet?

So what are these IBM assets which are brought to the table to facilitate and energise Innovation Sourcing? Leading the programme from the IBM side will generally be a consultant from IBM Business Consulting Services (BCS) who will be able to draw upon deep industry knowledge as well as expertise across the range of BCS practice areas: • Strategy & Change • Human Capital Management • Customer Relationship Management • Supply Chain Management • Financial Management • Application Innovation.

For additional industry insight, the programme can also leverage the IBM Institute for Business Value (IBV). Accessible to all IBM clients, IBV is a focus for industry thought leadership and research with a mission to highlight and anticipate industry trends, understand the emerging technology landscape and assess strategic options for the alignment of IT with business needs.

Working closely with the BCS focal-point will be IBM Researchers specialising in Innovation Sourcing; they will provide the

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necessary window into the largest corporate IT research organisation in the world (see panel).

They are the client's guide to IBM Research's intellectual assets ranging from subject matter experts and current research focus areas through to IBM's patent portfolio, laboratory capabilities and collaborator networks (eg academia, venture capitalists).

To ensure that the fruits of IBM Research make the transition to its main business, IBM operates a portfolio of Emerging Business Opportunity (EBO) projects. EBO groups work with the main IBM business lines to develop prototypes and support projects with earlyadopter, flagship clients. Recent EBO subjects include radio frequency identification and advanced digital media solutions.

Other assets which can be leveraged within Innovation Sourcing are of course IBM's hardware and software divisions together with architects experienced in bringing together both hardware, software and services to build industry-specific solutions.

IBM Research IBM has the world's largest IT research organisation with about 3000 scientists and engineers (including 5 Nobel Laureates) working at eight laboratories in six countries.

Since 1996, IBM has invested approximately $5 Billion per year in research, development and engineering and its current portfolio of 40,000 patents is the result of 12 years where IBM has consistently been awarded more patents that any other company. Its specialists from multiple disciplines are engaged in a diverse range of fields: • • • • • • • • •

Communications technologies; Deep Computing; Display technologies; Ecommerce; Personal systems; Semiconductor technology; Servers and embedded systems; Storage; VLSI design.

Most recently, it has dedicated significant resources to On Demand Innovation Services (ODIS) where IBM researchers team with IBM clients to tackle business challenges in innovative ways.

IBM Business Partners can also be called upon for specialist skills and capabilities.

The Innovation Sourcing process, like any significant investment, requires buy-in from the client's executive management team. To assist this process, IBM is able to leverage its Advanced Business Institute (ABI) in New York as a forum for engaging senior client executives on the role of innovation within their organisations. These events are part of a wider syllabus covering both Leadership and IT Effectiveness2. With many outsourcing clients, IBM has leveraged the ABI to drive 'Value Infusion' workshops as a time-boxed method of exploring innovation strategies.

Finnair exploiting maths to drive revenues Finnair is one of the world's oldest operating airlines and carries approximately 7 Million passengers per year. IBM's long-term relationship with the company was extended in 2002 through an outsourcing contract; with technological leadership and innovation high priorities for Finnair, the outsourcing agreement included provision for an Innovation Sourcing programme.

One of the early tasks tackled was to address Finnair's vast and growing database covering customer travel and purchase histories. How could this hitherto unused asset be exploited to gain a better understanding of customer types and their historic buying

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patterns? Taking it further, if you could predict future patterns and also understand the eventual value a customer represented, this insight could be integrated into marketing programmes and processes. Customer relationship management would then become customer equity management - a whole new way to run an airline.

Working closing with Finnair's marketing group, IBM brought in a team from its Zurich Research Laboratory who were able to develop and refine mathematical modelling and optimisation algorithms to investigate the data. Success here, and collaboration with an IBM partner, led to the development of a prototype for IBM's Customer Equity Management solution, which already has an 80% accuracy rate for predicting the eventual value a customer represents.

The implications are far-reaching for the Finnair business: this approach can reduce marketing costs by up to 20 percent through better targeted campaigns whilst improving campaign response rates to boost revenues. In addition, by forecasting future travel decisions, the IBM solution will improve the airline's customer satisfaction.

Critical to the success of this programme were the mutual commitment to pursue an innovative agenda, sharing of the client's business challenges with the IBM team and a joint approach to problem solving covering both business and IT. Other areas of joint investigation with Finnair have included flight logistics analysis as well as exploitation of broadband, digital TV and radio frequency identification technologies. The Innovation Sourcing programme at Finnair drew upon several IBM Research laboratories, the IBM Institute for Business Value and IBM business partners as well as Innovation Sourcing programmes with other IBM clients.

Banking leadership in technical innovation One of IBM's key clients in the finance sector in Europe is a large, multi-national banking and insurance group with assets in excess of 200B€, approximate 10 million personal customers and one million corporate clients. Having grown inorganically in the past four years, its strategy is founded on strength and innovation. IBM was therefore a natural partner when the group was looking for an outsourcing relationship to help it consolidate and transform IT support to the business. The outsourcing agreement between the parties

was one of the largest ever concluded in the finance sector.

The Innovation Sourcing model centred on a Transformation and Innovation Team jointly staffed and managed by the client and IBM with the remit to: • Provide access to IBM's investment in R&D and expertise with other world-wide finance sector clients; • Support the client's decision-making with technology and market insight; • Propose projects and programmes to improve the client's cost-income ratio within three years.

about relationships, business value, innovation delivered and leverage outsourcing partnerships to drive revenue growth.

IBM's experience with clients reinforces the importance of innovation in raising customer satisfaction. Innovation Sourcing is the route through which IBM leverages its world-class capability in research, products, services and business solutions to deliver more business value to its outsourcing clients.

However, a single approach does not fit all cases and a range of models are available ranging from physical to virtual innovation centres and directed innovation versus more 'blue-sky' approaches.

Innovation is a creative and necessarily unpredictable phenomenon but provided the appropriate technical, commercial and organisational environment is established, the pay-off can be substantial. IBM's outsourcing clients have benefited in tangible business terms from Innovation Sourcing programmes.

References: 1

Since its inception, the Transformation and Innovation Team has focussed on a wide range of initiatives, for example: • Optimisation of ERP solutions to drive cost reductions of 20%; • Assessment and development of the group's on-line banking architecture by specialists from IBM's Haifa Laboratories; • Assessment of its Enterprise Content Management projects - again drawing upon specialists from IBM's Haifa Laboratories; • Integration of the multiple legacy systems from the various banks brought together within the group.

Review and direction of the Transformation and Innovation Team ensures that it continues to deliver value by focussing on joint research interests, technology exploitation and quick wins together with knowledge transfer to the client in critical areas such as ebanking.

Summary The outsourcing market has evolved significantly in recent years. The competitive environment has been transformed and there are more providers able to deliver the basics of IT service. As a consequence, client purchasing and satisfaction criteria have shifted. The customer dialogue is increasingly

2

Morgan Chambers, “Outsourcing in the FTSE 100: Episode 2 - Impact on Financial Performance”, 2001 IBM Advanced Business Institute syllabus, http://www03.ibm.com/ibm/palisades/a bi/index.html

© 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.

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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BPO IN GERMANY: A REALITY CHECK

Business process outsourcing (BPO) has generated a lot of hype – not only in Germany – and is often cited as the ‘next big thing’ in the IT Services market. In the US and the UK, BPO has existed for more than a decade – a now well established market, which is still growing and prospering. Many established business process outsourcers, as well as IT services players have now set their eyes on Germany as the next high-growth market to focus on. This article takes a critical look at what the German BPO market really looks like and where the opportunities lie.

Katharina Grimme Director Ovum Deutschland

BPO is still at a nascent stage in Germany Ovum has conducted in-depth supply-side as well as demand-side research of the German market opportunity in BPO. This article summarises our findings.

The reality in Germany is that the market is still very small. Ovum estimates that the BPO market in Germany is worth euro765 million in 2005. Growth rates ranging from 7% to 11% Euro million

%

1,200

14 1,005

1,00

910

Market Size

830

10

765

800 660

12

710 8

600 6 400 4 200

2

0 2004

2005

2006

2007

2008

Market size Growth - total Source: Ovum

Figure 1. German BPO market, 2003 to 2008

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Ovum estimates that the BPO market in Germany is worth euro765 million in 2005.

0 2003

40

between 2004 and 2008 make BPO one of the most attractive markets in pure growth terms, where most areas of IT and business services are continuing to grow at lower rates in Germany. Indeed, as illustrated in Figure 1, we see BPO in total growing to over euro1 billion in value by 2008. However, we should point out that the new net value being added to the BPO market each year is relatively small, ranging from euro50 million in 2004 to euro95 million in 2008. This illustrates that there is future potential, which can be exploited.

However, cultural as well as socio-political barriers remain high and mass-market development is still many years off.

Dominated by basic processing services Another reality is that the German BPO market today consists mostly of basic, low value services in payroll outsourcing across all vertical markets, and specialist processing

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services in the finance sector. These areas will only grow modestly in the coming years, typically at rates of 4–6%. Meanwhile, it is the newer areas of BPO that are really driving the overall growth of the market and which offer the most enticing opportunities for IT-led outsourcing providers and other entrants into the German market. By ‘newer areas of BPO’, we refer to horizontal areas such as: • HR outsourcing, involving areas such as joiner and leaver administration, benefits administration, employee profiling, managed training and other areas beyond pure payroll - although of course payroll will remain an important part of the overall HR BPO service mix in many contracts • Other areas of back-office processes, in particular procurement and finance/accounting • Customer management, with suppliers taking on full responsibility for improving and handling customer interaction, rather than just providing standalone contact centre services.

Market drivers for BPO Our cautious view of the German BPO market is mainly due to the fact that growth drivers for BPO adoption are mostly supplyside led, although there are demand-side drivers for BPO, which are largely similar to those for ITO.

Demand-side drivers The current difficult economic environment puts pressure on German companies to cut costs, concentrate on core competencies and reduce assets on balance sheets. CIOs have felt this through stagnant or reduced IT budgets, but other areas of the business are also under review. The interest is to consolidate and optimise business processes, however often companies aim to achieve this in-house, and only then consider giving it to an external provider – if further cost reductions, service quality improvements or flexibility are achievable.

Supply-side drivers BPO in Germany is largely driven by the supply side. Most importantly, the large IT service providers, such as IBM, EDS and Accenture, have gained experience with BPO provision in the US and the UK market, and look to deploy their skills in the large, but as yet untapped German market. The hype created in the press from overseas experience

and from a handful of large BPO deals in Germany (such as EDS/Infineon and Accenture/Deutsche Bank) fuels interest and a lively discussion, which all players use to talk the market up.

Smaller players such as TDS, AC Service or Triaton (now HP) have jumped on the bandwagon and aim to position themselves as local BPO specialists. Most of them provide simple payroll process, but are increasingly targeting larger and higher value-add elements of HR BPO, such as recruiting and personnel administration.

A key motivation for players developing strategies in this area is the concept of BPO as a type of outsourcing with high value-add, and hence potentially good margins, which will compensate for the commoditisation of basic IT infrastructure and network services.

However, for the German market this is a hope not to be fulfilled anytime soon: the BPO services accepted by German companies are mostly standardised transactional services, where only high volumes can ensure profitability. The outsourcing of high value-add processes is not happening to any significant extent and we predict that this will not happen within the next two years.

•

•

a significant impact on a company’s strategic options. The Betriebsrat, which is in most cases represented at board level, has enormous decision-making power, as it fulfils its primary function of job protection. Under §613a BGB (German Civil Code), personnel transferred as part of an outsourcing deal has at least one year of job security. Moreover, the outsourcer typically has to assume responsibility for pension and other benefit obligations of the transferred employees, which are often complex and costly In Germany, BPO is often closely associated with offshore or nearshore transfer of jobs, again raising the issue of further job losses Despite the long-term experience with payroll services, the concept of BPO is still new to the German market. Germany is not known as an early adopter of innovative concepts and experiences. This is why IBM claims its main competitor is ‘no decision’: uncertainty about the details and implications of a BPO contract often result in no decision being taken at all.

Moreover, sales cycles are prolonged,

Outsourcing in general is inhibited by Germany’s restrictive labour market regulations, which state that any staff reductions or staff outplacements have to be agreed with the workers’ councils (Betriebsrat).

Growth inhibitors Although BPO growth rates appear healthy in relation to overall IT services or outsourcing growth, the overall German BPO market is still very small – and will remain so for some time.

This is due to a number of growth inhibitors: • In a country with a stagnant unemployment rate of 10% any threat of further redundancies (which is often assumed when outsourcing is discussed) is heavily opposed by workers’ councils and trade unions. Outsourcing in general is inhibited by Germany’s restrictive labour market regulations, which state that any staff reductions or staff outplacements have to be agreed with the workers’ councils (Betriebsrat). These councils, as well as the trade unions, have

•

taking at least nine months, and even up to 18 months. BPO references from the US and the UK only have limited value. Only when there are a number of high-profile success stories reported from within Germany will the acceptance of BPO increase Unlike in the UK, where public sector outsourcing has helped to establish BPO, and has also driven BPO growth in the private sector, the German public sector has not yet woken up to the benefits, in terms of cost-effectiveness and improved customer service offered through BPO to local and central government, as well as education and healthcare. So far, the public sector only uses basic payroll services based on the standardised Kidicap software solution.

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So where are the opportunities?

Growth in such horizontal areas of BPO in the next four years will be most evident in the finance, manufacturing, telecommunications and utilities sectors. We would recommend that suppliers targeting the German market focus their efforts on large, internationally oriented organisations in these sectors, since it is here that deals are most likely to be successfully shaped and completed.

Meanwhile, the German government sector offers large potential for efficiency gains through shared services but we do not believe such opportunities will begin to be realised at significant scale within our forecast period to 2008.

In addition to the horizontal growth areas highlighted above, we believe that the finance sector offers additional opportunities to supply vertical-specific services. Areas of potential include the administration of loans, life and general insurance policies and other consumer-oriented accounts. It is true that many large German finance institutions are not yet ready to consider handing over such processes to a third party. However, we believe that over the next four years we will begin to see smaller scale opportunities (for example, contract values typically of less than

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euro50 million) opening up as banks and insurers increasingly focus on back-office rationalisation. It will be up to suppliers to reassure finance institutions of their ability to handle operations of this nature.

But it won’t be an easy ride!

It will be crucial for BPO outsourcers to make a realistic assessment of the market and set expectations accordingly. The reality is that when it comes to outsourcing responsibility for entire business processes, Germany is still one of the more conservative countries within Europe. Cultural attitudes, as well as labour regulation, act as significant barriers to the growth of BPO, and it cannot be assumed that Germany, the second largest IT services market in Europe, will be a fast adopter for BPO. So far, there are only a handful of significant deals, such as EDS/Infineon, IBM/Dresdner Bank, Accenture/Deutsche Bank. Although such deals help to raise awareness, only their longterm success can be expected to have a visible impact on the future development of the German BPO market.

Katharina.Grimme@ovum.com

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GALES OF CREATIVE DESTRUCTION OR LOOKING AT OUTSOURCING FROM A STRATEGIC PERSPECTIVE

Juergen Weigand Professor of Economics and Director WHU

The times are a-changin' -

Peter Kreutter Managing Director WHU GRID

'Bayer Completes Spin Off of Lanxess AG' 'DaimlerChrysler shows loss for the first time in many years' 'China's Lenovo to buy IBM's PC business'

Those and similar headlines are predominant in the current business press not only in Germany but increasingly all over Europe. Weakened by an ongoing economic recession, even blue-chip companies have to cope with the split between cost-cutting to increase profitability on the one hand and the need for investments to secure the future on the other. To aggravate the situation further changing customer structures in many industries render familiar landmarks on the market side impossible. The market entry of new competitors from Central and Eastern European countries as well as from China and Asia, generate additional competitive pressure and strategic uncertainty.

Management guru Peter F. Drucker coined the term 'Age of Discontinuity', in the 1970s for such an increasingly inconstant and highly dynamic environment.

Thus, the resulting questions for corporate leadership are manifold: - How to address the substantial strategic challenges?

- What measures to take at what time?

- How to secure existing advantages while building up new competitive strengths?

To answer those questions one has to take a closer look at the strategic dilemma many

companies are facing currently. This evaluation leads to an understanding that success requires a paradigmatic change in the way companies cope with strategic repositioning. It is the company's value-chain architecture in its entirety that must be analysed, changed and managed to avoid the incrementalism and imbalance. However, even knowing 'where to go to' in the sense of having a clear strategic vision does not give an answer of 'how to get from here to there'.

Successfully getting ahead has its foundation in a systematic redefinition of know-how or to put it in a different way - corporate capabilities. Outsourcing and Business Process Outsourcing are measures of changing corporate capabilities and the alignment of value-chain architecture.

Therefore competitive advantage very much depends on selecting the right strategic suppliers to form a value-adding network. The need to have a common strategic view and understanding on both the supplier and the customer side - of how outsourcing can be used to encourage ongoing business transformation therefore emerges as one of the most critical factors.

Being stuck in the treadmill At the beginning a view on the competitive environment was outlined, in which companies currently have to struggle for success or survival. To systemise and put relevant trends in order the CESSP model offers a basic analytic framework. It helps to understand that the trends mentioned can be found in all three important parts of the overall

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competitive environment. Moreover, in many cases they reinforce each other. For example, in the finance and telecommunications industry deregulation has opened markets, in which new technologies allowed new entrants to aggressively compete with incumbents and satisfy new customer demands. As a result in both industries market structures have changed dramatically over recent years. In a German context the weak performance of local players in the finance sector gives reason for the existence of large-scale problems overcoming those changes.

On principle two cardinal errors can be identified regarding strategies of companies in such situations:

1 Companies only re-act to changes in the competitive environment It has to be observed that many companies only re-act after stagnant growth; declining margins and loss of market share have already taken place. Hope and suppression are seen as legitimate substitutes for developing and employing a clear-cut strategy. Competitiveness problems have to become inescapable until the wait-and-see-policy is abandoned.

There is a long pitiful record of German companies that lost a former leading market position through a failure to actively address far-reaching changes in their environment.

Nixdorf, Grundig or Triumph-Adler are three examples. Recent news about ongoing losses at Leica, once a world-wide famous manufacturer for high-end cameras, adds to this. In the case of Leica, the management ignored the digitalisation trend within the camera industry for many years.

But even if management initiates restructuring under massive external pressure, it often lacks the willingness for emergency room surgery and limits itself to a few rather cosmetic cuts. This is the second main problem.

2 Companies fail to implement farreaching, yet balanced corporate renewal Although for example cost-cutting efforts are in some way necessary to correct mistakes of the past, they seldom result in fundamental improvements of a company's strategic position. Limiting corporate renewal on a few isolated topics such as getting the products to market a few weeks earlier or launching two new product lines, neglects other important success factors like reconfiguring the supply and delivery value-chain or developing substantial new business outside existing markets.

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As trivial the two cardinal problems outlined above might appear as causally connected they are to the decline and fall of industry leaders all over the world. Let us be clear. Being on the winning side in the quest for competitiveness needs no less than a new, dynamic view on competition and corporate strategy.

The need for a dynamic view on competition It is the spirit of Joseph Schumpeter, which is inseparably linked to most theories targeting a more dynamic, pro-active perspective on industry and corporate transformation. Already in the early twentieth century he laid the foundations for a radically different way of thinking about competition by demanding 'creative destruction'. His deepest belief, that every company really does have the opportunity to shape its own destiny, is diametrically opposed to predominantly reactive management and strategy approaches.

Schumpeter pointed out that real competitive advantage is not based on sole product innovation but by additionally introducing new means of production and new forms of organisation over the entire value-chain.

The Swiss watch manufacturer SWATCH highlights an example of a successful 'Schumpeterian approach'. After a long painful journey, in which the former leading European watch industry lost most of its market share to competitors like TIMEX and CASIO, Nicolas G. Hayek and his SWATCH concept brought back billion dollar turnover and huge profits. His 'innovation' included not only a radical new product design; it changed the way people thought about their watch. The combination of cheapness and strong brand with a large 'design' element made SWATCH a fashion good rather than a watch just telling the time.

However, a fact, which is often overseen, is Hayek's success is more than the product idea.

He introduced new distribution channels ignoring the way that the watch manufacturers brought their goods to the customers over the last 200 years. It was his ability to bring in different know-how and employ capabilities from other industries to develop and market watches that was the key success factor.

Let's look at the second example of 'creative destruction': the efforts of Deutsche Bank to get back to the top. After years of underperformance the management team around Josef Ackermann started an extensive restructuring and repositioning program in

2002. This was more than an incremental portfolio optimisation. Deutsche Bank made huge divestments in combination with some focused investments to strengthen core competencies in selected markets. What makes the Deutsche Bank case so different is that Deutsche Bank thoroughly aligned its internal and external value-chains along its new business portfolio.

Both examples indicate that the success of a company's strategy is closely tied to its ability to change capabilities over the entire valuechain. In some cases this means divestment, in others, the build up of know-how. “There is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new order of things.�

Niccolo Machiavelli, The Prince

Changing capabilities through outsourcing Applying the ideas outlined above, within the German outsourcing market, it becomes clear that the structural changes in many industries and the resulting competitive pressures are the main drivers behind the increasing growth rates in outsourcing.

Companies have to divest their non-strategic, non-core know-how while securing access to it, e.g. over an outsourcing contract.

In the course of rebuilding Corporate Germany especially information technology is being put to the test regarding its strategic relevance. Foremost, the so-called 'captive outsourcing players' are currently under severe pressure. They are separate legal entities of large companies generating turnover almost exclusively with the parent company or affiliated companies. Lufthansa Systems, BASF IT Services or Siemens Business Services are examples of that type of species.

Strategic evaluation shows weaknesses in two respects. On the one hand in almost all cases the initial idea behind the spin-off, to generate significant additional business from outside the group, didn't become successful.

Establishing IT as new pillar in the business portfolio means competing in a rather mature market with blue chip companies such as IBM or EDS already being in leading position.

Moreover, the ambitions of CSC or Hewlett Packard to expand market share in Germany increases competition and reduce the chances for the captives to get up to speed.

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On the other hand from a parent company perspective the question has to be raised whether a captive IT player can support the other core businesses in a strategic way. There should be no doubt that information technology is and will be increasingly an important support factor. But the real question is, does your IT enables you to differentiate against competitors? Unfortunately the answer to that question is often 'NO'.

Therefore there is no strategic reason to stick to that knowledge.

According to Ovum figures there is an increasing number of strategic divestments in the German market, stressing a portfoliooriented or M&A style view on IT subsidiaries.

Following Rheinmetall selling its IT subsidiary Rheinmetall Informationssysteme to IBM in 2002, it was the divestment of ThyssenKrupp's IT division Triaton in 2003 that drew massive attention to the question 'is IT strategic?' After a competitive bid, in which all large global outsourcing companies were involved, finally Hewlett Packard took over Triaton for 340 million along with a long term outsourcing contract with ThyssenKrupp. In the opinion of market analysts, HP paid a large strategic premium for its entry into the German outsourcing market. At that time Deutsche Bank already had sold its Sinius to Siemens Business Services, IT SchmidtBank being passed to Accenture while three IT subsidiaries of Draegerwerke were changing hands to Capgemini.

Other companies tried to jump onto that train selling off their IT subsidiaries for a strategic premium, but only with limited success. Ruhrkohle, KarstadtQuelle or the insurer Gerling had to realise that bulge bracket players like IBM, EDS or CSC have a clear understanding of what makes a deal attractive for both sides and therefore might avoid stepping into deals with an unpredictable future.

For sellers focusing on premiums, this behaviour will cause severe problems. Getting high cash payment is one thing but getting a partner that is able to provide IT as support function to most of your core business processes, optimise them and implement technological innovation is even more important. Having only 2nd and 3rd row outsourcing players in the bid can perhaps give you some kind of 'need to make a large deal' premium from the buyer, but in many cases won't secure a highly experienced outsourcing partner for providing mission critical IT.

In this sense selling the IT unit in combination with an outsourcing contract must achieve two separate goals: Divesting non-strategic IT know-how while having a partner securing the support function.

Whether a real value-adding strategic partnership has an opportunity to evolve largely depends on the mindset and culture of both partners.

Strategic outsourcing needs strategic partnership models In strategic outsourcing, which means large, complex transactions digging deep into customer's value-chains, selecting the right partner is key to success. Along with basic criteria such as market position or financial stability, it is the ability of an IT outsourcing company to support its customer in achieving its strategic goals that is paramount.

Evaluating aspects like experience in the industry, regional presence or special competencies in certain technology areas will reduce the number of potential partners to a few. However, history shows that it is the cultural fit between customer and outsourcer, which is in the end the key success or key factor for failure.

Strategic outsourcing with its long-term contracts is an undertaking with a high degree of uncertainty on both sides. The outsourcer as well the customer will have to change over time to respond to a dynamic environment. Since those changes will not inevitably move in the same direction, tensions between both parties are unavoidable. Only mutual trust and a deep, long-term understanding of each others situation, strategic goals and inherent corporate culture will help to readjust the initial objectives towards a common new setting. Consequently this means a much more qualitative criteria approach in decision- making.

Conclusion As we have outlined above major structural changes in many industries enforce the need to actively change corporate capabilities. Outsourcing can be seen as one measure to redesign corporate know-how and value-chains. One will have to select the outsourcing-partner depending on how important non-strategic know-how will be even after having divested it. Especially in such complex tasks like outsourcing and redesigning the IT value-chain of large enterprises, recent developments in Germany

have shown that the process of selecting a partner is a two-sided decision.

Companies will have to learn that sometimes only one or two outsourcers can fulfil this task, limiting a chance for 'auctioning' the sell-off of the IT subsidiary or outsourcing deal. Many 2nd and 3rd row outsourcers will have to cope with the negative result of a 'quick win' attitude stepping into risky deals, i.e. with enterprises in financial unhealthy conditions.

As we have outlined above major structural changes in many industries enforce the need to actively change corporate capabilities.

Success therefore needs strong, long-term strategic partnerships on both sides. Realising that despite a large number of companies offering outsourcing solutions, those strategic partner positions are in short supply, the message for blue chip enterprises is clear: Occupy the position as 'strategic partner No. 1' with your favourite outsourcer before your competitor does.

Biographies Juergen Weigand Juergen Weigand is Professor of Economics and Director of the Institute for Industrial Organisation at WHU Otto Beisheim Graduate School of Management in Vallendar, one of Germany's most prestigious private business schools. He is also Academic Director of WHU's GRID (Group for Research on Industrial Dynamics). jweigand@whu.edu Peter Kreutter Peter Kreutter, CFA is Managing Director of WHU's GRID (Group for Research on Industrial Dynamics) and research fellow at the Institute for Industrial Organisation. His research interest is technological innovation and its long-run effects on industrial market structure as well as corporate and competitive strategy peter.kreutter@whu.edu

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TAKING A STRATEGIC APPROACH TO SOURCING: WHAT IS MY SOURCING STRATEGY?

Taking a truly strategic approach to the use of sourcing relative to corporate strategies is a choice of corporate lifestyle. The means through which the enterprise engages with external service providers for the provision of services offers key points of leverage in corporate growth strategies. Although often reduced to administrative activities, the strategic sourcing function is being redefined through empowerment related to cost reduction, avoidance of capital expenditure, service quality improvements and flexibility, to accommodate change as business needs evolve. In this paper, we look at the critical success factors related to effective strategic sourcing that supports corporate business objectives.

John Buscher John Buscher, Partner, TPI

The term ‘strategic’ sounds much more progressive and future-oriented than its analogue, ‘tactical.’ Many of us, when forced to admit to resorting to ‘tactical approaches’, are acknowledging that we’re really not certain what our destination truly is, but we’re trying to demonstrate leadership through action rather than merely passing time to see what the future might bring.

When it comes to corporate sourcing — the art of leveraging the expertise and efficiencies of a third party to deliver services to the enterprise, as opposed to building, maintaining, and operating the services organically – most don’t want to admit that they don’t have a plan that aligns with corporate directions and offers flexibility to the executive suite. Hence, the popular adoption of ‘strategic sourcing’ to connote the existence of third-party vendor management or a similar centralisation of purchasing-related functions associated with contracted services.

Too often, it’s the ‘vendor management’ activities that consume the cycles of corporate strategic sourcing resources. Whether affiliated with the office of the Chief Information Officer (CIO), established as part of a corporate purchasing function, or even designated as the domain of a Chief Procurement Officer (CPO), the functions

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performed tend toward administration more than true stewardship of a corporate strategy.

Following the age-old adage of aligning internal functions with broad corporate visions, missions, and directions, the strategic sourcing professionals will endeavour to predict the likely future state of their corporate enterprise. They will seek guidance from the C-suite, looking for macro-trends along the lines of corporate structural changes (perhaps through acquisitions or divestitures), global expansion plans, product line or category modifications and employee demographic considerations.

However, different parts of the organisation will often have very different drivers. The Chief Financial Officer (CFO) will often challenge the strategic sourcing team, looking for internal measures of efficiency compared with alternative service delivery models. The procurement infrastructure will look for robustness in the supply chain and the executives focused on business risk will ask for approaches to business continuity, contingency capabilities, and similar considerations.

Often it is difficult for the strategic sourcing organisation to truly act strategically. They adopt a reactive model in order to keep pace with the latest hot topic or ill-defined and

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shifting business imperatives, all the while hoping for the opportunity to develop a truly progressive approach to the use of sourcing.

But how exactly should organisations approach developing a truly strategic sourcing plan? How do they weigh the merits of various operating models and leverage the benefits offered by industry service providers, while effectively governing a portfolio of sourced relationships? What are the available sourcing options? How should they put together a framework to establish a truly ‘strategic’ utility to aid enterprises in achieving their desired ambitions?

A Sourcing Strategy – What Is It? Most major corporations define their strategic sourcing functions by terms that are related to the organisational alignment of the function. Some separate the responsibilities around geographic axes, paying homage to the autonomy of business units and/or the differentiating characteristics of certain markets. Others make a distinction between direct and indirect products and services — emphasising the variances associated with the procurement and consumption models that occur between serving customers versus serving internal needs.

However, there seems to be a common thread among corporations on the topic of scope definition. In general ‘Strategic Sourcing’ is being defined as the process of analysis of the internal and external environment via industry analysis, vendor analysis, business need assessment, competitive analysis, and supply/demand forecasting. There may be subtle differences in this definition attributable to such differences as the organisational alignment of the strategic sourcing utility and the industry within which the enterprise competes. Yet, the terms generally adopted for the function carry a distinctly ‘administrative’ tone to them.

The principle functions found in most strategic sourcing organisations relate to the following: • Customer Needs Assessment • Spend Analysis • Strategy Development • Supplier Selection • Contract Management • Supplier Management • Information Management • Strategy Measurement & Renewal • Asset Management

However, these functions simply don’t convey the level of importance and farreaching impact a well-designed sourcing strategy can yield for an enterprise. They also don’t communicate the benefits such an emphasis can deliver in the near and longerterm. With the pressures to reduce capital expenditures, achieve greater transparency and variability in general and administrative (G&A) costs, and streamline the enterprise for increasingly global competition, it has never been more important to have an empowered and progressive leadership team owning the portfolio of sourcing initiatives and ensuring that those initiatives are aligned with corporate ambitions.

Some enterprises are renewing the significance of their strategic sourcing teams.

They are empowering the strategic sourcing organisation to consider all alternatives for the effective engagement of third-party service providers in literally all corners of the enterprise. With the lessons learned from having administered relatively ‘low-risk’ functions such as facilities and real estate, payroll processing, and the like, senior executives are challenging the sourcing strategy to address the full spectrum of business functions as candidates for sourcing, including transactions related to human resources (HR) services, finance and accounting operations, customer relationship management utilities and even purchasing functions.

To deliver on these challenges, sourcing executives are leveraging the experience of the past 15 years related to the outsourcing of information technology (IT) services. With a model proven to be effective for the evaluation, negotiation, implementation and management of outsourced technology services, to include the strategy development aspect of those sourcing initiatives, the strategic sourcing function is renewed with expectations of cost savings, service quality improvements, greater variability to allow for changes in the business posture, and avoidance of capital expenditures.

The range of alternatives available to CIOs and functional executives is broad. It includes, among others: • Insourcing • Contracting in • Contracting out • Outsourcing • Alliances • Partnerships • Equity Ventures

The questions before corporate sourcing executives are not about whether to source, or even how to administer sourced services.

Instead, the questions relate to how to most effectively source, the appropriate definition of scope for sourcing initiatives, global versus regional consistency, and assured achievement of the promised results of sourced relationships, among others. The call for a strategic perspective has never been stronger.

Why is it so Difficult to Develop and Live?

Taking a ‘strategic view’ sounds easy. At its simplest form, it says, “Design an approach to achieve the destination we envision for the future.’ Yet the economic and political uncertainty in the world and in many corporations has never been greater. How is a strategic sourcing team to balance the nearterm imperatives with the ambition of building a sustainable model for the future?

Whether the focus is on the provision of technology, business process services, manufacturing, distribution, or supply chain efficiency, the approach used should gauge the degree of effectiveness, in terms of cost, quality, variability, and risk, among other factors and should be tuned to provide a professional judgment regarding whether and how sourcing might benefit the enterprise. Any analysis should address the question of scope — whether to bundle multiple business functions into a single sourcing initiative, or to apply ‘point solutions’ to address risks and opportunities.

A well-constructed sourcing strategy ought to answer three fundamental questions for the enterprise, all relative to the corporation’s ambition: • Where are we? How effective and efficient are our current capabilities?

• Where could we be? What are the marginal opportunities?

• How can we get there? What is the roadmap that will allow us to move forward?

Like many things in business, ambition is a moving target. Developing and living a strategic sourcing strategy is made yet more complex by changes in executive leadership, market pressures, shareholder expectations and the like. Yet it is possible for the enterprise to install an empowered leadership to develop and own the strategies related to the appropriate application of sourcing towards the firm’s business strategies.

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How Can I Install Leadership in Strategic Sourcing?

Leadership begins with empowerment. In the recent past, the CIO was generally empowered to define the ‘business of technology’ as a means to showing direct relevance between technology services and the business units served. Many CIO’s endeavoured to operate their organisations as business units, with defined services offered at defined prices. The discipline associated with delivering technology in a manner that appeared to be a commercial offering is generally cited as a marked improvement over predecessor models.

But even in technology services, whether those services are delivered in whole or in part through outsourcing relationships, the need exists for continually refreshed sourcing strategies. Once a sourcing transaction has been completed, whether for a narrow scope of services or even a globally-relevant relationship, the work of sourcing strategy is far from complete.

In other functional areas of the enterprise, notably the G&A functions that are being weighed for possible outsourcing, the ability to achieve the same degree of service provisioning is also being sought. But internal ownership of the initiative is often ambiguous, the degree of process integration that exists today may confuse the delineation of scope, and the service providers that exist in the marketplace may be hard to gauge.

Market experience reveals several key steps necessary to achieve true leadership in developing a strategic approach to sourcing. a) Link the corporate needs with sourcing alternatives — complete a thorough business needs assessment and spend analysis to provide alternatives in the areas of market intervention, technical intervention, cost structure, supplier relationships, internal process intervention and technology-enhancement initiatives.

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b) Develop short-term, mid-term and longterm sourcing strategies — develop and syndicate a statement of the strategy that includes each of the criteria and the rationale for each element. The strategy document includes statement of strategy, desired results, tactical choices and rationale, exit strategies, appropriate internal approval commitments required and strength, weakness opportunity, threat (SWOT) analysis components. c) Obtain internal alignment on strategy after documenting the strategy with rationale and supporting data, review the strategy for alignment with the internal decision makers in the C-suite and business units. d) Establish savings targets – as sourcing strategies always entail the reduction of costs, use the strategy document to define the potential savings targets based on the strategic intervention choices defined in the strategy. e) Develop the Sourcing Plan - use the strategy document and the savings targets to develop a detailed tactical plan that defines how each stated corporate need will be sourced, by whom, when and with what level of required support. f) Leverage market expertise to validate the merits of the strategy with focus on such considerations as the viability of the service provider marketplace, global resource considerations and impact of industry trends.

Applying a consistent process for sourcing strategy development across multiple corporate business functions, whether or not already sourced in whole or in part, will install a discipline for decision making, risk assessment, and opportunity evaluation that ensures alignment with business imperatives.

These steps will also help to guide any eventual sourcing transactions with respect to key business terms that should apply to the establishment of services agreements, such as

those related to exclusivity, termination rights, inter-process accountabilities, and other aspects contributing to a portfolio approach.

Finally, the benefits of such an approach will accrue to the sourcing management function that is ultimately accountable for monitoring and administering sourcing relationships. The achievement of the value propositions associated with a sourcing relationship is only made possible if there is a clear articulation of the strategy for the relationship in the first place.

Conclusions A truly strategic perspective on the topic of sourcing is more important to corporate enterprises today than ever before. Too often the role of strategic sourcing organisations is reduced to administrative tasks. Outsourcing is never a foregone conclusion, merely one alternative in the arsenal of the corporate executive.

By leveraging defined corporate needs and objectives, a framework for assessing the effectiveness of the current state of service delivery is outlined. In addition, developing a baseline characterisation, augmented by market expertise that delivers professional judgment regarding what alternatives are possible, is critical to the process. Finally, a lifecycle representation allows the strategic sourcing team to direct initiatives in a consistent and manageable manner.

Strategic sourcing is a lifestyle. It is not a project, in the sense of being a one-time or periodic initiative. Sourcing, done right, works.

About the Author John Buscher is a Partner at TPI, the world’s largest and most established sourcing advisory firm.

Since its founding in 1989, TPI has advised on more than 650 transactions with a total contract value exceeding €288 billion. TPI employs more than 250 advisors globally who average more than 21 years of industry experience.

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SHAPING DEALS THAT LAST - PRINCIPLES OF DYNAMIC OUTSOURCING

Achieving Sustainable Transformation in a Dynamic World David Thomas Vice President

Simon Knowles Marketing Director European Business Development CSC Principles based on research undertaken by the Leading Edge Forum - Executive Programme

The Outsourcing Challenge If you read the press, consult the analyst / advisor community, listen to clients or even talk to outsourcing vendors, it is clear that there are two themes running through the outsourcing industry at the moment.

Firstly, the outsourcing market is growing and more and more suppliers are attempting to enter: the more mature infrastructurerelated services are growing steadily; the applications and offshore markets are growing quickly; and the newer business process segment is growing exponentially.

Secondly, outsourcing is not delivering on expectations: over 50% of deals fail; around 75%

fail to deliver the value expected by both parties; well over half need to be renegotiated in the first 18 months due to 'material divergence between supplier and customer'; and an increasing number of companies are considering repatriating previously outsourced activity.

Now, we at CSC work with many clients around the world. None are stupid, all have a good understanding of their goals and the market alternatives available to them, nearly all retain well qualified advisors to assist them.

So why would such informed clients continue to buy a product that is so obviously flawed?

The issue is simple, even if the solution is not. The basic concept of outsourcing transferring work to a specialist partner more capable of leveraging economies of scale, scope and skill whilst lowering costs, reducing risk, improving variability and quality, remains highly attractive.

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Indeed, most clients are pursuing a sourcing strategy that will lead to the transfer of infrastructure and applications-related services as well as an increasingly wide range of business processes and support functions.

However, problems arise in two regards: • Accommodating change and innovation over the life of the contract; • Managing the array of partners participating in the overall sourcing strategy.

These are the issues that drive the dysfunctional outcomes correctly identified by industry analysts and advisors.

Historically, outsourcing arrangements have contemplated a one-to-one relationship between supplier and client, over an extended period of time, where little changes other than: the price and performance of the services in question; the volumes in which they are consumed; and perhaps the 'version' or currency of the technology platform from which they are delivered.

The New Agenda for Outsourcing Today's requirements are very different.

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. The competitive nature of the outsourcing business means that the levels of value offered to new clients can easily outstrip that being delivered to existing clients.

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.

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

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improvement.

Discrete outsourcing transactions may still be focused on operational efficiency, but 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 becoming a hot topic.

“The key issue is that contracts no longer reflect the requirements and priorities of the client, meaning that the supplier is only meeting the contractual needs rather than addressing the real business challenges” Traditional outsourcing arrangements and the contracts that define them do not cope well with radical change, and fail to address flexibility and collaboration between competitive service providers.

Even 'successful' arrangements rarely highlight innovation or creativity as the distinguishing feature of the relationship.

Traditional outsourcing contracts are transactional in nature and assume that much of what may happen in the next five to 10 years can be envisaged and captured in contract. They deal mainly with improvements to the existing environment rather than with transformation to a desired competitive position and maintenance of that relative position over time. They focus on legal remedies against non-performance and attainable penalties rather than on the behaviours that each party will exhibit when faced with opportunity, threat or regulatory requirement.

No surprise then that in the 'failed arrangements' referred to above the supplier is almost always discharging its obligations under the contract in full. The real issue 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 contractual, needs of the client.

Principles of Dynamic Outsourcing Increasingly, CSC and its clients are taking a new approach to outsourcing: 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 approach 'Dynamic Outsourcing'.

In essence the concept is built around five principles that address the issues outlined earlier.

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 capabilities 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

“As a consequence the relationship is dynamic, changing in line with the business and remaining vital over an extended period”

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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, 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 Sourcing Model: In CSC's most recent market survey, 93% of the respondents said that they were pursuing multi-supplier sourcing strategies and that collaboration between suppliers was a key challenge. It has become comparatively rare for a client to transfer all of its IT services to a single supplier, and when Business Process Outsourcing is included within the sourcing strategy there are indeed no single supplier models.

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.

“93% of the respondents said that they were pursuing multi-sourcing strategies and that collaboration between suppliers was a key challenge.”

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 reengineered 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 chosen 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.

Dynamic Outsourcing 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 Intentions: Dynamic Outsourcing 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 full-term 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 Outsourcing 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 realised and shared.

Designing this level of alignment is highly rewarding but challenging - unlike traditional approaches, it requires a level 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 Outsourcing

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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�

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 outsourcing 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

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business model and technology environment in real time, as the business's needs, priorities and configuration change.

5. Ensure Appropriate Systems of Governance/Alignment: Dynamic Outsourcing assumes that from the outset there will be a multi-partner environment providing end-to-end service delivery, management and improvement processes. It assumes the existence of end to end service delivery, management and improvement 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 outsourcing embodies these ideas in an innovative operating model and a radically different approach to governance.

CSC s 5 principles of dynamic outsourcing

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Focus on business outcomes

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Create a collaborative sourcing model

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Align customer and supplier intentions

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Build mechanisms for sustainable transformation

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Ensure appropriate governance/alignment

In short, Dynamic Outsourcing 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.

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 perhaps 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.

For dynamic, innovative, results-driven outsourcing solutions, talk to CSC Contact: Simon Knowles, Marketing Director, European Business Development E-mail: sknowle2@csc.com, Tel: +44 (0)1252 536871

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UTILISING OUTSOURCING PRACTICES TO GAIN IN-SOURCED SUCCESS

For many years outsourcing has been the top agenda item for companies looking to achieve cost savings and efficiencies from their internal processes. However, with talk of escalating costs and loss of control, there is a new wave of thinking emerging where companies are looking to take advantage of outsourcing processes without utilising a third-party. Companies are now looking to use In-Sourcing as a strategic tool.

Robert Morgan Director - Business and Brand Development

John Clements Senior Consultant Morgan Chambers

The term 'In-Sourcing' can hold a number of different meanings. For example, in the United States, it is widely used to describe the movement of foreign jobs into the country (otherwise known as Foreign Direct Investment). However, within the UK and Continental Europe, companies who undertake in-house service provision without applying the disciplines inherent in a thirdparty relationship have taken to calling this arrangement In-Sourcing as well. This common usage of the term In-Sourcing is incorrect, and it corrupts the term because In-Sourcing should be applied strictly to 'applying market forces, culture and disciplines to such internal services, not as a one-off exercise but on an ongoing basis'.

This involves major cultural and organisational change and political and economic sponsorship from the Executive.

Few companies truly achieve this sponsorship to ensure this philosophy is successful in the mid and long-term.

In this article In-Sourcing is specifically used in reference to intra-organisational relationships whether they be IT/IS driven or business process driven. There are two main types of true In-Sourcing that Morgan Chambers sees and in some cases, helps to create in the market today.

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These are: In-house services are delivered as if they were externalised. This is typically as a result of a strategic decision NOT to Outsource, but to organise in a more supply focused manner. In-Sourcing in this form is a major challenge. Culturally and organisationally, companies are seldom ready. Far too often this form of In-Sourcing is seen internally as a half way house alternative, that avoids biting the Outsourcing bullet.

In-Sourcing as a direct result of Outsourcing failure or, through a change of strategy or approach at executive level to return these services in-house. This was the case in September 2004 when JP Morgan hit the headlines by ending their $2.8Bn outsourced deal with IBM and taking back 4000 IT/IS staff and assets. In this type of scenario, In-Sourcing will have overcome the cultural challenge, and the 'demand' organisation has already begun to see these services in question as externally provided.

However, challenges remain: - The cost of exit from the existing contract(s). This can be prohibitively expensive unless there is a genuine 'with cause' breach of contract - The staff re-transfer implications

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(The Acquired Rights Directive in Europe or in the case of the UK, the TUPE retransfer issues. This legal constraint is not a consideration in the US, which offers comparatively little employment protection to staff in these cases).

Critical functions and knowledge needs to be retained. However, staff in Europe have a choice of staying with the supplier or (re) transferring to the client organisation - Understanding the true reasons why the Outsourcing failed on both sides (poor performance, perception versus reality, lack of original preparation, failure to manage, attrition of the original team, wrong cultural mix with supplier, etc).

It is critical that this is thoroughly understood before any decision to In-Source is made.

In spite of the issues raised, there are significant benefits that can be achieved from In-Sourcing. However, the achievement of these benefits requires that serious questions be asked before embarking on an In-Sourcing process. Regardless of the type of In-Sourcing, Morgan Chambers believes these questions remain the same, and they are discussed in the following section.

Deciding on Whether or Not In-Sourcing Could Succeed The discipline of In-Sourcing is 'applying market forces, culture and disciplines to such internal services, not as a one-off exercise but on an ongoing basis'. It demands the continuous application of true best practice disciplines to internal services. This is a major issue as best practice constantly evolves and can even stepchange within a very short period in, what is, a fiercely competitive global market.

The discipline of In-Sourcing is 'applying market forces, culture and disciplines to such internal services, not as a one-off exercise but on an ongoing basis'.

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Is there acceptance that outsourcing certain aspects is part of a sound In - Sourcing policy/strategy?

Q10 Q9

Will the organisations be able to put greater emphasis on understanding Business needs and handling large - scale change consistently well?

Q8

Is the “supply”organisation prepared to accept greater transparency and solid governance?

Q7 Q6 Q5

Q4

Q3 Q2 Q1

Is there acceptance that the In - Sourced operation needs at all times to be run, managed and measured as if it is an external service provider?

Is the “demand” organisation prepared to accept improved governance and education, as well as strengthening and maturation of its organisation?

Is the organisation as a whole prepared to accept and embrace cultural change?

Is there a real and significant investment budget to keep pace with market knowledge and change?

Does the business and service delivery function understand the demand/supply side of the equation?

Is there top - level executive understanding and sponsorship for the In - Sourcing initiative?

Do you have a deep understanding of outsourcing business models, tools and techniques?

Figure 1. Ten Key Questions to Ask Before Making an In-Sourcing Decision

Appreciating this should illustrate that making In-Sourcing successful, even in the short to mid-term, requires different operational work practices, planned investment profiles, open reporting structures, business representation, engagement and accountability processes and perhaps most crucially, a fundamental shift of senior management understanding as to why In-Sourcing is important and how it will work. Figure 1 highlights ten key questions that In-Sourcing decision makers will need to ask themselves before embarking on the In-Sourcing Process.

In-Sourcing Decision Do you have a deep understanding of outsourcing business models, tools and techniques?

More critically, do you understand and have access to mechanisms to keep this knowledge current going forward. For example, could you answer the following in some detail: • How do suppliers reduce costs and still make money?

• How do suppliers advance process and procedures?

• How do suppliers improve productivity and effectiveness?

• What is the appropriate level of planned

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•

•

• •

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investment cost per service tower/function (is it percentage of attributable revenue or 'profit' of the department)?

What upfront investment is needed to get the function to a world-class standard in the first place?

How do suppliers go about getting the Business 'on-board' and treating the function in a truly disciplined supply/demand manner?

What buying power do suppliers have that you do not, and can you compensate for this?

How do suppliers acquire and leverage IP? Can we provide detailed and transparent pricing to ensure users pay for what they use?

Can we verify that the costs we incur and the prices we charge are market conformant?

Can we keep abreast of new technology, and ensure that our staff are trained to use and exploit it?

Is there top-level executive understanding and sponsorship for the In-Sourcing initiative?

There must be a fundamental executive commitment and recognition that In-Sourcing is a long-term initiative. It is not just for constructing the initial agreement and

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underpinning disciplines. A single board member needs to take direct responsibility for the decision and the ongoing sponsorship, management and motivation of the internal unit. The threat must always be there that failure to achieve full and regular market benefits could result in the outsourcing of the function.

Does the business and service delivery function understand the demand/supply side of the equation?

The 'demand-side' senior Business users must commit to the 'supply-side' leadership and logic. There can be no undermining of the In-Sourcing mandate. As with an Outsourced operation, a contract should tie in both parties so that: • The service delivery function has a clear strategy and overt sponsorship to become 'commercial' • Service delivery inhibitors (e.g. typically unrealistic 'power user' demands) can be dismantled and swept away or at least addressed, understood and charged for accordingly • Money for buying in specialist support (i.e. outsourcing knowledge, cultural change experts, benchmarking data) is expected, budgeted for and available.

Is there a real and significant investment budget to keep pace with market knowledge and change?

This would include budget for technology refresh, staff training, new technologies and software, etc. as they evolve. Organisations who In-Source should expect to experience set-backs (e.g. service failures, cost overruns), but they should aim to keep it in context and ensure joint accountability for both the Business and Service Delivery.

Is the organisation as a whole prepared to accept and embrace cultural change?

In-Sourcing will be painful, systemic and dynamic. Outsourcing is about imposing new discipline and changing culture and the same also applies for In-Sourcing. Without ongoing commitment to change, In-Sourcing will rapidly fail.

Is the 'demand' organisation prepared to accept the fact there must be improved governance and education as well as strengthening and maturation of its organisation?

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• •

The Business must act like a client of outsourced services It must mature its approach and be accountable for failing to specify requirements correctly … … produce appropriate levels of business case for investment decisions, and … know how to buy, what to buy, when to buy, what transparency, reporting and responsibilities they will accept, etc.

Is the 'supply' organisation prepared to accept greater transparency and solid governance?

Outsourcing automatically provides greater transparency and solid governance; the supply organisation must now be able and willing to provide this too. Transparency and governance stops and depoliticises demand/supply disputes.

Will the organisation be able to put greater emphasis on understanding Business needs and handling large-scale change consistently well?

The service delivery function must employ properly qualified business consultants/analysts to act as the interface between service delivery and the Business.

This is important so that service delivery can respond more meaningfully and rapidly to business requests and change.

Is there acceptance that the In-Sourced operation needs at all times to be run, managed and measured as if it is an external service provider?

In effect, this means that the In-Sourcing arrangement needs to be set-up so that Service Delivery is: • Accountable • Measurable through KPIs and Business and Service SLAs • Consistently monitored • Able to capitalise on risk/reward opportunities • Expected to make a profit (ploughed back into services or not) • Able to incentivise key staff in way that is market relevant.

Is there acceptance that outsourcing certain aspects is part of a sound In-Sourcing policy/strategy?

It is normal to 'sub-contract' low value services e.g. old coding skills, hardware maintenance or web-hosting. In addition,

sourcing new services (i.e. services that you have never previously had) from the market with the view to managing them once they are implemented/stable, must be seen as normal and as mitigating corporate risk.

Additional Considerations In addition to answering these questions, there are other considerations that a sourcing decision maker needs to factor in:

Productivity It must be remembered that suppliers are forced by the market to realise a general annual 5% to 8% productivity improvement.

However, this can be even higher in certain commodity service towers. The pressure on pricing and margins is certainly far higher in back office business processes, where commoditisation is happening at a dynamic and alarming rate. For example the costs of administering insurance policies has dropped by 65% in three years and claims management by over 50% in a similar timeframe.

Success Could Lead to Other Opportunities Many In-Sourced organisations are asking whether there is scope to bring in other support workloads from different departments or divisions and even competitors. Back office functions that may be mission critical but provide no discernable competitive advantage are particularly suited. However, the fundamental question is, 'do we want to capitalise on our investment?' ITnet owes its

Many In-Sourced organisations are asking whether there is scope to bring in other support workloads from different departments or divisions and even competitors.

very existence to the fact that Cadbury's commercialised its IT/IS department. The same is true of Vertex, having been spawned out of United Utilities. Success breeds different forms of thinking and generates its own pressures and outcomes.

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Offshore/Near-Shore This aspect of the global market is evolving exceptionally fast and extreme caution needs to be applied within the context of In-Sourcing. Companies who move jobs offshore may find it very difficult to bring those jobs back in-house should they have a change in strategic direction.

Early direct client investment in building 'tied' sub-continent capabilities has almost vanished. However, any In-Sourced solution needs to see this aspect as valid and as a potential extension of internal options.

recruitment of industry expertise is typically advised. The management team needs to build a solid blend of skills across Governance, Service and Business domains, including: • Relationship (Business and Supplier) • Contract Management • Finance/Commercial • Strategy • Architecture • Security/Business Continuity • Organisation Policies/Standards • Legal • Supplier Management/Service Integration.

Sourcing Management Skills (General) Any In-Sourcing will require building a portfolio of new or improved service skills, some externally focused but most for internal interfaces. Developing these skills needs careful attention and may require external training contributions from specialists.

Indeed, it is seldom the case that an organisation has the necessary skills in-house to manage its In-sourcing decisions and

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Conclusion In-Sourcing is every bit as strategic as Outsourcing. This is because of the need for: • On-going sponsorship for cultural change within the Business • On-going sponsorship for commercialisation of the function • Formal adoption of a new supply/demand management style of operating.

The preparation and sheer effort to understand and maintain best practice and standards as the market evolves requires significant, planned and intelligent investment.

However, if the political will and foresight is truly there, then the success and transformation of the corporate entity will be immense. For some industries and companies it will fundamentally strengthen their ability to not just survive but to re-invent themselves both culturally and financially - customers and market analysts will notice!

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APPROACHING THE END OF THE ROAD PREPARING FOR THE NATURAL TERMINATION OF AN OUTSOURCING CONTRACT

Over the next few years, billions of dollars worth of outsourcing contracts are up for renewal.

Research has shown that companies outsourcing for the second time, having carefully studied and learned from past mistakes, have a far greater level of satisfaction than the first time around. This is partially due to better planning and management of the outsourcing process and also due to more realistic expectations about what they can achieve through outsourcing.

Geraldine Fox global director of sourcing services for Compass

Preparation is key. Twelve to eighteen months before the contract renewal date, the client organisation should consider its options: • Renew/renegotiate the contract with the existing service provider • Exit the contract, go to RFP with multiple vendors • Bring services back in-house • A combination of all of the above

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• Continuing the relationship with the incumbent vendor often appears to be the simplest and least stressful route, but is it the right way to go?

Following are some guidelines and principles to help you define and implement a viable re-sourcing strategy.

Take a broad approach to your outsourcing strategy: Make NO assumptions.

Don't be limited by past experience and don't anticipate a solution before you have examined the issue/problem, understand the cause and evaluated the alternatives: • Don't assume that renewing the contract is the best option, before exploring alternatives • Beware of the incumbent that offers you a 'deal you cannot refuse', before you

•

independently validate if this is, in fact, the best possible deal Don't assume that another vendor can solve the problems that the incumbent could not, without determining how your organisation contributed to the problems.

If you can't understand your own management problems, you are bound to repeat the behaviour with another vendor Don't assume that bringing the services back in-house will automatically result in lower costs, higher quality service and better alignment between IT-Business, without first understanding the cost and complexity of building a new IT organisation and recognising the resistance you might encounter in the Executive ranks Recognise that Business Process Outsourcing may be an excellent opportunity in the future, not just for traditional support services (HR, Purchasing and Finance), but also for vertical operations that affect one business unit.

Since IT underpins almost all business processes, be careful about committing IT services to one vendor only to outsource the business process to another. The resulting arrangement might be expensive and complicated.

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Involve the business units The business unit perspective on outsourcing can often differ dramatically from that of the IT department. Involve representatives from the business units to assist in reviewing the successes and failures of the incumbent as well as setting the goals and objectives going forward. You can't possible construct an effective outsourcing strategy without the direct involvement and participation of the business community.

Learn from your mistakes - and from your successes If you are disappointed with your outsourcer, recognise that only rarely is the service provider solely to blame for the problems with an outsourcing relationship.

Whichever path you choose, be honest and acknowledge that your organisation may have contributed to the problems and challenges with the existing relationship. Ask yourself these questions: • Did you have clear goals for outsourcing and did you articulate these goals to the vendor?

• Were you open and frank with the vendor at the beginning?

• Did your corporate objectives change as the contract matured?

• Did you perform due-diligence on the contract before you signed it?

• Did you staff your retained function appropriately?

• Did you allow the vendor to implement 'best practices'?

• Have you attended all of the 'committee' meetings described in the contract?

If you can answer 'yes' to all of the above questions, then you are in the minority. If you answered 'no' to any, make sure you don't repeat the problems of the past in any future outsourcing relationship.

Get an objective appraisal of the current relationship If a relationship starts off badly, it often settles into a scrappy, contentious, teenage existence and never achieves maturity. An independent third-party governance review of the relationship will identify key problem areas that must be addressed, whether or not you exit the contract. These governance challenges will not disappear with the incumbent vendor; unless you sort out the problems, you are in danger of repeating the

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problems with a new vendor. Understand your capabilities and limitations to manage an outsourcing relationship. Understand the uniqueness and idiosyncrasies of your corporation to ensure that the problems of the past are not rolled over into a new relationship.

How do your prices compare with the market?

Many clients believe they over-pay their outsourcer and could find another vendor willing to deliver the same services for less.

This is not necessarily true. Although some vendors will respond to RFPs with cut-rate pricing (at least in the first year) to win the business, such deals generally lead to dissatisfaction. If cost of IT services is an issue, quantify the potential savings before undertaking an expensive and stressful process of re-tendering or repatriation.

An independent evaluation can define a fair price for services in many areas. A 'proxy bid' - which can be based on either prices outsourcers charge, or on the vendor's cost to deliver services - can provide a quick and inexpensive point of reference and a critical reality check. One key benefit of a proxy is to show if a vendor is deliberately underbidding to oust the incumbent.

What are the costs and challenges of bringing services back in house?

Although insourcing might reduce overall IT costs by 20 to 30 percent, the transition will involve increasing the headcount and purchasing assets. This is a hard sell to the Executive and the Board of Directors. A viable business case to justify the upheaval must be based on a realistic and thorough appraisal of market costs, including the cost of repatriation as well as the personnel to run the operation.

Options and Risks Each course of action involves risks that should be evaluated and addressed before a decision is reached. The following discuses some of the risks associated with the options available at the end of the contract.

The risk of renewing the contract Do you have a troubled relationship with your outsourcer, characterised by mistrust and resentment, constant friction, and disagreement over the content of the contract?

If so, renewing this contract will most likely result in a relationship that continues to fail.

Trust, once lost, is rarely recovered. Lower charges, or vague promises of better service in the future, will not guarantee success in the future. If both parties are to blame, it generally comes down to a bad cultural fit, rather than a bad client and a bad service provider. A wiser strategy is to accept that you are culturally misaligned, to learn your lessons and move on, rather than to try to rebuild a seriously flawed relationship.

However, if the parties have established a good outsourcing relationship, primarily characterised by trust between the parties, renewal is a low-risk proposition. Issues such as perceived overcharging for services, or disappointing service delivery, can be sorted out during renegotiation, if done the right way.

If you decide to proceed with renewing the contract, do not do so without first: • Identifying the impediments to success in the existing deal through an overall assessment of the governance relationship to determine how the cause of the problems can be addressed during negotiations • Determining the scope of services and responsibilities to outsource and those to take back in-house. Often, the client has already 'absorbed' some responsibilities over the contract term. Now is a good opportunity to make this official • Developing a new master services schedule, which fully defines the service offering, maps the responsibilities, and establishes the service delivery targets and reporting • Using a third-party to develop a 'Proxy Bid' to fulfill the requirements for competitive bid situation and to set a fair market price for the services

The risk of going to RFP An incumbent vendor participating in the RFP process adds complexity to the process: • Other vendors may assume that you will use their bids to achieve a lower price with the incumbent: You must woo them to participate in the biding process • The incumbent has extensive knowledge of your operation and therefore has a substantial advantage over the competition • The competition may deliberately underbid to oust the incumbent • An incumbent vendor that expects to lose the contract may be uncooperative in sharing information and allowing access to other vendors

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The key issue in the re-bid scenario is control: You must have access to your data and information and build an internal and external team of experts to execute and manage the outsourcing process.

• Take control of your own data and information and avoid being placed at the mercy of the incumbent vendor.

• If you don't have access to the data and information required to issue an RFP, execute the contract-benchmarking clause and allow a third-party to gather that information.

• Understand the prevailing market prices before embarking on this process. If cost reduction is the primary driver, make sure other vendors can deliver on your expectations • The re-bid process is expensive and does not guarantee success. You will require substantial investment for internal and external resources. Make sure the funds are available before you consider this venture • The other vendors must be assured that the process will be fair and that all vendors will have access to as much knowledge about the operation as the incumbent. You must be prepared to invest in educating the other vendors about your environment • Do not use re-tendering as a means to achieve a 'better deal' from the incumbent: this is not only unfair and unethical, but also expensive. If that is your primary objective, then hire a consulting company to develop a 'Proxy Bid', which you can use in lieu of competitive bids • The incumbent should be given the benefit of the doubt when offering new solutions to previously existing problems. In other words, consider whether you can forgive and forget past transgressions and build a new relationship. If so, allow the incumbent to start with a clean slate and view their proposal with the same enthusiasm and lack of cynicism accorded to the proposals of the competitors.

The risk of bringing services back in-house Organisations that take this path are generally: • Dissatisfied with the performance of the incumbent vendor • Disillusioned about outsourcing • Pursuing aggressive cost savings or control over their IT budget • Have discovered that outsourcing does not add value to their operation • Aware that IT is a core competency and instrumental to their overall operation Although rare, large-scale insourcing will likely become more common over the next few years, despite the challenges. Our analysis has revealed that organisations have been quietly insourcing selective areas for years.

Don't underestimate the challenge of

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into a substantial cost savings and notable increase in quality Once the services are repatriated, be prepared to run the service as a business and to quantify the associated costs.

Consider that executives may find a discount from the incumbent vendor, or from the market, more appealing than achieving cost savings through repatriation.

Organisations unhappy with outsourcing might be tempted to repatriate the whole operation once their contract term expires.

While insourcing can be an enticing option, it's not as easy as it seems, and requires careful planning and execution, a strong business case, and a sympathetic executive willing to undertake significant cost and disruption.

If both parties are to blame, it generally comes down to a bad cultural fit, rather than a bad client and a bad service provider. justifying the business case to the executive: In the past, a key driver for outsourcing was to get people 'off the books' and to sell the assets for a cash infusion. Notwithstanding potential savings of 20 to 30 percent, making a compelling business case is often difficult, as insourcing will involve increasing the headcount and perhaps purchasing assets.

You must consider staffing the operation: Staff transferred to the incumbent vendor at the outset of the contract may be unwilling to transfer back. You must consider running this new organisation as a business.

Repatriation should never be a knee-jerk reaction to a bad outsourcing experience, but an outcome of careful analysis. Moreover, if you think the outsourcer is solely to blame for a bad situation, you are probably wrong, and will probably repeat the same mistakes whether you repatriate, renegotiate with the incumbent, or switch to another vendor.

Some issues to consider: •

Realistic, independent market costs, associated with the personnel and the cost of repatriation, are needed to develop a viable business case to justify the upheaval. You need to demonstrate the effort is worth it, which usually translates

Geraldine Fox is global director of sourcing services for Compass, a management consulting firm headquartered in Guildford, UK.

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www.CSC.com

For dynamic, innovative, results-driven outsourcing 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.

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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Enabling the Results Driven Enterprise

The New Agenda for Outsourcing

Since its formation in 1959, CSC has helped its clients manage and profit from every major wave of change in IT. 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.

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.

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.

Discrete outsourcing transactions may still be focused on operational efficiency, but 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

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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 becoming a hot topic.

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.

The Principles of Dynamic Outsourcing Increasingly, CSC and its clients are taking a new approach to outsourcing: 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 approach 'Dynamic Outsourcing'.

In essence the concept is built around five principles that address the issues outlined:

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 Outsourcing approach envisages sustained, or iterative, transformation throughout the life of the outsourcing 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 higherorder objectives are better understood by the business and have the advantage of greater longevity.

2. Create a Collaborative Sourcing 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 Outsourcing 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.

5. Ensure Appropriate Systems of Governance/Alignment: Dynamic Outsourcing assumes that from the outset there will be a multi-partner environment providing end to end service delivery, management and improvement processes. It assumes the existence of end to end service delivery, management and improvement 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 outsourcing embodies these ideas in an innovative operating model and a radically different approach to governance.

So if you want to implement a dynamic, innovative, results-driven outsourcing solution, talk to CSC. Experience. Results.

Experience. CSC.

3. Align Client and Supplier Intentions: Dynamic Outsourcing 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

CSC at a Glance www.CSC.com

Year founded: 1959 No. of employees: 79,000 FY04 revenue: $14.1 billion

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ENABLING DOCUMENT PROCESS OUTSOURCING IN THE CORPORATE DOCUMENT ENTERPRISE

Brian R. Miller Associate Director InfoTrends/CAP Ventures

The Business Challenge Within the present economic environment, intense competition, slowing growth rates, and a relentless drive to improve operational efficiencies have driven many economists to describe a transition in corporate planning from 'exuberance' in growth to 'prudence' in asset and personnel deployment. Other observers, including InfoTrends/CAP Ventures, believe that the exuberance within the corporate enterprise has not disappeared it has simply changed its focus in uncovering opportunities in a 21st century marketplace that no longer is perceived to be 'growing without restriction.'

This change in focus is a direct result of efforts to re-engineer business processes. If vertically-integrated, technologicallyadvanced companies dominated the manufacturing economy of the 20th century, lean and focused integrated enterprise will dominate the knowledge economy of the 21st century. Many companies within the marketplace are moving to transform from the former to the latter, and encountering significant pains in doing so.

The preferred option of many corporate transformations, organisational change, did reduce costs through headcount, but often simply didn't provide enterprises with the competitive advantages that were required in order to become (or remain) strong marketplace competitors. Often, resources that were 'rationalised' or eliminated were in crucial areas of core competency - reducing costs but ultimately damaging corporate effectiveness and competitiveness to a degree which made 'savings' uneconomical.

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Also overlooked within the organisational change movement was the importance of corporate document business processes. Often, these processes were optimised at the most recognisable point - output - but rarely examined from end-to-end, in order to better develop and refine operational improvements that optimised efficiency and improved quality.

As a result, traditional document outsourcing options such as facilities management and contracted print services were aggressively employed. These services, while delivering tremendous reductions in cost and improvements in efficiency, didn't optimise the document business processes within the enterprise to the degree that other strategic outsourcing engagements in other areas did.

Considering that, by some estimates, corporate enterprises spend 10% to 15% of net revenues on document processes, this was a significant barrier to full corporate optimisation.

Today, corporate organisations are moving faster than ever before to optimise their operationally-necessary business processes, including document business processes.

However, as they do so, they are discovering that they lack the fundamental knowledge and insight required to fully optimise their document processes. The challenge, for these enterprises and the service providers who assist them, is to understand the total document process, optimise it, and then - particularly in the case of operationally necessary but non-differentiating document processes - outsource the entire document process to an external provider.

Enterprises within the 21st century seek to transform their exuberance for optimisation of document operations into a plan for action.

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The object of this white paper is to examine the sources of cost within typical document business processes, identify a strategy for evaluating and controlling those costs, and proposing a roadmap for implementation of a new type of document outsourcing - full Document Process Outsourcing (or DPO).

The Enterprise Document Process Cost Model The Case of the Missing Efficiencies Even the best-run corporate environments often have difficulty in realising their enterprise document sources of cost.

Companies within the automotive marketplace, for instance, are considered pioneers in many cost reduction and efficiency improvement techniques within their industries, such as just-in-time manufacturing, lean production, and computer-aided low-cost design. However, automotive manufacturing document process costs are often difficult to evaluate and even more difficult to reduce.

Consider the case of a major European automaker faced with a strong cost-reduction focus in its core business. The company, an aggressively managed enterprise, noticed that its cost for production and distribution of technical service bulletins (or TSBs) was considerably higher than a larger European competitor. These TSBs, technical documents that are produced on a regular basis for the consumption of the automaker's dealer service network, contain crucial information about model changes, new repair techniques, new models, and safety/performance/reliability recalls. With an average of ten per month produced per model, the automaker distributed over 150 per dealer on a monthly basis to thousands of dealers across Europe, the Middle East and North Africa.

The TSBs were translated into local languages, printed and mailed from a centralised production facility within Europe.

The company focused relentlessly on reducing the total cost of its document operations, using the lowest cost offset technology, avoiding costly investments in new capital equipment, and optimising its production workflow to ensure that technical bulletins were sent to production quickly after the engineers in the enterprise developed them. Despite this focus, however, the company noted that its technical service bulletin operations overall cost 20% higher than the industry average and over 30% higher than its closest competitor. Confusion

Figure 1. The Total Document Cost Model

and frustration were the end result, particularly for document operations management who received extensive negative scrutiny from senior managers seeking to cut costs further for this crucial document process.

The True Cost of a Document: Focus on the Process The experience given in the prior case study is by no means unique within enterprise document environments in most industries.

Service providers within traditional facilities management engagements have often encountered customer surprise regarding the degree of cost savings found within a document outsourcing engagement - customers often expected total costs to be reduced far more than they actually are. The reality is that, in many cases, customers and service providers alike are not focusing on the true cost of a document process - from end to end.

As Figure 1 indicates, the cost of printing a document represents, on average, only about 1/7th of the total cost to produce a document. The overwhelming majority of the document's cost is found within the process around the document - functions ranging from IT integration to fulfilment to warehousing and archiving. These critical document sub-processes are often overlooked. Traditionally, customers and service providers alike have focused on the top portion of this equation, since the print production of documents is often the most tangible element of entire document process.

This has compounded the challenge of soaring document costs - in both production and office environments - within the less visible process elements even further.

Examples of these business process costs include: • Warehousing and archiving. The cost of facilities and personnel to store and manage archives of documents for future distribution on demand, and that ensure rapid access to documents; • Fulfilment. The cost to deliver documents on time to the appropriate end customer internal or external; • Procurement administration. Personnel and systems who procure document infrastructure including print, supplies and equipment; • Internal document prep and creative.

Personnel and systems who perform makeready services for documents within a production workflow and who perform creative work for documents within a given business process; • IT administration and integration. A portion of the time required for IT personnel to keep document infrastructure running and the costs of limited integration, such as re-entry work, datastream transformation errors, and other consequences of inadequate IT infrastructure; • Inventory obsolescence. The cost of documents that are produced, stored, archived and then disposed of when they are no longer necessary.

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When these sources of cost are examined individually, it's often found that not only are process areas unoptimised, but the true cost of those areas is often completely unknown. For instance, information technology costs are typically an internal corporate budget area completely separated from other document operations - making it difficult to determine exactly how much an enterprise might spend due to IT inefficiencies in a particular document process. Other areas of cost, such as procurement administration, are not examined on an activities-based costing basis, so while total expenditures in those particular areas might be known, 'useful versus wasteful' activity is typically difficult to discern. Finally,

some of the most costly areas, such as fulfilment, warehousing and archiving, are viewed as 'necessary evils' which are required in order for a document to reach its final destination, and which often lacks cost flexibility - for instance, postal charges are difficult to reduce on a per-item basis.

Document Lifecycle Analysis: Gaining Cost Transparency to Grow Opportunity Given the large number of 'murky costs' that exist within the corporate document enterprise - often over 80% of the total document cost - how do companies that wish to consider strategic document outsourcing options get a clearer picture of their total

Creation Concept Preparation

Warehousing/ Archiving Order Management

Fulfillment/ Distribution*

Printing Finishing

Figure 2. The Document Lifecycle

Figure 3. Optimised Business and Creative Workflow

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document costs? The answer is a document lifecycle business assessment.

These assessments, provided by most of the major document outsourcing service providers, examine a document process from end-to-end - from when a document owner produces a document through to when the document reaches the end of its life and is archived or otherwise ended. Leveraging production, office and business workflow analyses, and incorporating advanced efficiency and quality metrics from manufacturing (such as six sigma), these analyses identify unique areas of cost within the document enterprise and suggest strategies to reduce costs within both print and process.

Operationally, these engagements focus on optimising the business and creative workflows within production and office document operations - usually to accommodate a major document process or even several of them, using a flexible deployment model.

These structured engagements typically take between three days up to several months (for large and complex processes), with the end result being an actionable report that offers a new implementation plan. The end result today is usually a facilities management engagement that optimises key portions of the workflow in order to reduce process costs.

However, even in this case, corporate enterprises remain ultimately responsible for at least a portion of the document process even if they don't want to be.

This was clearly ascertained by the European auto maker mentioned earlier.

When it underwent an assessment of its TSB production process, it discovered a number of inefficiencies and areas of high cost within its process. All IT expenditures were accounted for under a separate department, which 'charged' its document operations as needed without a detailed report of what IT services were consumed at a given time. Due to legal requirements as well as customer quality assurance, the company maintained a large archive of TSBs that required a costly facility for storage as well as professional taxonomy and retrieval.

Fulfilment was a large expenditure, with some postal systems being so unreliable that TSBs had to be remailed if they were lost or, worse, couriers had to be paid to deliver the documents. Finally, administrative costs had skyrocketed as the process grew ever more complex with increasing numbers of new models and new repair techniques.

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In the examination of its cost centre, the automaker realised that while it was spending less than one Euro cent on print costs per technical service bulletin - where it had traditionally focused its document cost-cutting emphasis - it was spending 26 Euro cents on process - making the process side more than four times as expensive as the average document process.

Document Process Outsourcing: The New Strategic Option A Logical Extension of Corporate Outsourcing Strategy While print and document spending is an important corporate cost, it is only one of many areas that corporations have focused upon to make more efficient. As companies within multiple industry areas examine what's necessary to succeed, often with limited resources, they quickly realise the benefits of freeing up resources once employed for non-core business operations such as document production and distribution - and reallocating them to their core business. As a result of this philosophy, Business Process Outsourcing (or BPO) has become one of the highest-growth areas of service provisioning within recent years.

Most popular within IT and financial service business processes, true BPO involves

the outsourcing of an entire non-corebusiness process to a service provider, who streamlines the business process and delivers it more efficiently and effectively, at a lower overall cost. The service provider benefits by earning additional revenue, often in a shared risk/reward model that allocates greater benefits in exchange for delivering greater efficiency. The customer benefits by freeing up valuable capital resources to invest, within core business operations, and in the operational benefits that come from a lowercost, more efficient business process.

These benefits quickly become apparent when examined from a document business process perspective. Given the substantial complexities of process costs, as well as print costs, document BPO may indeed be one of the most effective areas for a corporate entity to consider outsourcing.

Defining DPO InfoTrends/CAP Ventures defines this emerging document BPO standard as Document Process Outsourcing (or DPO). DPO is defined as the assignment of an entire document business process to an external provider. An engagement typically has three major stakeholders: • The DPO service provider, who takes over, optimises and operates the document process; • The DPO customer, who contracts directly

Report based on predefined metrics Structured or unstructured content Figure 3. The DPO Supplier and Customer Relationship

with the service provider and outsources the document process in question; • The end user, who is the ultimate recipient of the document or set of documents produced by the document process.

Examples include consumers, government agencies, suppliers, business partners, distributors, employees and shareholders.

In order for a DPO engagement to exist, a number of conditions must be met. These conditions include a document business process that can be fully outsourced, as well as a business process that results in the production of a document - either electronic or hard-copy.

Service providers experience new challenges and new opportunities within a DPO engagement, when contrasted with a traditional document outsourcing engagement such as facilities management. The first of these new challenges is a new degree of accountability. Service providers are no longer responsible for discreet functions, such as page clicks or hourly creative services, within DPO. Instead, they must meet core service level requirements that include metrics such as quality, throughput, cycle time, and customer satisfaction. If these metrics aren't met, the service provider is penalised. In the old document outsourcing world, this meant that a service provider might lose a contract if a customer wasn't satisfied - but often still got paid for the work performed. However, within DPO, if a service provider doesn't deliver, not only does the provider still have to do the work, but may often find that it is delivering documents and receiving no revenue perhaps, even paying the customer for severe violations of service level agreements!

Despite this assumed risk, DPO also offers savvy service providers unmatched flexibility in deployment.

If traditional document outsourcing was defined by the 'how' - the equipment, personnel and infrastructure to be deployed to meet a customer's demands, DPO is defined by the 'what' - the document to be delivered. Thus, the service provider is no longer restricted to deploying only the document infrastructure that meets a given contract. It is instead free to support the service level agreements with any infrastructure necessary - allowing dramatic changes to improve efficiency, lower cost and ultimately grow revenue for the service provider over time. Within DPO, a service provider can switch to electronic documents, completely optimise the production workflow, or move personnel

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offsite, usually without requesting customer approval. Such freedom allows the most agile service providers to find additional margin with a document process and quickly adapt to changing business conditions.

The Customer and Service Provider Relationship Information Exchanges The relationship between customers and service providers within a DPO engagement, like many other elements of DPO, is unique within the document outsourcing realm. By turning over the entire document process to a service provider, the customer exits many traditional oversight roles and becomes simply a high level observer of process performance metrics.

Within DPO, customer inputs generally consist of unstructured or structured content, which the service provider transforms into the end document. That document is then delivered to the end user, while the service provider outputs a report based upon predefined metrics to the customer on a periodic basis to ensure compliance with service level agreements. The service provider may also output structured or unstructured content based upon the document process for the customer to use within internal operations.

Most Commonly Outsourced Document Processes The document business processes most often being targeted today include: • Customer facing document processes the production and distribution of customerfacing documents. These document processes include on-demand fulfilment of customer requests for invoices and account information (through print, e-mail, or the web) and general customer service related to customer communications. In-scope services include design, print production, hosting, call centre and fulfilment.

• Technical document processes - the production and fulfilment of technical documents, usually between business units or corporate enterprises. These document processes include creation and distribution of technical service bulletins,

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manufacturing supplier technical documents, product design specifications, and repair manuals. In-scope services include design, translation, print production, hosting, call centre, edistribution, archive management, and fulfilment. and communications • Marketing document processes - document processes related to the production of customer marketing and communications documents, generally externally facing.

These document processes include ondemand customer collateral fulfilment, translation services, digital and offset colour print, advertisement and media buying services, and document design services.

• Regulatory compliance document processes - document processes designed to ensure compliance with regulatory requirements (usually within financial services, insurance, and product safety).

These document processes include content management, archiving, fulfilment, document consulting, legal advisory services and document design services.

• Financial accounting and invoicing document processes - document processes that facilitate the accurate and complete capture, reporting and archiving of financial information, and the seamless invoicing and payment of customers and suppliers. These document processes include design, content management, archiving, fulfilment, document consulting, legal advisory services, print production, and hosting.

The market size, growth rate and specific opportunity notes for each of these document processes within the United States, Canada and Western Europe are profiled in each region's respective InfoTrends/CAP Ventures Document Outsourcing Market Forecast.

Identifying Document Processes Best Suited for DPO A document business process assessment remains the best basis for determining the potential for document process outsourcing, but several key guidelines exist for determining which business processes are generally able to benefit from DPO. They include:

• Operationally necessary processes with no competitive differentiation.

Document business processes that are required for operational continuity, yet do not serve as a competitive differentiator from an end customer perspective are often among the best sources of opportunities for efficiency improvements.

• Processes that grew in an ad-hoc fashion. Often, document business processes grow around a particular application or technology in a piecemeal fashion, with little or no conscious thought to improving their efficiency. Since a key portion of DPO is business process redesign, processes that have not been rigorously structured can benefit substantially from a full redesign and redeployment as DPO. that serve as an • Processes Often, organisational bottleneck. document business processes can slow the performance of an organisation - a particular competitive weakness in a market environment that favours efficiency and rapid movement. Service providers who can open up a bottleneck through process redesign and superior execution can reap large dividends from the resulting performance improvements at their customers' enterprises.

• Processes that serve to fulfil regulatory requirements. Customers often execute document processes that fulfil regulatory requirements simply to avoid fines for noncompliance - viewing them as 'necessary evils.' By providing superior performance at a lower cost, document process outsourcing service providers can gain a strong and predictable revenue stream over time.

• Processes that are generally viewed as weak or needing adjustment by customers. Customers often know that a document process is weak, but lack the focus or expertise to optimise and redeploy a process. By redesigning these processes for the customer, a document process outsourcing service provider can gain revenue from helping customers transform a desire for improvement to actual cost reduction.

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Governance

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OUTSOURCING GOVERNANCE: A KEY TO BUSINESS SUCCESS

Tim Cummins President/CEO IACCM

Outsourcing saves money and gains efficiencies, but frequently fails to satisfy other strategic goals. CXO's are often to blame when results are sub-optimised; they fail to impose disciplined governance on the project.

These findings come from a multi-company survey recently undertaken by the International Association for Contract & Commercial Management (IACCM), a worldwide non-profit association dedicated to improving corporate standards in contracting, negotiation and relationship management.

Outsourcing represents a key shift in business strategy and structure; it demands sophisticated

governance methods, including project organisation and required skills, and ensure their linkage with overall strategy and objectives.

People issues are amongst the most important factors for the success or failure of outsourcing.

Investing time and effort to learn best practices from peers, potential providers and from those who have outsourced similar functions will maximise the effectiveness of outsourcing. However, corporations also need to re-think the quality, training and motivations of the staff they deploy to design, implement and manage outsourcing projects. And they need to consider carefully the role and contribution of external ‘experts’.

Surveys of executives suggest their decisions to outsource are often more strategic – things like innovation, time to market or maintaining competitiveness. techniques and methods to ensure its success.

Among the most common problems, executives often fail to adequately define business goals, to ensure 'political interests' do not derail the project, to assign accountability and to monitor performance.

The survey found that a majority turn to external resources for help, but those resources may compound the problems. Their approach (especially if goals are not well-defined) is often traditional and confrontational, which undermines collaboration - internally and externally. Executives who want to maximise the return from outsourcing need to rethink

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More than 100 companies contributed to the IACCM survey on the current state of outsourcing. More than 90% have experience with outsourcing IT and contact centers, with nearly 40% having ventured into business process outsourcing (BPO). Only 13% have been involved with outsourcing of research and development.

Among respondents, the major driver for outsourcing is (or rapidly becomes) cost reduction and related financial goals. Surveys of executives suggest their decisions to outsource are often more strategic – things like innovation, time to market or maintaining

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competitiveness. So why does this gap arise?

In part, it is due to the relative difficulty of measuring and monitoring these strategic attributes relative to more traditional financial measures. The survey results and interviews also highlight internal discord and mismatched priorities within the outsourcing corporation, which then reflect into confused negotiation, inappropriate terms and conditions and wrongly focused targets and measurements.

The reported problems are highly consistent - and they could be avoided if

manage contract complexities and collaborative relationships, which are essential for successful outsourcing, is identified as a weakness in virtually all the participating companies.

In the end, most outsourcing projects deliver significant benefits; but the research confirms that many targets are missed – and that overall, performance could be dramatically better if there was a different and more imaginative approach.

Governance is also critical to post-award contract and relationship management. Many

Outsourcing is complex; it raises not only the traditional issues of any major business negotiation, but frequently introduces complex emotional and loyalty issues that cloud judgments and confuse objectives. available resources and knowledge were used better. Outsourcing is complex; it raises not only the traditional issues of any major business negotiation, but frequently introduces complex emotional and loyalty issues that cloud judgments and confuse objectives. So it requires a new approach.

Most companies initiate outsourcing through their established business processes and resources. They build teams that then apply the same approach as they would to any major purchasing relationship. The timing of involvement, the training of the personnel, the management and measurement systems by which their success is gauged – none of these factors are typically given enough consideration. And the results reflect this. The teams run out of time; key data is missed; gaps in skill or knowledge remain unfilled.

Survey responses indicate that companies enter the world of outsourcing without adequate preparation and internal coordination at the inception of their outsourcing projects. Business strategies lack definition, or have not been adequately embedded into the vendor requirements, so negotiators miss critical service level and/or contingency provisions in contracts. These contract components would be captured in the contracts with better cross-company communications. This is reflected in reported issues such as the lack of a strategic plan, poor project definition and projects that are over budget and behind schedule. The ability to

outsourced relationships are fraught with claims and disputes that steadily chip away at trust and also detract from the innovation that could have been achieved.

The Big Three The three biggest issues that people were grappling with in setting up outsourcing projects were: 1. Lack of a Sourcing Plan and on-going management process 2. Poorly defined projects 3. Lack of skilled resources to execute and manage outsourcing projects While people know that they need to have a Sourcing Plan that is aligned with the strategic direction of the company, few companies have such plans. While contract managers may have marching orders to outsource a project, in the rush to execute the assignment, they don’t feel they are in a position to question the business motivation for outsourcing (linked to business strategy) or the business needs and requirements that drive project requirements. Often, key metrics are missing – for example, there is no readily available benchmark data to indicate goals or ensure clarity of objectives. Without a compelling business case and a clear definition of business needs and requirement, a company can easily pick the wrong vendor (a small partner vs. a large vendor capable of scaling) or the wrong outsourcing solution

(offshore vs. onshore; captive vs. third-party; short-term contract vs. long-term contract; etc.). Failure to plan is preparation to fail.

The lack of skilled resources seems to be a common problem. There are many traditional approaches to address this issue. An alternate approach may be to use temporary personnel with outsourcing experience. But in either case, it is key to understand precisely what skill and knowledge sets are needed and then to align these with what is available.

Companies often select the wrong people internally – and then compound the error by recruiting the wrong external experts.

While jobs in program management are probably best kept in-house, many of the tasks such as day-to-day project management, setting up a change management plan and onthe-ground vendor audits can be accomplished with short-term personnel. This will allow the company personnel to focus on the important tasks. Moreover, if a company is only in the early stages of using outsourcing as a tool to drive business performance, they may not want to invest in full-time personnel until the company has made a commitment to outsourcing and has a better understanding of long-term resource needs.

A very high percentage of the respondents (75%) said that they did not think their company had the skills required for success in-house, they were seeking help to ‘just get it done’. It is important to get the right kind of help. Many surveys show that more than half of all outsourcing projects fail to meet expectations within two years, suggesting that many of the ‘traditional’ methods are not ensuring success. For example, in projects that involve a large number of experienced vendors (indicating a relatively mature market), the RFI/RFP/RFQ ‘dance’ may be long, costly and lead to contentious relationships. For such projects, a clear understanding of the business requirements allows the list of capable vendors to be shortened to only a few.

Instead of the traditional bidding and negotiating process, a collaborative partnership with the service provider can yield the desired result – a skilled and experienced partner with deep expertise in the process that is outsourced that has both the infrastructure and knowledge of best practices that can be leveraged to the client’s advantage. Most importantly, a collaborative partner will be committed to evolving with your business needs.

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Dispersion of Outsourcing Expertise

Use of External Resources

40% of those surveyed have consolidated key resources into a centralised outsourcing group, with a further 15% now moving toward such a model. Participants clearly see such centralisation as an improvement - though many are concerned that even centralised groups manage individual deals and relationships as 'islands', with limited sharing of knowledge and experience. Implementing a systematic process that draws in relevant talent, both internally and externally, during the structuring of outsourcing projects will leverage internal skills and fill skill-gaps, leading to greater success.

The early obstacles - such as poorly defined projects, lack of clear strategy, poorly drafted contracts - are showing signs of improvement through organisational learning.

However, the rate and extent of that improvement is not satisfactory for many of the respondents. While outside legal, contract, and outsourcing advice is used successfully, most companies still use internal expertise with good results.

57% of respondents use external skilled resources to assist with the contract. Yet, the contract-related concerns for this group (versus those that do not use external resources) do not seem to diminish – and in some areas, their post-award concerns actually increase.

In part, the contract can only be as good as the requirements. There is also some evidence that external resources bring excessive focus on containing the consequences of risk, as opposed to reducing the probability of things going wrong - or more importantly, setting the framework for things to go right. For example, external advisors who advocate contentious negotiation may succeed in driving down prices and 'winning' on certain terms, but do they really assist in shaping a successful deal that delivers on their client's goals? Many external experts appear driven by the need for short-term, highly visible 'wins', rather than longer-term, superior results through collaborative approaches and win-win deal arrangements.

The Contract

Managing & Monitoring Vendors:

Tight contract definition can help define and manage service provider relationships.

The most critical elements highlighted in the survey were service level definition and monitoring, and performance management (remedies and penalties).

Successful outsourcing arrangements have leveraged performance bonuses with great success.

The contracting process is critical to success in outsourcing deals. The evidence suggests that there is frequently poor integration and misalignment between contracting and business personnel, both on the buy-side and sell-side of outsourcing contracts.

In the contract, while there will be a fair amount of ‘template material’, the contract manager plays a very central role in setting it up for success (or failure) – talking to all the key parties to ensure that the project is aligned with the strategy and the requirements of the firm; and, that the business requirements, the relationships and the governance are captured in this ‘live’ document.

There is a set of issues on the vendor side that did not surface in this client-side dominated respondent population. Those include the capability of vendors, the structuring of contracts from their perspective and their management processes.

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The survey accentuates the critical importance of skilled post-award contract management. Managing and monitoring performance is a headache for most of the participants. It seems to fall into three categories: • Successful companies focus on setting and maintaining the right service levels and relationship goals, with skilled resources ensuring pro-active management. These companies report relatively low levels of dispute.

Clever use of ’progressive SLAs‘ that demand increases in performance over time have shown excellent results. In addition, a regular review of mutual business goals and examination/realignment of relationships allow changing business conditions to be managed proactively. This, however, requires a level of engagement that most companies do not recognise. More dialogue, exchange and resources allocated to relationship management really are necessary for ongoing success. It is a fundamental shift in outsourcing management, from a traditional ‘stick’ approach to a more collaborative ‘carrot and stick’ approach.

•

•

Mid-performing companies have designated (not necessarily dedicated) resources responsible for monitoring service levels, though this is primarily concentrated on performance reporting and reactive handling of claims. Dispute levels are high - the relationships are contentious and extensive time is occupied in handling claims.

Poorly performing companies do not have dedicated contract management resources.

They typically view such roles as part of various jobs. Often, these roles are not even defined. Performance monitoring is limited and disputes are rare. However, such disputes, when they do arise, assume major proportions and typically involve executive management.

Once again, these findings point to the planning process. While SLAs are a part of most contracts, successful companies put considerable thought into their structure. For example, if the vendor is new to the process, the SLA should reflect the reduced effort required by the vendor over time - it might take the vendor 1 hour for a particular task at the beginning of the contract, but only take 35 minutes after doing it for 12 months. Similarly, the SLA should place a requirement to use technology (to reduce the required effort, thereby reducing costs).

Additionally, there should be agreement between the company and the vendor on future performance improvement goals for defined future periods (i.e. 3% improvement in every quarter). These goals and agreements take time to construct, but good planning will ensure that you get the business value from outsourcing and it is easy to monitor and manage.

Coordination across Multiple Suppliers: 83% of the respondents were from companies with revenues over $1.3B. In this group, 89% saw the need for coordination among suppliers as a significant issue. While outsourcing usually begins with single project, the indispensable need for coordination comes when there are multiple outsourcing suppliers.

This points to the advancement of the respondent companies along the outsourcing maturity curve.

While many of the respondent companies have done well with outsourcing projects, the skills required for acquiring and managing multiple suppliers are different. There is the

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issue of integrating across vendors - vendors working within a particular function (say, HR) and then those across outsourced functions (say, HR and F&A) in the entire company.

Conclusions Outsourcing creates a unique governance phenomenon. As an approach to doing business, it reflects the breakdown of traditional corporate structures. The old, centralised, multi-functional model is being replaced by a dynamic, networked

At a recent CXO conference, there was extensive discussion on the merits of collaborative negotiation and whether this was a potential remedy for today's underperforming relationships. The debate rapidly illustrated the lack of consensus over what is meant by 'collaboration' (one delegate even explained the perils of using such a word in parts of Europe), yet it also pointed to the growing importance of robust capabilities in negotiation, contract and relationship management. The quality of a corporation's

The old, centralised, multi-functional model is being replaced by a dynamic, networked environment, where the ability to manage change and enable innovation is critical to business success. environment, where the ability to manage change and enable innovation is critical to business success. It is hardly surprising that companies struggle to define the right process, measurements, roles and skills at the same time as they are designing their new environment. Yet that is the demand that confronts them.

'commitment management' is moving to centre stage because it lies at the heart of its strategic business execution. Outsourcing governance is one very immediate example of this critical need.

This report on Outsourcing Governance is based on research originally undertaken in late 2004 and supplemented by interviews

conducted in January – April 2005. Input came from a cross-industry group of international corporations, 75% with operations in North America, 74% with operations in Europe and 65% with operations in Asia-Pacific.

To hear and learn more about topics like this from THE Global Contracts & Negotiations professional association, visit www.iaccm.com/emea. “Contracting in a Global Marketplace: Are your Contracts, Systems & Procedures Ready?” will take place in Munich on September 12 & 13 and will be attended by over 150 leaders in sourcing and sales contracting.

ABOUT IACCM: IACCM is a non-profit association that focuses on developing excellence and integrity in contracting processes and practices in worldwide business. It has members representing more than 1,000 corporations in over 90 countries. More details are available at www.iaccm.com

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SOLUTION PROVIDER

www.atosorigin.com Atos Origin is a leading international IT services

Atos Origin Headquarters

company. Its business is turning client vision into results through the application of consulting, systems integration and managed operations.

Building VN 404, PO Box 218, 5600 MD Eindhoven, The Netherlands Tel: +31 (0)40 27 89073 Fax: +31 (0)40 27 84158

Business Contact John Dain – Senior Vice President Global Managed Operations

John Dain – Senior Vice President Global Managed Operations E-mail: John.Dain@atosorigin.com Tel: +31 (0)40 27 89073

Atos Origin – Turning Client Vision into Results Atos Origin is a leading international IT services company for enterprises worldwide. We integrate business and technology by designing, building and operating IT-enabled business processes that improve the effectiveness of our clients’ businesses.

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 solutions that add real value and act as a base for future growth. And to maximise 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.

Our business approach is based on establishing a long-term partnership approach that encourages success through mutual benefit.

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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.

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.

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 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.

The Group's activities are supported by four Centers of Excellence, which deliver solution alignment, dissemination and development as well as supporting business development activities in four key domains: • Strategy & Technologies • Operational Transformation • Financial Management Solutions • People & Change Management

SYSTEMS INTEGRATION – Delivering Clarity from Complexity

Atos Consulting has a legacy of longstanding and close relationships with its clients, providing complete business transformation solutions that deliver highly effective results. We support our clients through every stage of the change processfrom strategic planning through to implementation and beyond.

System Integration Delivering Clarity from Complexity Our Systems Integration specialists design and implement new IT solutions and systems across a number of core markets, ensuring a seamless fit with existing infrastructures, and providing ongoing support and enhancement of IT applications. Our extensive experience in integrating people, processes and technologies enables us to design, build and operate practical and robust solutions.

We work with our clients to develop, implement, and maintain systems that will support and enhance their overall business strategy. And as the market moves towards standardised packages, we design and implement solutions from leading vendors

sourcing capabilities to deliver substantial Total Cost of Ownership (TCO) reductions via flexible pricing models aligned with their business activities. Key services and solutions include: • Enterprise Resource Management • Customer Relationship Management • Business Intelligence and Corporate Performance • Supply Chain / Product Lifecycle Management • Enterprise Application Integration • Enterprise Content Management • In-Product Software • Security The Group is particularly strong in managing large-scale integration programs and has significant technical architecture skills. Our complete service offering is founded on extensive training and the adoption of high-level industry certification standards such as the Capability Maturity Model (CMM), Project Management Institute - PMI and ISO9001: 2000, with a set of fully defined systems integration processes.

Atos Origin is also a leader in deploying European SEI CMM capabilities. We currently

We work with our clients to develop, implement, and maintain systems that will support and enhance their overall business strategy. such as SAP, Oracle, Siebel, and integrate them in complex environments, using best-ofbreed technologies. We also perform projects using customized software, open source, and legacy applications, including various languages and design methods. We work with a carefully selected group of strategic partners to develop and implement end-to-end offerings, integrating best of breed technologies and packaged systems.

As the global demand for application management increases, the Group has crafted a unique and transparent value proposition, incorporating state-of-the-art process and methodologies, strong governance, industry standards (ITIL for continuous service delivery). This solution, applicable across all of our core markets, leverages our global

have global sourcing centers in Europe, Asia, and South America assessed up to CMM level 5. Our approach to global sourcing is about leveraging a worldwide portfolio of capabilities, irrespective of their geographical location, to deliver high performance, dependable and globally consistent services across all the elements of the IT lifecycle.

Managed Operations Strategic Alternatives Addressing Cost and Risk Our highly successful outsourcing operations manage core IT infrastructures for clients, including datacenters, desktop support, server farms and network communication systems. We provide 7x24

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Atos Origin – Atos Origin is a leading international IT services company for enterprises worldwide.

'follow the sun' infrastructure and application support through our global network and the company has unrivalled experience in major enterprise programs covering complex and 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.

Our services and solutions include: • Enterprise Infrastructure Management Managing and transforming the IT infrastructure operations of our clients.

• Desktop - Installation and management of complex distributed architectures encompassing workstations, LANs, servers and software and including 7x24 Global Service Desk IT Support through a worldwide network.

• Utility Based Computing (UBC) - including on-demand storage and capacity services that are secure, reliable and cost-effective.

• Application Management - True end-toend support covering infrastructure operations and management. Specialist processes for the management of SAP R/3 platforms, including multilingual, specialist helpdesks, application maintenance and platform management.

• Messaging - Internet and extranet services, collaborative messaging, web and portal based application-hosting services.

• Security - Managed security services supported by experienced global service delivery and infrastructure resources.

We are a market leader in areas such as eBanking and eTrading, encompassing bank, brokerage and insurance companies. 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 our subsidiary, Atos Worldline.

We offer flexible pricing and capacity options to meet the changing needs of your business and help your enterprise realize its full business potential. And with consistent outsourcing solutions, flexible contracting options, and measurement against service quality, an increasing number of world-renowned clients such as the International Olympic Committee (IOC) have chosen Atos Origin as their worldwide information technology partner.

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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.

Understanding the Issues - Maintaining the Competitive Edge 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 Industries, the Public Sector, Telecom, Utilities, and Media.

Atos Origin has a strong and balanced presence in all the major IT spending markets of Europe and we provide comprehensive IT support operations in The Americas and Asia Pacific for our multinational client base.

www.atosorigin.com

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 billion and it employs over 46,000 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, AtosEuronext and Atos Worldline.

For more information send an email to outsourcing@atosorigin.com

Comprehensive IT support – IT support operations in the Americas and AsiaPacific for our multinational client base.

or visit the company's web site at http://www.atosorigin.com

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BUILDING FOR THE FUTURE THROUGH OUTSOURCING

KarstadtQuelle AG, based in Essen, Germany, is Europe's largest department store and mail order group. The Group achieved sales of EUR 13.4billion in the financial year 2003. The Group's business segments include Over-the-Counter Retail, Mail Order, Services and Real estate. The KarstadtQuelle Group employs around 100,000 staff.

Ulrich Engelhardt CIO, Over-the-Counter Retail KarstadtQuelle

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. The agreement comprised the Infrastructure Division of Itellium Systems and Services GmbH, which was responsible for KarstadtQuelle's data processing centers, network operations, terminal device support and the application management group. Around 900 staff transferred to Atos Origin under a business transfer arrangement.

Planning for a Secure Future As part of a regular review of strategy, the issue of costs and cost structures became a leading business driver for the company.

Looking ahead on a 10 year basis, it was clear that the company would not be able to realise sufficient synergies or leverage significant economies of scale alone and that therefore other options such as outsourcing had to be considered. This would also give an opportunity to change the cost structure and move a number of costs from fixed to variable.

A decision to look for an outsourcing partner

was made and the company then embarked on a carefully planned process to realise this.

The first step was the production of an information brochure. This enabled the company to crystalise its ideas and strategy and identify what it was looking for in an IT services partner. This brochure was created to contact the leading players in the European outsourcing market and led to a number of positive responses. From these we selected 4 to go into a second phase. This was done on the basis of the level of cost savings they had identified based on the provided information and on their position and experience in the market.

The second phase was followed by Due Diligence, after which the Board made their decision. In coming to their decision the original factors of cost savings and market position were still critical and they considered additional important factors such as the service providers experience and track record in areas and disciplines such as legal, finance, communications and especially Human Resource Management (HRM).

Atos Origin had a long-term strategy based on achieving significant growth in Germany and using the area as a major center of business. Their approach also meant that our own computer centers would be kept in place and crucially they had excellent human resource procedures in place to manage the

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transition and careers of the employees that would transfer, and a proven track record of assimilating outsourced staff. As a result of the Board's deliberations, Atos Origin was selected and a long-term outsourcing agreement was announced in September 2004.

Quick and Smooth off the Grid!

Although this outsourcing deal has only been running for a few months, the results were noticeable very quickly. Atos Origin management moved to Essen to be near the business and this has ensured that communication has been fast and transparent at all levels right from the start. No interruptions in normal daily business were experienced and everyone's favorite state 'stability' was continued!

On the crucial aspect of cost savings we immediately noticed that the cost of running applications was cheaper. Not only that but we have already seen a price reduction in the first half of 2005 on the levels agreed in 2004.

Significant assets have also been smoothly transferred bringing further savings. And importantly, with the company going through a restructuring process, we have been able to reduce our own headcount. This aspect of change always has the potential to cause problems to employees and their families.

However HRM formed a major part of the Board's thinking during the decision making process and this has proved successful so far.

Here establishing trust and selecting a partner with a good cultural fit have helped to ensure a good and smooth start to the relationship.

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Keeping the Motor Running - A FutureProofed Strategy!

Although we have had a good start, our strategy has always been to secure the longterm success and profitability of our company.

Continued cost reductions are obviously an expectation but there will be many other aspects to be considered when entering into this sort of outsourcing relationship.

We will particularly look to Atos Origin for thought leadership and innovation in their IT service provision. This could be in the area of technical changes such as new networks or in other areas like pricing. Here for example, new ideas such as a flexible project oriented or application-by-application billing model would allow for better budget planning and give us greater control over our costs.

I believe that a customer, rather than sales-oriented approach from our partners is the way forward.

Finally, I believe that a customer, rather than sales-oriented approach from our partners is the way forward. An open relationship, regular discussions and feedback, and a positive desire to share the risks and rewards form the basis for the way ahead.

Together with Atos Origin, we have made a good start in delivering our long-term strategy.

Looking ahead I feel that the nature, fit and strategies of both companies means that there are a number of clear and strong market drivers to ensure that both parties will continue to build on this start and grow successfully and profitably together.

About the Author Ulrich Engelhardt is Managing Director of the Itellium Systems & Services GmbH, responsible for consultancy and systems integration for the Over-theCounter Retail business of KarstadtQuelle and also CIO for Karstadt Warenhaus AG, covering some 160 department stores and sports shops.

After studying education and mathematics, in 1987 Ulrich Engelhardt founded the company 'SHE Information Technology AG' in Ludwigshafen. Until 2003 he developed SHE into one of the leading companies in the area of IT-Security, first as a managing director and later as a chairman of the board.

From 1987 to 1991, he was also was active as a lecturer in mathematics and business administration at the university of Mannheim in Germany and carried out research at the chair of business administration and operations research.

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DEMAND SUPPLY MANAGEMENT IN IT OUTSOURCING PARTNERSHIPS GOVERNANCE IN ACTION! For decades outsourcing has been growing with double-digit percentages. Different types of outsourcing have emerged, including Business Process Outsourcing and Global Sourcing. Furthermore, the focus of IT outsourcing partnerships is slowly shifting from efficiency to innovation.

Key to maintaining this growth, and making outsourcing a success for both parties, is governance. Weill and Ross, in their 2004 book 'IT Governance', define it as 'specifying the decision rights and accountability framework to encourage desirable behavior in the use of IT'.

While adequate IT governance needs to be applied by any service recipient, it is unthinkable having a governance structure in place in which external service providers do not play a role. A co-operation model has to be implemented, which we have called Demand Supply management.

Erik Beulen International Business Development Manager Atos Origin

Introduction A large number of IT outsourcing relationships still lack a proper governance structure and mechanisms and this hinders the achieving of business goals and smooth service provisioning. A lack of IT governance also hinders transparency for which the mutual obligations of both the service recipient and service provider have to be crystal clear.

The need for proper governance structures is stronger than ever due to the need for compliance to regulations such as the Sarbanes Oxley Act, IFRS or IAS. In this respect the key questions that have to be answered are: What are the responsibilities for both the

implementing outsourcing relationships - the Demand Supply Management Model.

The Demand Supply Management Landscape On the Demand Management side, business management has information requirements, which are structured by functions usually labeled as information management. These requirements are predefined by the guidance and constraints of the business strategy and more particularly by the IT strategy, including the sourcing strategy.

Demand Management is also responsible for structuring the information needs and supplier management. The Chief Information Officer,

A large number of IT outsourcing relationships still lack a proper governance structure and mechanisms and this hinders the achieving of business goals and smooth service provisioning. service recipient and the service provider in IT outsourcing partnerships? - And how to make Demand Supply management work?

Atos Origin's approach is to provide a structured approach to successfully

Information Managers, Contract Managers, Purchasing Managers, Information Analysts and Functional Application Managers are part of the Demand Management.

Supply Management is responsible for the

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Service Delivery management

Account & Contract management

information management

business management

execution of the services as this is the core business of the service provider. Account and contract management is responsible for managing the relationship with the service recipient and for managing the service provisioning. Service delivery management is responsible for the service provisioning, including investigating new technologies in order to continually provide state of the art services to customers at an affordable price and at adequate service levels. The business opportunities afforded by these new technologies have to be taken pro-actively to the service recipient.

Client Executives, Customer Operations Directors, Lead Technical Officers, Client Managers, Service Delivery and Customer Operations Managers, TCO Managers and Customer Solution Operations Managers, Sales Managers, Services and Project Managers are part of the account and contract management.

strategic level

tactical level

operatioal level demand management

outsourcing partnerships are business driven.

An IT outsourcing partnership may start with a cost cutting focus and over time transform into a business driven IT outsourcing partnership.

These different types of IT outsourcing relationships are detailed in Figure 2. For each type the characteristics are detailed in so called growth paths addressing customer value, service concept and the relationship.

These different types of IT outsourcing partnerships have an impact on Demand Supply Management. The interface in IT outsourcing partnerships targeting innovation objectives has to be more open and intimate resulting in sharing strategies and ultimately jointly going to market. This requires making available resources to create and assess innovation proposals. These resources come from both the service recipient and the service provider.

The level of management attention also increases in IT outsourcing relationships targeting innovation. This type of IT outsourcing partnership also requires more business and process knowledge from the service providers. Therefore a sector focus is necessary within the organisation structure of the service recipient. This sector focus should not be limited to the account management organisation, but should also encompass the business and strategy consultants.

Furthermore business management has to be involved in the discussion on Demand Supply Management. Discussions between the business management of the service recipient and the service providers are essential!

Communication Structure In order to ensure service provisioning, the implementation of a formal communication structure and service delivery processes are

On each level, strategic, tactical and operational, formal communication structures have to be implemented. necessary. On each level, strategic, tactical and operational, formal communication structures have to be implemented. The implementation is a mutual responsibility for the service recipient and the service provider.

This implies that both the service recipient and the service provider have to free up qualified resources for the implementation of the formal communication structures.

The proper implementation of service delivery processes is important to ensure governance. These processes, related to continuous services, have interfaces to both the service recipient and the service provider.

Here, Atos Origin uses CSDM, which essentially consists of a set of coherent business processes for the delivery of continuous managed services, including a supporting organisation and tools. In order to

supply management

Figure 1. Demand Supply management structure

innovation Value Innovation in Business - ICT

The Nature of the IT Outsourcing Relationship The nature of the relationship can be derived from the objectives of the IT outsourcing partnership - efficiency or innovation.

In IT outsourcing partnerships targeting efficiency, there are two different types of partnerships - single service management (direct cost focus) and multiple service lifecycle management (Total Cost of Ownership focus). These IT outsourcing partnerships are technology driven. In IT outsourcing partnerships targeting innovation there are also two different types of partnerships - business portfolio innovation (return on investment focus) and business process innovation (value focus). These IT

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ROI Reduce business & Process cost

Business Process Innovation

TCO Structural ICT cost reduction

BPR Service portfolio Innovation

Joint venture and co-makership Comp.edge driven

Managed Innovation process Business result driven

efficiency

Customer value Growth path

Direct Cost Immediate ICT cost savings

Multiple service life-cycle management

Service Concept Growth path

Single service management

Demand/Supply Efficiency driven

Relation Growth path

Pro-active SLA’s Supply Output driven

Figure 2. Nature of the IT Outsourcing Relationship: Targeting Efficiency or Innovation

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A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships

IT board

Business management

Information management

Account & contract management

Strategic level

IT management

Client management

Tactical level

Contract management

Service management

IT operations

Operations management

Operational level

Demand management

Service delivery management

Supply management

Figure 3. Formal Communication Structure at the Strategic Level: the IT Board

have CSDM applied consistently by employees all over the world, the supporting organisation assists in setting up the processes, checks the tooling and provides training and auditing facilities. The scope of the processes is limited to the tactical and operational level.

Strategic Level At the strategic level there are two forums - the IT Board and the Partner Board. These meetings are held annually or bi-annually. At this level there may also be an important role for independent consultants.

IT Board - The IT Board is an internal forum within the service recipient's organisation to maximise the contribution of IT to the business processes. The CIO, the information managers and the senior business management, including C-level, represent the service recipient at this meeting. The purpose is to align future business requirements and provide an overview of technical innovations to the business management. This is essential at the strategic level and will be captured in the IT strategy. Sometimes the IT Board is used to get feedback from representatives of the business management in order to the draft IT strategy, prior to endorsement. No decisionmaking on the IT strategy is made in the IT board, this is done by the service recipient's Board of Management.

As the discussions are of strategic importance to the service recipient, there can be some resistance within service recipients to inviting representatives of the service provider for the IT Board. The commercial interests of

Partner board

Business management

Information management

Account & contract management

Strategic level

IT management

Client management

Tactical level

Contract management

Service management

IT operations

Operations management

Operational level

Demand management

Service delivery management

Supply management

Figure 4. Formal Communication Structure at the Strategic Level: the Partner Board

the service provider can also hinder participation in the IT Board. If the service recipient does invite representatives of the service provider, these representatives should be experts with an in-depth understanding of the relevant topic and able to make a knowledge based contribution.

Partner Board - In the Partner Board joint strategic planning is important. The involvement of senior management from both the service recipient and the service provider enables the implementation of visionary strategies. This is essential in IT outsourcing partnerships with a focus on return on investment (ROI) and business process innovation. Transparency of information is also key at this level and in mature IT outsourcing partnerships the information is provided by a management cockpit.

Another important topic for the Partner Board is to resolve escalated tactical issues related to the service provisioning and issues related to mutual contractual obligations. The contract provides guidance to resolving the issues, however, contracts cannot cover everything. In that case, the service recipient and the service provider have to solve any issues in good faith.

In addition to the Partner Board, the service recipient and the service provider can add independent advisors to the governance structure at the strategic level to secure the interests of both the service recipient and the service provider. Furthermore, independent third parties can provide benchmark and auditing services in order to ensure a proper

governance structure in the IT outsourcing partnership. Due to the independence of the advisor, the results of the benchmark and auditing services are binding for both the service recipient and the service provider. The Customer Operation Director and sometimes the Lead Technology Officer are present at the Partner Board in order to address technical issues in the discussions on behalf of the service provider. The information managers are their counterparts.

Finally, relationship building is key at the strategic level. The client executive has to maintain the relationship with the CIO and the information managers. This relationship with information management does not mean that the client executive has no or limited relationships with representatives of the business management. It is more that the relationships with business management do not contribute to the governance of the IT outsourcing partnership but rather influence the stakeholders in the IT outsourcing partnership in order to expand the IT outsourcing partnership. Therefore as this solution paper is only focusing on governance issues this is not addressed in detail here.

Tactical Level At the tactical level there are four forums the Service Review Board, the Contract Review Meeting, the Service Portfolio Board and the Change Advisory Board. These meetings are held monthly or bi-monthly, except for the service portfolio board.

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process is more stable after this initial period.

Service Portfolio Board - In the Service Portfolio Board the appropriateness of new technologies is explored. Therefore the production process is related to the Service Portfolio Board. Based on the strategic guidance of the service recipient, the service provider provides feasibility studies and pilot projects for the implementation of new technologies. Also in this board, decisions on the implementation of new technologies are taken. Therefore configuration management is also related to the Service Portfolio Board.

Structural problems experienced with the

Software control & distribution

Service level Management

X

Contract review board

X

X

X

Service portfolio board Change control board

Complaint Management

X

Configuration Management

X

Query Management

X

Production

Change Management

Atos Origin's CSDM processes Problem Management

Service review meeting

Change Advisory Board - In the Change Advisory Board, change requests are discussed at a high level. The impact of a change request in terms of financial impact and alignment with the IT strategy of the service recipient is discussed. Based on the initial approval of the Change Advisory Board, the Change Control Meeting will prepare a detailed implementation plan for any change requests. Then based on the implementation plan, the Change Advisory Board will approve a change request. At the operational level the Change Control Meeting carries out the execution of the changes.

Incident Management

Tactical forums Call management

Unsolved issues at the tactical level are escalated to the strategic level. These forums are linked to Atos Origin's Continuous Service Delivery Model (CSDM) processes.

Service Review Board - In the Service Review Board the performance of the service provider is discussed based on reports of the last month's performance. These discussions are related to the service level management processes. The reports also include historical data on the performance of the service provider. The trends can be analyzed and in the case of non-performance, improvement plans have to be implemented. These implementation plans are related to the incident management and problem management processes. The implementation of the improvement plans is the responsibility of the service provider and the status of the implementation of these plans is also discussed in the meeting. The implementation of the improvement plans often requires the implementation of changes. Therefore the change management process is also related to the Service Review Board. In the meetings, the Information Manager and the Contract Manager are the representatives of the service recipient and the Customer Operations Director and Service Delivery Managers attending on behalf of the service provider.

Contract Review Meeting - For the Contract Review Meeting, the invoices are approved in advance, based on a concept invoice prepared by the service provider.

Preparing this concept invoice avoids discussions afterwards and any delay in payment of the service recipients to the service provider. The complaint management process is also related to the Contract Review Meeting as it enables cost control and transparency for the service recipient. Only undisputed elements of the concept invoice will be invoiced and therefore the service level management process is related to the contract review meeting. If necessary any disputed elements of the invoice will be discussed at the strategic level. The Contract Manager and Purchasing Managers from the service recipient attend the contract review meeting and the Client Manager and Customer Operations Director represent the service provider.

In IT outsourcing partnerships the service review and the contract review can also be combined into one meeting to save time and valuable resources. This is often a more feasible option after the start of the IT outsourcing partnership, as the invoicing

X X

X

X X

X

Table 1. Mapping of Atos Origin's CSDM Processes on Forums at the Tactical Level

current services are also discussed here and from the starting point for new/adapted services.

This means that problem management is also related to the Service Portfolio Board.

Ideally the strategic guidance is not limited simply to guidance based on the IT strategy. If the service recipient is also willing to share the business strategy with the service provider, exploring the appropriateness of new technologies will be more effective. To obtain this will mean the participation of information managers and contract managers on behalf of the service recipient, and also of representatives of the business management.

The lead technical officer and customer solution architects represent the service provider in the Service Portfolio Board. The initiatives of the Board have to be approved by the Partner Board at the strategic level, as there is a serious cost impact in implementing new technologies.

Operational Level At the operational level there are three forums - the Service Meeting, Change Control Meeting and Project Meeting. These meetings are held daily or weekly. Unsolved issues at the operational level are escalated to the tactical level.

Service Meeting - In the Service Meeting, day-to-day issues related to the service provisioning are discussed, including the handling of calls and operational service levels such as availability. Therefore the service level management process is closely connected with the Service Meetings. It is essential to keep track of the issues discussed over a period of time and therefore the incident management and problem management processes are also related to the Service Meetings. Unsolved issues have to be escalated to the tactical level - the Service Review Board.

The Customer Operation Manager and Service Delivery Manager represent the

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Project Meeting - In the Project Meeting day-to-day issues related to the projects are discussed. It is essential to keep track of the issues discussed over a period of time and any unsolved issues have to be escalated to the tactical level - the Service Review Board.

Here the Project Manager represents the service provider. The counterpart of the Customer Operations Manager is the Contract Manager and sometimes representatives of business management also participate in the service meetings as they often provide the budget for implementation of the project. And as the information analysts and functional application managers of the service recipient have a relevant in-depth knowledge they can also be invited to the project meetings. As the focus of CSDM processes is on continuous services none of the CSDM processes are linked to the project meeting.

X

X

X

X

X X

Service level Management

X

Software control & distribution

Query Management

X

Complaint Management

Production

X

Configuration Management

Change Management

Atos Origin's CSDM processes Problem Management

Service meeting Change control team

In today's IT outsourcing partnerships there is a strong need for governance. The business strategy and the IT strategy set the boundaries of the IT outsourcing partnership and the nature of the IT outsourcing relationship determines the focus of the Demand Supply Management which then has to be implemented on three levels - Strategic, Tactical and Operational.

The implementation of Demand Supply Management requires substantial management attention from both the service recipient and the service provider.

Implementing sound Demand Supply Management ensures an alignment between today's business dynamics and technological innovation opportunities resulting in stable governance in action!

Incident Management

Operational forums

Conclusion

Call management

service provider at these meetings and the Service Delivery Manager is the interface to the service managers. The counterpart of the Customer Operation Manager is the Contract Manager. Often representatives of business management also participate in the Service Meetings and as the information analysts and functional application managers of the service recipient have a relevant in-depth knowledge, they can also be invited to the Service Meetings.

Change Control Meeting - In the Change Control Meeting, analyses are made of the implications of the implementation of the change requests. As it is important to fully understand the present mode of operations, the configuration management and the software control & distribution process are related to the change control team. Based on the analyses, the Change Control Meeting approves the implementation plan for the change request and so the change management process is also related to the Change Control Meeting. The final and financial approval takes place in the Change Advisory Board, as there is a cost impact in implementing change requests. And, as change requests are often business driven, representatives of the business management also have a role in the Change Advisory Board.

The other service recipient representatives are the information managers, information analysts and functional application managers.

The Service Delivery Managers and Service Managers and Costumer Operations Manager attend on behalf of the service provider and sometimes the Client Manager is also present as change request might have a large commercial impact, for example the replacement of applications or the upgrade of a software package.

X X

Project meeting

Table 2. Mapping of CSDM Processes on Forums at the Operational Level

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AN OUTSOURCING PARTNERSHIP SHOULD BE ABOUT MORE THAN JUST SAVING MONEY!

The Immigration & Nationalisation Directorate (IND) is part of the UK Home Office and employs 16,000 staff spread over 100 sites. It is responsible for setting and enforcing the UK immigration and nationalisation policies. These include: • Policing the national borders, managing immigration and preventing illegal entry • Processing and approving applications for UK nationality

Stephen Calvard Director of IT IND

Introduction The continuing popularity of outsourcing as a business strategy is often driven by a desire to reduce costs, make costs more transparent, and shift the costs from fixed to variable. However, outsourcing can bring other benefits such as increased efficiency, flexibility and continuous improvements, which often bring more obvious and tangible benefits to end-users and customers alike.

Within the UK Government in recent years has been a desire to expand what became know as 'Private Public Partnerships' as a way of harnessing the latest ideas and technology and thereby securing improvements in public services and creating better value for money for taxpayers. As far as I am concerned for the Immigration & Nationalisation Directorate (IND), I am looking for, and expect, a close working relationship with a flexible and highly responsive IT partner.

Providing front line staff with the information they need, when and where they need it As part of the United Kingdom Home Office, the IND employs some 16,000 staff spread over 100 sites all over the UK. It is responsible for setting and enforcing the UK immigration and nationalisation policies

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including policing the national borders, managing immigration and preventing illegal entry and processing and approving applications for UK nationality.

This is a highly 'information intensive' Directorate requiring the efficient and effective handling and collation of large amounts of data. In order to continuously provide our staff with the information they need we are looking to create a new flexible IT infrastructure with a common look across many sites.

This involves a major technology upgrade of the current IT infrastructure, including desktops, networks and applications. We also want our service provider to act as our Prime Integrator, a role involving: • Managing the day-to-day Service Delivery of IND's major IT service providers and suppliers • Promoting uniformity of technical and architectural standards • Providing a single view of the IT infrastructure • Giving IND's own IT Directorate the space to focus on delivering benefits to the business

Finding the right partner As with most things in life, finding the right partner is never easy! For us this was run as a major European-wide procurement

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programme. This lasted about 18 months and following some very tough competition from a number of excellent candidates we reduced the candidates to a shortlist of three.

Then we had to see how our business drivers and goals matched up to the capabilities of the different service providers.

As indicated earlier, value for money was a key aspect in our decision-making, but there

Atos Origin was not completely unknown to us, as they had been assisting the IND with a number of key business programmes since 2000. are other factors that are also equally important in other areas. A flexible and 'future-proofed' approach is important to deal with often changing policies and approaches.

Suppliers need to be open and engender trust and be both able and willing to respond quickly. And the cultural fit is also important.

When working together in high-pressure situations, and to tight deadlines, it is always important to be able to understand each other and to be able to discuss things in an open and transparent manner.

So at the end of this process, in August 2004, we selected Atos Origin as the company that offered the right balance and the cultural fit and agreed a 6-year transformational

outsourcing contract. Atos Origin was not completely unknown to us, as they had been assisting the IND with a number of key business programmes since 2000. These included involvement in complex initiatives such as Programme Management, Programme and Office Support, Project Management, Change Management, Risk and Issue Management and Technical Assurance.

Atos Origin took over control in November 2004 and the partnership has got off to a good start. Personnel from both our teams are already closely physically located, making communication easy, and are operating as a tightly integrated unit. The importance of the 'cultural fit' is already paying off and, for example, we have already been able to present jointly our business plans and to demonstrate a good fit between our respective targets and objectives.

Proactively building for the future As the relationship grows, it is important to ensure that we can build for the future. There is a need to build strong ties between Atos Origin, the IND business and the in-house IT Directorate. From this we will be able to satisfy our major goal of a single, effective infrastructure that offers ease of working and uniformity across our large spread of offices so that front line staff have access to the information they need, when they need it.

An efficient and effective IT infrastructure is critical to almost every aspect of the IND's work. As Home Office minister Des Browne said at contract inception, “Atos Origin demonstrated to us that they have the expertise

and understanding to successfully deliver the IND's IT. Investing in its infrastructure is part of the directorate drive to continually improve the working environment for its staff as well as ensuring value for money.”

About the Author Stephen Calvard was appointed IT Director in the IND, Home Office in 2001. Before that, he was with the Ministry of Defence where he held a range of posts.

He joined the Ministry of Defence in 1970 and worked for 10 years on electronics research and development at the Royal Aircraft Establishment. In 1980 he worked for 5 years on technical support to Naval Defence Systems before moving to London in 1985, where he was the project manager on a range of major guided weapons systems.

In 1990 he became a Scientific Advisor with the Central Scientific Staffs in MOD, Whitehall. In 1992 he was transferred to the Defence Research Agency where he held the post of Director of Engineering Services.

From 1994 to 1998 he was the MOD's IT Director in Defence Intelligence in the Old War Office, Whitehall.

In 1999 he spent a year at the Royal College of Defence Studies, Belgrave Square, London.

Stephen has one son and one daughter and lives in Guildford, Surrey.

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SOLUTION PROVIDER

www.simmons-simmons.com Simmons & Simmons is a leading international law firm with over 1,000 legal staff in 19 business and financial centres across Europe, the Middle East, Asia and the US.

David Barrett - Partner Tel: +44 (0)20 7825 4032 E-mail: david.barrett@simmons-simmons.com Peter Brudenall - Partner Tel: +44 (0)20 7825 4346 E-mail: peter.brudenall@simmons-simmons.com Michael Sinclair - Partner Tel: +44 (0)20 7825 4155 E-mail: michael.sinclair@simmons-simmons.com

Delivering innovative outsourcing solutions Simmons & Simmons is a leading international law firm with 19 offices across Europe, the Middle East, Asia and the US.

We believe it is who we are and how we approach our work that sets us apart from the competition. We set the highest standards in the way we operate and pride ourselves on our client focus.

Our philosophy to international growth has been to build practices around local lawyers who understand the country's culture, business and language. In doing so, we have created a closely knit and cohesive network of lawyers. It is a significant challenge to unite the wide range of cultures and legal approaches that run through our firm and we believe that we have succeeded in achieving the right balance between respecting these traditions and delivering a global service.

We have organised ourselves in line with our clients' requirements into key practice areas and sector groups.

Our sector focus allows us to bring together specialists from across our practice areas into dedicated groups. This enables us to better appreciate the environment in which our clients operate and to work with them to achieve their objectives. We currently have sector groups focussing on Aerospace & Defence, Consumer Goods, Energy & Utilities, Financial Markets, Pharmaceutical and Biotechnology, Real Estate & Construction,

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Technology, Media & Telecommunications and Transport.

The core practice areas, from which we draw our sector teams, are: Commercial, IT&Telecoms, Corporate, Dispute Resolution, EU & Competition, Employment, Finance, IP, Projects, Real Estate & Environment and Tax.

Simmons & Simmons in outsourcing Simmons & Simmons has one of the leading outsourcing practices in Europe, which is supported by an extensive international network. Our lawyers advise on all types of outsourcing transactions, ranging from traditional IT outsourcings, business processes and offshore outsourcings to cutting-edge strategic partnerships. We advise clients throughout the duration of the transaction, from the commencement of the sourcing until after the end of the transition process. We advise on single jurisdiction relationships to multi-million dollar global arrangements. Our clients include vendors, intermediaries, consultants and customers.

Simmons & Simmons is ranked joint second in The Lawyer's survey of UK-based law firms advising suppliers on outsourcings.

The list was compiled following consultation with in-house lawyers. Simmons & Simmons

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was also recently judged by the same publication to be the leading firm in the UK in advising suppliers in the Indian offshore outsourcing sector.

The Simmons & Simmons team is dedicated full-time to outsourcing and we bring a wealth of experience not just on the hard commercial and legal issues that arise but on softer issues such as governance and contract management and broader issues such as pricing process and key performance indicator ('KPI') measurement and remedies.

Outsourcing transactions are very different from other transactions companies enter into they involve staking key processes for their success in the hands of others. The lawyering and soundness of those transactions is crucial to business success. We have a breadth of experience in providing and managing the provision of legal advice to address the following legal and commercial issues within the context of a global outsourcing:

Service Description The heart of a successful outsourcing is a clear definition of 'who does what for whom for how much'. In other words, there needs to be a clear service description, a clear statement of customer responsibilities and a clear delineation between the two. All too often this is ignored (particularly by lawyers, who tend to regard these as technical matters). In contrast, we regard achieving clarity on these issues as being at the heart of what we do.

Service Levels and Service Credits It is important that the service level and service credit regime is properly designed so that it incentivises good performance rather than institutionalises poor performance.

Service credits are not a perfect solution to non-performance and they have to be engineered with care in conjunction with other mechanisms (such as reporting requirements and escalation) designed to identify and mitigate poor performance.

Regulation

Offshore

Outsourcings in the financial services sector are usually subject to supervision by a regulator (in the UK, the Financial Services Authority). A proper balance needs to be struck between customer and supplier regarding who bears the cost of changes required as a result of changes in regulation.

US listed companies and their subsidiaries (and those with US listed securities) have to comply with various audit requirements under the Sarbanes-Oxley Act. These requirements need to be reflected in the contract by drawing a workable balance between access to supplier systems and processes and protection of supplier commercially sensitive information. We have developed a standard set of contractual provisions to achieve this.

Outsourcings in the public sector require expertise in the regulations governing the public procurement process. Precise legal analysis is required in relation to proposals to procure under framework agreements and when relying on exemptions to the procurement requirements; the requirements of the 'OJEC' process (contract tender notices) need to be complied with; the legal requirements of tender evaluation can be exacting; government approved contract wording needs to be used. A considered understanding of 'how things are done' in the public sector informs our advice in this area.

Understanding the offshore outsourcing market is key to a successful outsourcing negotiation. We have been working in India for over 10 years (and even longer in China) and our Indian and Chinese qualified outsourcing lawyers provide valuable support for outsourcings in these key offshore destinations. Offshore suppliers often have a different attitude about the sharing and allocation of risk, and appreciating this is crucial in both commercial and legal negotiations.

Issues concerning the enforceability of the contract, the ability to change the on-shore/off-shore mix, the protection of intellectual property rights, and compliance requirements (including data protection) all need to be addressed. Due diligence (in addition to the strict legal requirements) is fundamental.

Data Protection and Confidentiality The transfer of personal data for processing in another country can raise significant issues under data protection legislation in Europe and elsewhere. Contractual models for permitting such transfers and for protecting the information are at the heart of many business process outsourcings. The reputational consequences for not addressing this in an outsourcing can be significant. Data protection lawyers within our outsourcing team are experts at formulating appropriate contractual protections to achieve such compliance.

Pricing Competitiveness and the Cost of Change One of the key commercial issues is ensuring ongoing price competitiveness.

Benchmarking and other forms of market testing, indexation and incentivised gainsharing are common, although there is no 'one size fits all' solution. Long-term arrangements are likely to yield more attractive pricing, but with a greater need over time for changes to be made to the service description, service levels and technology platform. It is vital that the outsourcing agreement caters for change in a way that 'systematises' the process of agreeing and implementing change, and that it controls and governs the cost of changes made.

Structuring and Tax Some outsourcings, to be financially viable, depend on preserving VAT/sales tax groupings and the exempt status of services. Tax lawyers within our outsourcing group regularly advise banks and financial institutions on VAT treatment in outsourcings, and liaise with the Revenue where necessary to obtain clearances.

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Simmons & Simmons – is a leading international law firm with 19 offices across Europe, the Middle East, Asia and the US.

Management and Corporate Governance One factor that is consistently absent in failed outsourcings is a proper management and governance structure. The issue of corporate governance needs specifically to be addressed in the contract: a jointly appointed management committee, an independent chair, a dispute resolution mechanism, an escalation procedure, joint participation in continuous improvement and other classic 'signatures' of good corporate governance should be designed for the deal.

Employment Issues While the Acquired Rights Directive (ARD) (the directive governing employee transfers, implemented in the UK as TUPE) cannot be contracted out of, the customer and supplier are free to re-allocate cost amongst themselves for the consequences of the ARD (including reallocating the cost of meeting transferring claims). One of the major commercial issues is the cost of redundancies of surplus employees at the end of the agreement, as the supplier will wish the customer to bear this cost (whether or not the employees are deemed to have transferred to the customer by virtue of the ARD). But the ARD is but one of several issues that need to be addressed in relation to inscope employees. Pensions, employment terms and conditions, consultation, and benefits also need to be addressed.

Liability One of the most contentious issues in an outsourcing is the allocation of liability between the customer and supplier. The supplier will want the degree of liability it takes on to reflect the reward it is receiving, while the customer will wish to transfer risk to the supplier. Issues such as liability for data loss or corruption can be major issues for a supplier. Creative solutions are sometimes called for: can the supplier accept liability because it has insurance for that kind of loss? Can liability for delay be quantified in advance by way of liquidated damages?

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Exit Management A right to terminate is a hollow right if it cannot be backed up with the ability to exit smoothly to a successor supplier or to take the service back in-house. The exit rights will need to be carefully designed to balance the competing needs of the customer and supplier.

Post-termination assistance, use of intellectual property rights and assets, recruitment of staff, and return of data and records will all need to be addressed.

Delivering successful outcomes A successful outsourcing requires that the process of outsourcing is project managed and that the resulting contract balances the objectives of limiting risk and achieving a commercial and enduring outcome.

Expertise Simmons & Simmons provides cutting edge legal advice with lawyers who are specialists in outsourcing, many of whom have worked in industry, and who therefore understand the commercial drivers to a successful outsourcing. Our lawyers are recognised leaders in the field - we publish and speak on outsourcing globally.

Industry Specialisation We advise on outsourcing across a wide range of industry sectors, nationally and globally, including the health, technology/telecoms, defence, banking/finance, insurance/pensions, transport, and public sectors. We work closely with outsourcing suppliers, businesses wishing to outsource, consultants and specialist industry associations.

Strength in Depth We have a global outsourcing group throughout our network of global offices, enabling us to mobilise large teams of outsourcing lawyers on short notice to manage even the largest of national and global outsourcings. Reflecting the dominance

of India (and increasingly China) for offshore outsourcing, we have Indian and Chinese qualified outsourcing lawyers who are able to deal with local considerations as they arise (avoiding the expense and delay of having to source such advice locally).

Project Management The process of outsourcing needs to be carefully controlled using expert project management techniques. Our outsourcing team has developed a project management methodology, adapted from industry. It delivers 'no surprises' of full costs transparency and provides support and resource to your commercial team on a seamless basis.

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IT OUTSOURCING GOVERNANCE: IMPLEMENTING CORE IS CAPABILITIES

In 1998, Feeny and Willcocks published a core IS capabilities framework suggesting four tasks and nine capabilities for any future IT function. This paper revisits the framework, examining the challenges and learning points from its implementation in Dupont and in four other cases from 1997 to 2004. Longitudinal case research revealed a range of omissions and resulting problems.

Two research questions guide this paper: Does the model still hold or does it require revision? What challenges and learning arise from trying to implement the framework?

Leslie Willcocks Warwick University

David Feeny Templeton College, Oxford

Throughout we define a 'capability' as a distinctive set of human resource-based skills, orientations, attitudes, motivations and behaviours that have the potential, in suitable contexts, to contribute to achieving specific activities and influencing business performance.

A 'core IS capability' is a capability needed to facilitate the exploitation of IT, measurable in terms of IT activities supported, and resulting business performance.

The original framework is shown in Figure 1, and was developed from detailed interview research into 53 high performers in the IT function, and multiple interviews in 112 IT sourcing arrangements in the mid-1990s. The research suggested that the future IT function has four tasks - eliciting and delivering on business requirements; ensuring technical capability; managing external supply; and governance, coordination and leadership.

Capability 1

IS/IT Governance

'integrating IT effort with business purpose and activity'

Capability 2

Business Systems Thinking

'ensuring that IT/e-business technologies capabilities are envisioned in every business process'

Capability 3

Relationship Building

'getting the business constructively engaged in IT issues'

Capability 4

Designing Technical Architecture

'creating the coherent blueprint for a technical platform which responds to present and future business needs'

Capability 5

Making Technology Work

'rapidly trouble-shoot problems which are being disowned by others across the technical supply chain'

Capability 6

Informed Buying

'analysis of the external market for IT/e-business services; selection of a sourcing strategy to meet business needs and technology issues; leadership of the tendering, contracting, and service management processes'

Capability 7

Contract Facilitation

'ensuring the success of existing contracts for IT services'

Capability 8

Contract Monitoring

'holding suppliers to account against both the existing service contracts and the developing performance standards of the services market'

Capability 9

Vendor Development

'identifying the potential added value of IT/e-business service suppliers'

Figure 1. Nine Core IS Capabilities (Source: Feeny and Willcocks, 1998)

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Case Study: Dupont Background Dupont is a chemicals, health care, materials and energy multinational operating in a range of segments. Its divisions include Agriculture and Nutrition, Coatings and Colour Technologies, Electronic and Communication Technologies, Performance Materials, Safety and Protection, (Textiles/Interiors/Other was divested in 2004). By the end of 2004 Dupont had $US 27.3 billion revenues and 55,000 employees worldwide. Its 20 plus strategic business units operated in more than 70 countries. From 1996 Dupont strove to focus on core business competencies and has regularly divested non-core businesses. It has also focused on the reduction of overhead costs and increased capital efficiency. Part of this involved IT outsourcing.

In 1997 Dupont signed a series of 10-year contracts, worth $US 4 billion, with CSC and Accenture (then Andersen Consulting). By 2002, 80% of its IT spending (total: $600 million a year) and 75% (3000) of its IT staff had been transferred to its alliance partners. CSC was responsible for shared infrastructure worldwide, and corporate, regional and business specific applications, while Accenture managed the Chemical division's business enterprise applications. Dupont initially retained 100, (later reduced to 60), central staff to manage the contracts, and over 1000 distributed technical and business people to provide business IT leadership, process control computing in manufacturing, and R&D computing.

service 'towers'. By 2001 Dupont had reduced its 90% fixed IT costs to 50% fixed, was getting quicker injections of skills from suppliers than it had before outsourcing, was achieving increases in some service speeds and flexibility, was probably achieving modest cost reductions on a pro rata basis (overall IT budget actually increased with greater demand), and had given a range of its ex-employees real career development opportunities. However, by 1999 it was questioning whether it had given away too much IT technical and management expertise.

IT Organisation and Core IS Capabilities By this date the CIO headed two organisational units - Global Services and Alliance Operations. Global Services had 70 people providing leadership of strategic planning, architecture, security, emerging technologies, and enterprise-wide projects.

Oversight of regional and specialised services was delegated to 350 people across five regions responsible for country specific IT architecture and administration and management of regional vendors. Global Service also had a Business Unit Support group made up of 500 employees across 20 divisions. These looked after manufacturing process and production controls, businessspecific applications and IT for central R&D. Alliance Operations consisted of 47 people who managed business unit demand for vendor services, monitored vendor service delivery, developed SLA metrics and achieved

In 1997 Dupont signed a series of 10-year contracts, worth $US 4 billion, with CSC and Accenture (then Andersen Consulting). By 2002, 80% of its IT spending (total: $600 million a year) and 75% (3000) of its IT staff had been transferred to its alliance partners.

For new project work Dupont retained the right to source from anywhere as well as from one or both sitting suppliers. As one example, by the late 1990s Dupont had identified a new $400 million worldwide SAP/Y2K project. One supplier brought 400 SAP people on to the project, while, to supplement the other supplier's SAP skills Dupont transferred 300 people from the divisions over to the supplier, who then bore the costs of their SAP training.

Dupont also adopted a balanced scorecard approach for benchmarking the health of its IT

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continuous performance improvement. Of the 47, 10 dealt with Infrastructure - oversight of the CSC deal, and service responsibility for desktop, telecom, midrange and mainframe.

Another five dealt with Applications oversight of Acenture/CSC, and liaison with four business divisions. Three employees looked after Contract management performance scorecards, resolve contract disputes. A further 20 staff managed IT Finance - invoices, charges to business units, audit billing accuracy and timelines.

While this seemed sufficient, by early 1999 Dupont began to question whether its internal capabilities were strong enough. IT was often excluded from critical business discussions and decisions. Succession planning for IT leaders and core staff needed work. And employees were looking for guidance on changing skills and career paths. About this time Dupont adopted the Feeny-Willcocks framework to begin formalising competencies, job families, personal development opportunities, and career paths. Dupont defined relationship building, leadership, contract facilitation, informed buying and making technology work as 'general competencies', and pointed to three career paths - Business and IT Vision (needing business systems thinking), Design of IT Architecture (requiring architecture planning) and Delivery of IT Services (including vendor development and contract monitoring). In December 2000 Dupont launched an intranetaccessible career management site, enabling employees to identify required competencies business, interpersonal and technical - for each of its Dupont's 55 existing and prospective IT roles.

Our own analysis of Dupont's retained IT capabilities took place in July 2001. The overall finding of weaknesses in retained core capability some four years into a large-scale outsourcing arrangement was not, in fact, untypical of what we have found elsewhere (see for example Kern and Willcocks, 2001; Lacity and Willcocks, 2001). On Business and IT Vision we found the following. With limited local resources, business unit IS leaders tended to be driven to operate also in relationship building and contract facilitation modes. The focus on service delivery, automation, and fire-fighting led to diminished strategy and value creation. Business unit executives themselves commonly positioned IT as an agent of cost reduction, rather than of business value creation, and business systems thinking was generally squeezed out of the IT frame. Vendors were not filling the gap in stimulating innovation for business value.

On IT Service Delivery, we saw the informed buying and vendor development roles needing considerable enhancement.

Many Business Unit IT leaders needed to move from fire-fighting to a more strategic focus, while making technology work was often underpowered, given the IT demands, and the variable strengths of the suppliers operating in different parts of Dupont. Neglect of the

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vendor development capability contributed to a number of adverse supplier behaviours and practices. The relationship had not evolved and this inhibited Dupont's ability to tap into the suppliers' intellectual capital. Weakness in informed buying led to a limited sourcing vision, intra-Dupont learning, and limited future sourcing flexibility. As a result, the issue of how to anticipate and cope with sourcing changes over the next four to ten years was not being addressed sufficiently.

On Designing IT Architecture, Dupont's position on this capability fitted fairly well with our findings elsewhere. Dupont had already noted its weaknesses here and was rebuilding this capability. It needed to develop career paths and more staff for this key area. One weakness of our own model, identified in work in 2001 on building e-business infrastructure, is that architecture needs to be more closely aligned with business strategy than would seem from the way it is portrayed in our three rings model. Our conclusion in our 2001 study was that infrastructure and architecture planning were now board-room issues because the technology platform now influenced greatly what was and was not possible as a business. The implication for Dupont was to ensure that architecture planning becomes closely co-located/dealt with closely with business planning. Here we recommended development of career paths for this core retained capability, with the possible quick hiring of experienced staff to fill the vital gap left by the vendor here.

On a regional basis we found Asia Pacific quite well adapted and leveraging the core IS capabilities concept. Europe and South America had not yet tailored the capabilities to their environments and resource levels. Some core IS capability definitely needed enhancement in terms of making local resources available, in particular contract facilitation, making technology work, business vision and contract monitoring. In terms of Dupont's overall objectives, we felt it could only move from cost reduction to business value if business executives were educated into the transformational possibilities of IT. Increased delivery speed needed more inhouse project management capability and a rapid application development approach, riskreward contracts with vendors, a change in the bureaucratic process by which work was contracted for and assigned, architecture planning linked to business vision, and strengthened technical fixer and contract

facilitation capabilities in order to leverage the operational service. Innovation could be delivered through enhanced business systems thinking, informed buying and vendor development capabilities to unlock vendor potential and greater internal and external networking. To facilitate these moves, the core IS capabilities framework was correctly positioned for career development, but needed to be further imbedded in human resource processes, including selection, appraisal and reward systems.

By early 2003 the competency modelling and career development self-service efforts had generated several positive results. 80% of

more accurate tracking of performance and as an inducement to improve. As a global outsource with two major partners, Dupont had specific issues on distribution of resources locally - in the business units - and centrally. It under-resourced the more operational capabilities (MTW, CF, RB) resulting in IT managers and local CIOs having to deflect their attention into these areas and away from more strategic, business oriented activity.

Moreover, despite the size of the outsourcing arrangements, Dupont had not retained enough technical or architecture planning capability either at the centre or locally. This could be dangerous for big projects such as the

After outsourcing 80% of its IT budget Dupont discovered it had retained inadequate management and technical expertise to control its IT destiny. staff accessed the site in 2002 and 30% created career plans Employees and managers focused on competencies rather than administrative tasks. By 2003 the company was able to fill 90% of key leadership positions internally, despite the fact that it had reduced the pool of potential successors from 4000 to 1,200 as a result of outsourcing. The projected short-fall of in-demand employees was reduced from 30 in 1999 to two in 2004. The strength of emerging IT leaders was recognised by business management, with 90% of business unit CIOs reporting to a business unit VP/General Manager as opposed to 50% previously. Even more importantly, Dupont felt that it had wrested back control of its IT destiny and put itself in a much better position to leverage its relationships with suppliers, and renegotiate sourcing arrangements into the future, as it began to do from 2003 onward.

Analysis Of The Case The company's experiences were not untypical of other large-scale outsourcing arrangements we have researched (Cullen and Willcocks, 2003). After outsourcing 80% of its IT budget Dupont discovered it had retained inadequate management and technical expertise to control its IT destiny. Mid-contract sag occurred after transition. Here the question: 'how much more value and leverage could be got from the relationships' was raised, and benchmarking was introduced for

major SAP project allied with the Y2K work from 1999. The other areas of concern were Dupont's on-going ability to monitor and manage present and future sourcing strategy, and develop further business value from the vendor relationships.

Dupont IT management began addressing these issues from 1999, one result being the move towards using the core IS capabilities framework as a basis for staff development and career succession planning. Architecture planning was an interesting case in point.

Given away to CSC in 1997, Dupont found it was losing control of designing its technical platform and being able to have informed discussions with vendors. It began recreating this capability in-house from 2000. Contract monitoring, initially, had seemed detailed enough, but within two years a major benchmarking process had been introduced.

Dupont thought it had resourced the business units enough, but then discovered that IT leaders there got pulled too much into operational issues, and too much doing capability was left to the supplier, run through an over-bureaucratic procurement process. Subsequently we found different business units left to deal with these issues in their own different ways.

Dupont subsequently also bolstered its senior technical capability, and also its informed buying capability in order to deal with renegotiation of their outsourcing arrangements into the 2003-2005 period.

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Conclusion: Learning From Implementation Here, based on Dupont and four other cases we reflect on what might be learned from attempting to implement the FeenyWillcocks framework.

1. Organisations need to develop long-term strategic core capability rather than being drawn into fire-fighting and focusing only on the shorter term capabilities in our model. Problems develop when any of the core IS capabilities are not suitably staffed, but there is a tendency in the first few years to neglect the capabilities with longer time horizons - business systems thinking, governance, architecture planning for example, thus building up important issues further down the line.

2. The case supports our earlier 1998 findings that high performers with distinctive skills, capabilities, and orientations need to be appointed.

3. Issues of core capability development and succession emerged which need careful management.

4. Getting innovation and business valueadded from outsourcing really does need organised, pro-active in-house core capabilities being applied to the task. But a further challenge at Dupont was to get the business units and power brokers there engaged with IT issues. This underlined the importance of the Leadership role and the business facing capabilities in the IT function. It also points to the fact that

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5.

6.

7.

8.

however empowered the IT function cannot do it alone. Maturity of the business units' capability to manage IT strategically also has to develop. We found, however, that the IT function has an important role to play in that process.

Our framework emerged as better applied as an evolutionary process rather than an instant fix. Particularly endorsed was the Feeny model of IT organisations passing through Delivery, Reorientation and Reorganization phases (see Feeny and Ross, 2000). Here core capabilities focusing on technology and service were developed in the Delivery phase, more business focussed capabilities in the Re-orientation phase, with the fully fledged model being applied only in the Re-organisation phase, which is the lowest risk phase for largescale outsourcing.

Core IS capabilities success levels also related to other mitigating factors, namely governance mechanisms in place, inflexibility of outsourcing contracts and deals, the level of resourcing (numbers of staff), supplier capabilities and responsiveness to new demands.

We were discovering in 2001-5 that technical architecture capability has to be much closer to and responsive to the business units than we were finding in the 1990s.

In the original model we positioned project management as an organizational rather than a specific IS core capability. Since

then we have been getting more feedback from these two cases on aspects of project management that might be distinctive to the IT function.

9. In the cases we have examined, so far, we have found the Core IS capabilities framework producing significantly better results in terms of control of IT destiny, effective working with business units, supplier management, better control of financial aspects of IT. 10. In allied research, we are finding the model, with a few modifications, also translates well for use in business process outsourcing

References Cullen, S. and Willcocks, L. (2003). Intelligent IT Outsourcing, Butterworth, Oxford.

Feeny, D. and Ross, J. (2000). The Evolving Role Of The CIO. In Zmud, R.(ed.) Framing the Domains Of IT Management Research. Glimpsing The Future Through The Past Pinnaflex Educational Resources, Cincinnati.

Feeny, D. and Willcocks, L. (1998). Core IS Capabilities For Exploiting Information Technology.

Sloan Management Review, 39, 3, 9-21.

Kern, T. and Willcocks, L. (2001) The Relationship Advantage. OUP, Oxford.

Lacity, M. and Willcocks, L. (2001). Global IT Outsourcing: In Search Of Business Advantage.

Wiley, Chichester.

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THE IMPLEMENTATION OF UTILITY COMPUTING WITHIN AN OUTSOURCING RELATIONSHIP

Outsourcing is by now a well-established method of commissioning and providing services, whereas utility computing is a much newer and much-misunderstood concept. Is there a relationship between them, or should there be?

This article will examine both concepts. It is the author's view that they are complementary concepts, which when combined well can provide significant added value. All of the ideas and concepts suggested here are themselves well-understood and repeatable activities available from good suppliers. But it is their intelligent combination which provides the real progress towards the desired goal and this is where I believe Atos Origin can offer a competitive advantage.

Michael Symonds Atos Origin

The reasons for adopting utility computing are by now quite well understood. It improves flexibility, allows 'pay for use' services and increases responsiveness to business change.

But a less well understood benefit is that it allows a reduction in complexity, which is increasingly a predominant factor within any sizeable IT environment. It does this by both simplifying the services provided and also by reducing the variations in the infrastructure employed to deliver them.

So why outsource to provide a utility environment? Well it allows the supply model to change so that the customer no longer owns the 'boxes', it allows the application of a level of supply process maturity that most end user companies struggle to achieve, and finally it ensures a critical mass of infrastructure without which the utility model cannot really work.

necessary to do business, and one that needs to be right, but nothing to get too excited about.

Major steps forward within IT have been prompted by the development of so-called 'killer apps' - new capabilities that depended on the provision of certain facilities, such as the PC or the Internet. Such developments are cumulative, and most new applications nowadays presume a certain amount of infrastructure already exists. So developments within that infrastructure are now more about efficiency than effectiveness: reducing cost and increasing quality of service, rather than the introduction of new 'must have' technologies.

IT Today - Less Visible, More Critical?

There are various people, notably Nicholas Carr1, who claim that IT 'does not matter', as it is becoming a commodity. Others, such as Wiell and Broadbent2, say that a well-structured infrastructure can make a significant contribution to the flexibility and responsiveness of a business. They may both be right, of course, if we come to view such an IT infrastructure as a 'hygiene factor'3, something

Figure 1.

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Indeed, the infrastructure itself is becoming quite boring and routine. Whereas in the past there was concern as to whether you could buy a machine big enough for some applications, nowadays there is more concern as to whether you can buy a machine small enough, or risk gross under-utilisation. And the reliability of the components has improved to such a degree that it is not mean time to failure (MTBF) that is the problem but, due to the complexity and unfamiliarity with fault resolution, mean time to recover (MTTR) if something ever does go seriously wrong. So the emphasis must change from the complex repair of failing components to their rapid replacement should such a failure occur. And this, in turn, allows the adoption of less expensive and more 'commodity' components.

this is a much-better understood concept within other businesses, where vendormanaged inventory is a well-understood concept. But, again, a certain volume of supply is needed to make this work for all involved.

much all at once. You should never introduce a single point of failure and should always have a back-out plan. And a complex change control process should manage everything that moves.

Unpacking the Boxes, Freeing the Service So, how can utility, and outsourcing as a means of supplying it, help address these issues? Why change the supply model? The essential motivation is to disentangle the services used from the boxes used to supply them. This allows customers to use variable environments and amounts of them, as dictated by their business needs and without the need for capital investments to do so. That also frees the usage of systems from being tied to the depreciation cycles of the boxes.

On the supply side, the change is from one that has essentially been 'design and purchase to order' to one of 'assemble from stock'. To do so, new service capabilities have to be developed, such as (re )provisioning, metering and usage-based billing.

Providing such services can add a new dimension of availability to the services provided. When a failure does occur or an upgrade is needed, the service provider need never actually do any work on the customer's running systems: rather the system is 'swapped out' and the application continues while any work is done offline. This illustrates one of the advantages of moving from a traditional static to a dynamic IT infrastructure, where resources can be rapidly deployed and re-deployed as the business requires.

Within a utility-based service, there is a change in the supply chain, away from the provision of boxes to the supply of services.

The supply of the hardware itself is pushed down the supply chain towards the vendor.

Although a relatively new concept within IT,

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Figure 2.

One technological development that underpins all of these enhancements is that of virtualisation: a much-used and abused term, which means many things in many contexts.

See panel. This is gradually evolving and emerging, and the ability to do so is now starting to become of the 'industrial strength' needed for the delivery of commercial services to be based upon it.

These developments cause extra concerns within a managed IT services environment.

Such an environment is essentially conservative, indeed it is supposed to be so.

There is an in-bred aversion to changing too

Making Progress along the Road to Partnership So, the supply of IT infrastructure is moving over from a tangible, box-based service to one that is virtualised and evolving. And it has to do so in a well-controlled and incremental process. How can we plan to get there and how will we know when we are actually there?

One answer is to create a path towards a utility-based computing environment. A path that is likely to encompass change on the part of the customer, the supplier, and in the relationship between them. Some steps in this path may not actually be clearly defined until

Virtualisation is the creation of a logical abstraction of the physical environment It involves the decoupling of an interface, so that different and variable resources can be used ʻbeneath the surfaceʼ. It can make many appear as one, or one appear as many.

Virtualisation can be applied to a myriad of resources, examples of which include: • • • • •

Services: de-coupling what is used from the infrastructure used to provide it; Applications: use web services so that multiple customers can make use of a process; Servers: run multiple applications on the same box, whether in the same or using multiple operating systems; Storage: allow data to be stored across a range of physical storage devices; Networks: both WAN and LAN: run different services over the same cables.

Virtualisation can be made to work across an increasingly heterogeneous range of devices, so that devices of different types can be combined and replaced. Virtualisation drives increased utilisation of these resources.

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Figure 3.

they are well down the path, but importantly by following a set path they leave a 'trail' behind them and can feel that they are making progress together because they can see the tangible steps that they have trodden on the way.

That is the subject of the flow chart above, which depicts such a path as described for one particular customer. It needs to be interpreted in each case, but provides a set of ingredients and sample recipe that can be used to determine such a progression in whatever circumstances pertain to the particular customer.

It will be seen that Outsourcing is depicted as one of the possible steps on the road to Utility. Its applicability depends on the starting status of the customer. Its main intention is to ensure that all resources are in the right organization and suitably motivated to avoid the so-called “Turkeys and Christmas� syndrome when moving to an environment which disconnects services from the boxes used to deliver them.

A customer could go through this process in a single sweep for their whole IT environment, but such a managed service environment is often innately cautious and even conservative. It may be better to start with an identifiable sub-set of the environment for which these services are already well understood, namely, storage. Storage on demand is by now a mature service offering

and offers the opportunity for customers to deploy the utility concept in a staged and controlled manner, becoming familiar with the processes and gaining experience before moving on to a full-scale deployment across the whole operational environment.

For example, one of Atos Origin's first customers for a full utility service was a relatively small specialist chemical company, which was the subject of a divestment and acquisition from one multi-national to another. It needed its own SAP environment to be provided quite quickly and for a limited but unknown period, probably a year to eighteen months, before it could be incorporated into the new parent company's consolidated systems. The exact scale of the systems needed was difficult to judge until they had been separated out. Here, the necessary services and storage have been provided from Atos Origin's utility computing environment, and can be scaled up or down as required.

A Possible Path Towards a Utility-Computing Environment 1. Standardise: platforms (vendor, models, OS), applications environment, system management tools, etc. Determine standards for each set/class of applications systems (eg SAP).

2. Transfer supply-side personnel within businesses into a supplier, such as Atos Origin, to overcome the 'Turkeys and Christmas' syndrome.

3. Organise a single, structured service delivery architecture, including common processes, service descriptions and levels, tooling, etc.

4. Consider an offshore component, which could be significant for mature services and is dependent on the systems' lifecycles. This needs to be carefully combined with standards and possible subsequent automation.

5. Share facilities wherever they are not business-specific. Consolidate data centres into a common Tier 1 twin-centre structure, which may itself provide services to Tier 2 & 3 centres. Use common, virtualised DC-LAN and storage facilities, on an 'on demand' basis, with centralised backup and recovery facilities. Networked storage allows more efficient utilisation and the implementation of different classes of service.

6. Determine a structure between the customer's businesses which coordinates their Demand functions, allowing maintenance of requirements for ongoing services, and attuned to a complementary Supply structure. Use governance to reduce the diversity of perceived business needs, adopting company-wide release management processes for common components.

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7. Reduce the diversity of applications environments and run them in fewer, shared system platforms. Concentrate on standard Wintel and Lintel (Windows or Linux on Intel or AMD systems) environments. Use virtualisation facilities to allow the utilisation for suitable applications to be increased from the current below 30% to 60% or higher. Reduces the number of systems and thus some operations, hardware and software costs.

8. Run the resulting centres as fullyautomated, 'lights out' centres, with the services to deliver them being similarly automated. Use provisioning software to manage the environment on a utility-like basis which can allow re-purposing of IT resources driven by business needs.

Improve the support ratio from the current typical 1/15-30, depending on complexity, towards 1/50-60 or more, so halving relevant costs. Combining doubled utilisation with doubled support ratios gives a compound benefit on current costs for those elements.

9. Put in a simple, 'managed operations on demand' based service and contract structure, which allows transparency so that businesses can determine which of the rationalised service levels is appropriate for each of their systems.

10. Manage the management of data to reflect the business value of the information it contains.

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11. Deliver both storage and processing from a coherent utility environment, supplied and owned by fewer preferred platform vendors.

12. Constantly adjust pricing levels to reflect efficiency improvements.

Note: There are, according to the purists, 18 different forms of consolidation, but for the sake of understanding we have used the three major groupings: logical, physical and rational.

This is an iterative path, which can encompass an increasing scope as services are rolled out and become more ambitious as the maturity of the delivery organisation increases. All of these Instruments are themselves well-understood and repeatable activities from suppliers. It is their intelligent combination which provides the real progress towards the stated goals.

1

2

3

IT Doesn't Matter, Nicholas G. Carr, Harvard Business Review, June 2003 Leveraging the New Infrastructure, Peter Weill and Marianne Broadbent, Harvard Business School Press, ISBN 0-87584-830-3, 1998 The Motivation to Work, Frederick Herzberg, Wiley and Sons, ISBN 0-47137-390-7, 1959

About the Author Michael A. Symonds is an IT consultant and currently Principal Solutions Architect for Atos Origin. He studied Psychology at Reading University, UK and Computer Studies at Cambridge Technical College.

An experienced IT practitioner and Consultant with many years of in-depth technical IT experience, as well as experience in marketing and general management, Michael has worked both in the UK and internationally at a senior level. He has contributed to many white papers and is a regular speaker at vendor and public conferences on IT related subjects.

Recently responsibilities have included several major service and product development projects, including the definition of architectural standards and processes and the establishment of a structured, forward-looking vision creation and development concept.

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OUTSOURCING GOVERNANCE AND REGULATORY COMPLIANCE - CAN THEY CO-EXIST?

Nick Andrews Managing Director EquaTerra Europe

Regulatory compliance mandates are becoming increasingly pervasive and onerous in western countries (see Figure 1). They have become a driving force in influencing affected organisation's investments, areas of attention and activity, and in extreme cases, strategic direction (i.e., going private in an attempt to avoid regulatory mandates). Business process regulation has become a new and uglier “BPR”.

A large company, for example, could easily have total direct and indirect costs for Sarbanes-Oxley (SOX) compliance in excess of $10M annually. AMR Research estimates that affected organisations worldwide will spend $6B+ on SOX related activities in 2005, not counting actual audit fees, and will spend $80B+ over the next five years on compliance

• • • •

as a whole. And these numbers do not take into account the opportunity cost of compliance and the distraction it creates from other critical activities.

Regulatory Compliance You Can't Hide While organisations can debate the collective merit of these regulations, most are here to stay. While some, such as SOX, could potentially be scaled back, the overall regulatory environment is not going to loosen significantly in the near term. Affected organisations must address these regulations as efficiently and effectively as possible.

One common misperception in the market is that existing outsourcing audit mechanisms,

DoD 5015.2, U.K. PRO: Federal standards on records management in the U.S. and U.K. EU95/46, EU02/58: European Union privacy legislation.

Gramm-Leach Bliley Act (GLBA): Privacy of financial information.

Health Insurance Portability and Accountability Act (HIPAA): Privacy of patient information and healthcare records.

•

National Association of Security Dealers/NASD 3110: Written policies and procedures for review of correspondence with the public.

• •

New Basel Capital Accord (Basel II): Capital assessment and reporting standards for global banking.

• •

Sarbanes-Oxley Act: fiscal accountability and control environment integrity; various Europe versions are in place on a country-by-country basis.

SEC Rules 17a-3, 17a-4: Securities-related records retention.

USA PATRIOT Act: Various anti-terrorism, surveillance and anti-money laundering dictates.

Figure 1. Major Regulatory Mandates

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SAS (Statement on Auditing Standards) 70 is an international auditing standard developed by the American Institute of Certified Public Accountants for service organisations. A SAS 70 audit is the means through which an auditor examines a service organisation's or outsourcer's control activities, particularly around IT and related processes. SAS 70 is based on SAS 55, 'Consideration of Internal Control in a Financial Statement Audit', and on the COSO framework. There are Type 1 and Type 2 audits. Type 1 is a point-intime/snapshot audit that focuses on general and application controls but does not include testing by auditors. A Type 2 audit occurs over a period of time (e.g., 6 to 12 months), focusing on general and operational controls during a life cycle, with auditors typically performing actual testing. A Type 2 is obviously more expensive as well as burdensome for the outsourcer. Only a CPA firm can perform an SAS 70 audit, and the Big Four audit firms, as well as the specialist firm SAS 70 Solutions (formerly part of Andersen), perform the bulk of the audits for G2000 organisations.

Figure 2. SAS 70 and SOX Compliance primarily the SAS 70 audit (see Figure 2), are always adequate for SOX compliance. The reality is that even an SAS 70 Type 2 audit may not prove enough for SOX in all cases. The SAS 70 standard was developed long before SOX regulations existed and was not designed to focus on the type of controls that SOX addresses. In addition, there have been no requirements for users to request a SAS 70 audit, and many have not.

The result is that there are more cases where aggressive/thorough clients are demanding additional controls and documentation beyond an SAS 70 Type 2 audit to enable what they estimate is 'good enough' SOX compliance. In some cases, however, SAS 70 Type 2 audits are enough - it depends.

As more corporations are evaluating outsourcing, the roles and responsibilities often change within their organisation.

Ultimate responsibility for compliance resides with the client, but as it reallocates resources post-outsourcing, many of these responsibility shift to the outsourcing governance organisation. This is the team retained by the client to manage the interdependencies between the service provider and the client and may serve as a Center of Excellence (COE) for all the processes a company has outsourced. This group often becomes a 'corporate watchdog' over the compliance requirements for the outsourced process(es).

Outsourcing Business Processes & Role Realignment Most outsourcers are still struggling to get their compliance capabilities adequately in place. Long-term compliance efficiency and effectiveness will become a factor to help

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•

•

•

• define Business Process Outsourcing (BPO) market leaders and will drive market consolidation. Organisations considering BPO or in existing arrangements must thoroughly vet their outsourcer's compliance capabilities.

The following is a sample (and far from exhaustive) compliance checklist for organisations to use as a starting point in assessing compliance readiness and requirements in an outsourcing situation.

• Compliance organisation and internal audit represented on the buyer sourcing team.

• Corporate governance and risk management frameworks employed address and account for outsourcing requirements.

• Ownership assigned to address outsourcing governance and relationship management.

• Short-listed service provider's SOX capabilities and position understood.

• Service provider's operations have undergone SAS 70 audits.

• Geographic locations of potential service delivery centers known and compliance implications understood.

• Are the cost associated with compliance testing and SAS 70 audits agreed upon?

• Does the proposed contract provide a means to review, assess and account for future changes in the regulatory environment.

There are positives to the marriage of compliance and outsourcing. BPO can help address an organisation's compliance needs in several ways.

• Outsourcers may possess more efficient processes that require fewer controls and hence have lower compliance costs.

• Processes that have more automated and

less manual controls are easier and cheaper to manage from a compliance standpoint.

Outsourcing service providers can perform much of the compliance legwork (e.g., control's testing and documentation) and spread the cost of the resources to perform that work over multiple clients.

Outsourcers with 'best practice' process models can possess stronger embedded process controls.

Outsourcers can dedicate more compliance expertise & experience against controls management and optimisation and spread those costs across multiple clients.

Outsourcers can gain more experience and capabilities with standardised (i.e., SAS 70) reporting.

A contract is the fundamental instrument guiding the outsourcing relationship. As regulatory compliance must be factored into the contract, clear definition of roles and responsibilities are often contained in the statement of work. Organisations must always remember, though, that they are ultimately liable for compliance requirements.

This does not mean that when the inevitable compliance meltdown involving outsourced processes occurs the service provider won't find itself in court. Organisations, however, must focus on the segmentation of compliance duties with an outsourcer to ensure they maintain ultimate control. This collaborative effort could divide the responsibilities along the following lines.

Document controls

>> Service Provider

Test controls and review control designs

>>

Client/ ServiceProvider

>>

Client

Design & sign off on controls testing program

Suggest process improvement to improve compliance >> Service Provider Approve process improvements

>> Service Provider

Define compliance, F&A policies & procedures

>>

Client

Define/own/manage risk assessment processes

>>

Client

Review/interpret responses to audit qualifications

>>

Client

Assist in performing remediation for audit qualifications >> Service Provider

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Roles change as a company enters an outsourcing agreement and forms the governance organisation that will now manage many of compliance issues. Often companies will establish a role for Service Quality and Compliance within the outsourcing governance team (see below) whose primary responsibility is compliance.

Prior to outsourcing, this role relied on work and information created internally, whereas data feeds and information is likely being received from the service provider. This person must be skilled at now using the provider as a resource and coordinating with their overall compliance requirements and team.

A sample job description for the Service Quality and Compliance Manager will likely look vastly different than prior to outsourcing.

A sample of that job description could resemble the following:

Figure 3. SAMPLE Organisational Chart for Outsourcing Governance

Role: Monitors and reports service delivery performance; conducts gap and root-cause analyses; and enables effective quality and compliance management

Reports to: Governance Director

Responsibilities: • Facilitates definition and continuous refinement of process and sub-process effectiveness and efficiency measurements; coordinates with SP and [Client] Retained Ops teams to enable required data capture

Experience & Education: Six Sigma 'mindset' Benchmarking and/or service level assessment Operations familiarity Outsourced service management familiarity Audit experience

• Consolidates performance reporting from SP and retained functions and distributes • Coordinates with Finance Manager to capture/confirm business-value-delivered information • Defines and revises reports as needed to enable improved business decision-making • Provides service-delivery performance information and validation to Financial Manager to aid in SP invoice verification; identifies potential areas for service credit assessments

Attributes & Characteristics: Strong (written, oral) communications Root-cause focused Analytical and quantitative Business judgment

• Manages periodic (internal and external) audits of SP and [Client] activities to ensure compliance to policies; works with Regulatory Compliance Coordinator on root cause analysis of problem areas; • Manages SP/[Client] service-knowledge sharing processes • Maintains benchmarking efforts; provides analysis • Assists with the consolidation of demand forecasts from the business, and preliminary capacity planning Figure 4. Service Quality and Compliance Manager - SAMPLE Job Description

Outsourcing Governance and Regulatory Compliance - Co-exist or Conflict?

One area where regulatory mandates are already having a major impact is around IT Outsourcing (ITO) and BPO. In the short term, some regulations such as SOX have slowed and curtailed deals, particularly finance and accounting BPO. Longer term, however, compliance requirements and burdens will drive more outsourcing as organisations seek third-party support as they may find the sophistication and capabilities of the provider enables them to better manage compliance costs and requirements.

The result is that organisations are taking widely different approaches to applying compliance requirements against outsourced processes and engagements. For example, two separate META Group studies conducted in 2004 found that nearly 25 percent of organisations were ignoring outsourced functions and processes in first year SOX efforts, a recipe for potential audit failures.

Other organisations are much more aggressive.

A recent challenge faced by one U.S. company currently upgrading its HRIS system as a part of an outsourcing relationship is facing divergent interpretations of SOX compliance. The company is looking at a November 1, 2005 roll-out of an upgrade to its HRIS system, and faces questions about the amount of time needed to perform testing to meet SOX requirements. The most stringent interpretation states that there is not enough

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time to perform testing prior to year-end, and there is too much post-FYE activity needed to perform the upgrade in 1Q 2006. Therefore, under this interpretation, the company would not be able to roll out the new system until 2Q 2006. The lack of clarity has created a difficult situation as the new governance team is engaged to evaluate the risks around the various interpretations of the rules and guide the organisation and the provider on the appropriate plan of action.

The governance organisation now plays a critical role in leading the service provider and its company through the challenging path of regulatory compliance interpretation, role definition and execution of the defined regulatory issues. As the complexities of business increase with new and changing regulatory mandates, it is vital that a company allocates adequate resources to build and manage the outsourcing governance organisation.

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Conclusion - Manageable Challenges Ultimately, successful BPO efforts can significantly assist organisations in managing compliance more efficiently and effectively.

Outsourcing has the potential to improve the overall controls environment and make compliance more sustainable.

Most importantly, organisations can work with qualified outsourcers to leverage compliance investments for greater competitive gain. The process to marry compliance and outsourcing best practices is not an easy one, but one that is worth the effort.

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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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CORPORATE GOVERNANCE - OUTSOURCING AND OPERATIONAL RISK IN THE FINANCIAL SERVICES AND INSURANCE SECTOR

Recent developments in the regulation of outsourcing arrangements in the financial services and insurance sector has highlighted the need for firms to institute effective corporate governance structures to ensure that operational risk associated with such arrangements is effectively maintained and controlled.

Peter Brudenall Partner

Jeremy Storer Senior Associate Simmons & Simmons

The Financial Services Authority's recent Financial Risk Outlook 2005 highlights outsourcing, business continuity planning and responding to regulatory change as priority risks and operational challenges for the coming years across the financial services sector.

The FSA defines operational risk as the risk of loss resulting from inadequate processes, people and systems, or from external events.

Cost-cutting, greater use of technology, implementation of regulatory changes and the increasing complexity of financial products are primary sources of increased operational risk that firms face when considering outsourcing arrangements.

Risks may also arise out of inadequate due diligence or preparation of contracts and service level agreements (SLAs), which do not clearly specify all material aspects of an outsourcing arrangement. These risks may occur especially when outsourcing activity is accelerated by a desire for cost reductions and greater margins in the face of deteriorating business conditions.

In this context, the control and management of operational risk exposure due to outsourcing now features in regulatory frameworks across Europe. As a consequence, it is imperative that firms establish and

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maintain effective corporate governance structures to ensure that operational risks associated with outsourcing arrangements are adequately managed and controlled.

Each new set of principles, guidance and regulatory requirements designed to manage the operational risk of outsourcing will continue to create more complicated levels of regulatory compliance for firms that choose to go this route. The trend is likely to continue as the business processes and functions outsourced are, increasingly, more sophisticated, more reliant on intellectual capital and more central to a firm's key business functions. In this context, corporate governance remains a significant and ongoing consideration for any firm.

FSA guidance on outsourcing The FSA Handbook sets out certain requirements for regulated firms that engage in outsourcing. SYSC Chapter 3.2 provides that when a firm delegates functions and tasks, it should put in place 'appropriate safeguards' and should at all times ensure that it has taken reasonable care to establish and maintain effective systems and controls for compliance with regulatory obligations. SYSC 3.2 makes it

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clear that a firm cannot contract out of its regulatory duties. The firm must ensure that it takes reasonable care to supervise the discharge of outsourced functions by its contractor. The firm is required to obtain sufficient information from its service provider to assess the impact of outsourcing on its systems and controls.

More detailed guidance applying specifically to outsourcing activity conducted by banks is set out in the Handbook's Interim Prudential Sourcebook and includes: • Requirements for an SLA featuring specified performance targets, periodic reviews and appropriate remedies for poor performance; • Responsibilities on the service provider to notify the bank of developments which may have a material impact on its ability to meet its obligations; • Rights of termination on the service provider's insolvency or change of ownership; controls around subcontracting; • Obligations on the service provider to supply information about the outsourced function to the FSA. Whilst in draft form since March 2003, the FSA has now formally introduced guidance on outsourcing for certain insurance firms in a new section of the Handbook - SYSC Chapter 3A. The SYSC 3A guidance provides, in addition to existing notification requirements for material outsourcings that an insurance firm should: • Notify the FSA of any operational risk matter of which it would reasonably expect notice, including any significant operational exposures, the invocation of a business continuity plan and any other significant change to infrastructure or business operating environments; • Establish and maintain proper systems and controls for managing operational risks

Firms should consider whether outsourcing arrangements will allow them to monitor and control operational risk effectively

that can arise from inadequacies or failures in its processes and systems, and as appropriate, the systems and processes of third party suppliers, agents and others; • Put in place appropriate contingency arrangements to ensure business continuity in the event of a significant loss of services, for instance, due to significant loss of resources at, or financial failure of, the service provider or unexpected termination of the outsourcing arrangement.

SYSC 3A provides that, before entering into, or significantly changing, a material outsourcing arrangement, a firm should: • Analyse how the arrangement will fit with business strategy, overall risk profile and ability to meet its regulatory obligations; • Consider whether the arrangement will allow the firm to monitor and control its operational risk exposure; • Conduct appropriate due diligence on the service provider's financial stability and technical expertise; • Consider and manage transition arrangements; • Consider concentration risk implications such as business continuity implications arising in respect of single service providers being used by several firms.

In preparing and negotiating contractual documentation for material outsourcings, the SYSC 3A guidance provides that an insurance firm must have regard to: • Reporting and notification requirements, and ensuring appropriate access by internal and external auditors; • Clarifying information ownership rights and confidentiality agreements to protect the firm's interests; • The adequacy of any guarantees and indemnities; • Compliance with the firm's internal policies; • Business continuity arrangements, exclusivity arrangements, and the continued availability of third party software; • Processes for controlling changes to the outsourcing arrangements, including changes in the ownership, control or business operations of the service provider.

Firms should take the FSA's guidance into account when considering their corporate governance structures and whenever they

contemplate new material outsourcing projects or changes to existing material outsourcing arrangements.

Markets in Financial Instruments Directive The Markets in Financial Instruments Directive (MiFID), adopted by the EU Council of Ministers in April 2004, includes new organisational requirements for the outsourcing of some operational functions of investment firms. The Directive provides that, when an investment firm seeks to outsource the performance of operational functions that are 'critical for the provision of continuous and satisfactory service to clients and the performance of investment activities on a continuous and satisfactory basis', the firm must take 'reasonable steps' to avoid undue additional operational risk.

Article 13(5) of the Directive states: 'Outsourcing of operational functions may not be undertaken in such a way as to impair materially the quality of its internal control and the ability of the supervisor to monitor the firm's compliance with all obligations.' It requires investment firms to ensure that they maintain sound administrative and accounting procedures, internal control mechanisms, effective procedures for risk assessment, and effective control and safeguard arrangements for information processing systems when outsourcing operational functions.

EU member states are required to implement MiFID by May 2006. Technical Advice on Possible Implementing Measures of the Directive was submitted to the European Commission by the Committee of European Securities Regulators (CESR) on 29 April 2005.

The implementation recommendations include: •

•

That an investment firm should be required to notify its regulator of an intention to enter into outsourcing arrangements pertaining to operational functions, if a weakness or failure in performance of the outsourced functions would cast serious doubt on the investment firm's continuing compliance with the conditions and obligations of its authorisation and/or its financial performance, financial position, continuity of operation or reputation; That outsourcing arrangements should not release an investment firm from its regulatory obligations nor result in the delegation of senior management's responsibility;

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That outsourcing arrangements should not alter the relationship and obligations of the investment firm to its clients, as required by the terms of the Directive; • That the investment firm should be required to exercise due skill, care and diligence in planning, entering into, managing and exiting from outsourcing arrangements, and must identify, assess, monitor, and manage the risks inherent in outsourcing, taking reasonable steps to avoid or mitigate the impact of such risks.

It is clear that firms need to establish best practice corporate governance and robust internal management arrangements in order to meet the requirements of Article 13(5) of the Directive and the CESR's recommendations in respect of outsourcing and the control of operational risk. It is only with clearly defined and maintained management structures in place that firms will be able properly to identify, assess, monitor, manage and mitigate such attendant risks.

Basel II The new Accord on International Convergence of Capital Measurement and Capital Standards (Basel II) was finalised in June 2004 and is due to be implemented globally on 1 January 2007. It contains new rules for calculating the regulatory capital that internationally active banks will be required to maintain with effect from January 2007. In Europe, Basel II will be implemented via the Capital Requirements Directive, which will result in amendments to the existing Banking Consolidation Directive (Directive 2000/12/EC) and Capital Adequacy Directive (Directive 93/6/EEC).

The key objective of Basel II is to promote better risk management in the international financial arena. Whilst the basic regulatory capital regime remains the same, the Basel II changes reflect modern risk-based management systems and procedures, with the regulatory focus shifting towards evaluating the internal methodologies, models and databases used by banks. A major advance on the Basel I Accord is the new requirement for internationally active banks to hold a minimum amount of capital against operational risk.

How far a bank has outsourced its key business functions, and the extent to which it can demonstrate that it has established adequate corporate governance structures to

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retain control over such functions, will have an important bearing on the level of operational risk it faces.

A joint forum of the Basel Committee on Banking Supervision, the International Organisation of Securities Commission (IOSCO) and the International Association of Insurance Supervisors (IAIS) recently released its report, 'Outsourcing in Financial Services'.

The report suggests a range of mitigation strategies for firms to consider when assessing key risks in outsourcing, including to: • Draw up a comprehensive and clear assessment policy for outsourcing activities bearing in mind risk concentrations and limits on acceptable overall levels of outsourcing; • Establish effective risk management programmes to monitor the relationship with the service provider, including the general management by the service provider of operational risk; • Ensure that outsourcing arrangements neither reduce the ability of the firm to fulfil its obligations to customers or regulators, nor impede effective supervision of that firm by regulators; • Monitor effectively the outsourcing firm in terms of contingencies, including disaster recovery and testing of back-up facilities; • Ensure full due diligence in terms of choice of the service provider, putting in place contracts with effective management of the outsourcing firm and ensuring effective client confidentiality.

Sarbanes-Oxley Act Further regulatory and corporate governance challenges in respect of financial services outsourcing may arise due to requirements set out under the SarbanesOxley Act 2002 (SOX). Section 404 of SOX sets out rules requiring each annual report of a US public company to include a statement of management's responsibility for establishing and maintaining adequate internal control structures and procedures for financial reporting, and an assessment by management of the effectiveness of such control structures and procedures. Furthermore, section 404 requires the public company's auditors to attest to the internal control assessment made by management.

The SOX provisions also apply to European subsidiaries of US public parent companies.

Whilst responsibility for maintaining effective control over financial reporting is not delegable by management, standards developed by the Public Company Acounting Oversight Board establish that service providers and suppliers will fall within the sphere of internal control of a regulated company when providing services that materially affect how the company processes and reports transactions in its accounting records and the preparation of its financial statements.

Management's failure to discharge section 404 responsibilities carries heavy penalties under SOX. Firms subject to SOX will need to ensure that its corporate governance structures accommodate the control and reporting processes necessary for it and its outsourced service providers to comply with SOX requirements.

Other regulatory frameworks and principles Other regulatory groups are developing further and more specific guidance on outsourcing arrangements, corporate governance and risk management for parts of the financial services industry, including: • Draft high level principles on outsourcing for EU banking institutions issued for public consultation by the Committee of European Banking Supervisors (CEBS) in April 2004; • Principles for outsourcing in the securities industry published by the Technical Committee of IOSCO in February 2005; • An intended review of IT outsourcing practices among members by the Basel Committee's e-banking Group.

The recent developments we have highlighted indicate that the control and management of operational risk will remain an important aspect of the regulatory landscape for the coming years. As such, firms need to have effective corporate governance structures and related management practices in place to ensure compliance with this increasingly complex regulatory framework.

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SUN'S EXPERIENCES OF OUTSOURCING ITS EDUCATIONAL SERVICES TO A GLOBAL DELIVERY PARTNER.

In 2003, Sun Micro Systems outsourced the major part of its Educational Services Organisation to Accenture. This paper describes the rationale behind the decision, and focuses on the experience acquired and lessons learned in over two years, since the project's inception.

Stephan Gropp Director Global Education Business Partners

Sun Educational Services (SES) is part of Sun's Global Customer Services (GCS). The mission statement describes the environment SES is operating in: “We exist to enable an enterprise to measurably increase its productivity and business success with network computing, through development and conservation of intellectual capital.”

SES delivers educational solutions to enterprises and the majority of this business is classroom-based training. The official term is 'instructor led training' (ILT). Every year, all around the world, several 100,000 student days have been delivered by Sun. The scope of this particular outsourcing plan covered 12 countries in Europe, the Middle East and Africa (EMEA) and 20 training locations in the US. The infrastructure was mainly owned by Sun, which consisted of classrooms, technical equipment, remote lab data centers and so on. Obviously this also affects hundreds of instructors (including contractors) and administrative staff, who are essential in providing this part of the business.

Sun is well known as a partner-oriented customer. Partners are delivering Sun's products and services all over the world. So far, this was only partially true for SES. It was mainly SES who delivered this business to our partners and customers, including all the necessary overheads in infrastructure. Given

this scenario, it was logical to question why SES was not using partners to deliver the training to customers and leveraging our partner's infrastructure, skills and administrative capabilities.

Options In countries or regions where SES was not present - or did not have the necessary capacity to meet the market's expectations SES was already using local partners to support Sun's operations. One option, therefore, was to simply extend the existing model and add many local partners to the existing business everywhere else, thereby ensuring seamless transition or continuation.

On the other hand, an idea was put forward of a globally operating partner company, which would have an existing infrastructure,

The idea of having one point of contact, similar processes, common goals, shared environments and a smooth transition was compelling.

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consistent processes and a similar understanding of customer's expectations with high quality, high skilled instructors.

It soon became apparent that the second option was preferable, if such a partner could be identified. The idea of having one point of contact, similar processes, common goals, shared environments and a smooth transition was compelling. Of course, if such a globally operating partner could not be found, we would still have the first option of using lots of local partners in the various countries.

Challenges •

•

•

Partner Selection Having made that decision, the next step was easy. Sun submitted a request for proposal (RFP) to selected partners. Some were not interested at all. Others asked for several conditions to be met.

Several partners were interested but weren't ready for such a huge transaction at that time. To cut a long story short, Accenture Learning was the best answer to the RFP.

•

Crucially, the transition would need to take place without impacting on training delivery. The magnitude of this challenge is brought into focus when you consider the scope of the deal: 12 countries in EMEA and 20 locations in the US. The transition would have to abide by EU laws with regards to “Acquired Rights Directive” (ARD), and particularly the “Transfer of Undertaking, Protection of Employment” (TUPE).

The project would require adequate communication throughout the process.

Overall, it would require the management of Sun's largest ever outsourcing deal.

Process of Outsourcing

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ASEC indirect Compared to the direct version of an ASEC, an indirect partner is responsible for the entire business transaction (sales, marketing, administration etc) and therefore covers the contact with the customer, too. Sun simply provides the student handouts to the partner who is paying a license fee for it.

• Centers of Learning Excellence (CoLE) CoLEs remain Sun-owned training facilities, which deliver high end and internal technical training to our partners, customers and internal employees.

It was the intention of the deal to outsource almost the entire business to the selected Global Delivery Partner. However, the CoLE business would be continuously delivered by Sun directly when the negotiations started.

Due diligence What are the different parts of the business to be outsourced?

Some were not interested at all. Others asked for several conditions to be met.

Several partners were interested but weren't ready for such a huge transaction at that time.

To select the best-in-class, instructor-led training delivery partner, the following objectives and criteria were stipulated: • Expansion of the customer base for SES's products and services • Maintenance of SES's current high level of customer satisfaction for ILT delivery • Provision of ILT delivery coverage, coordinated with SES's planned exit location dates • Provision of uninterrupted employment for impacted Sun resources (apply EU legal requirements in the US as well).

• Ensure that this change is transparent to Sun customers • The selling and marketing of SES products and services should be performed in harmony with Sun's sales and services marketing organisations.

•

Negotiation Phase Having selected a partner, the pressure was on to come to an agreement as soon as possible. The chance of negotiations breaking down was a risk, however unlikely. Both sides lined up their teams, which would initiate the negotiations. At this point, it was March 2003.

The goal was to start this new relationship at the beginning of Sun's fiscal year in July.

Perhaps unsurprisingly, those negotiations took longer than expected and the agreement was finally signed in August.

Transition Phase

•

•

Global Delivery Partner (GDP) The GDP would cover the majority of the courses to a certain level in the curriculum.

(See also CoLE below) Authorized Sun Education Centers (ASEC direct) ASEC direct is the name of most of the existing local partners who are already in place. They work under the 'direct' concept, which describes the split of the tasks between Sun (sales, marketing, administration, enrollment of students, invoicing) and the Partner (course delivery). At the point of contact, customers deal directly with Sun, while the partner is actually responsible for delivering the courses.

The outsourcing deal was restricted to the US and EMEA, purely because in Asia and the Pacific geographical area (APAC) there is already a partner model in place. The SES revenue numbers in the US were 28%. In EMEA the figure was 72%. Consequently, there was a huge focus on EMEA right from the beginning. In addition, transferring SES's business in EMEA to Accenture Learning was much more time-consuming due to the legal requirements. Meeting the EU laws, with regards to the 'Acquired Rights Directive' (ARD) and the 'Transfer of Undertaking, Protection of Employment' (TUPE), as it is called in the UK, is not an easy task. Special legal skills are necessary to eliminate the risk of being sued, and the resulting penalty fees.

One of the most delicate parts of the process was providing the appropriate amount of communication to everybody who was affected. Primarily, the employed staff needed to be informed very carefully. As is often the case, the risk of losing the best people first is

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pretty high. Obviously rumors spread around amongst the staff but keeping them informed kept the risk of any unwanted departures to a minimum. By the same token it's equally important to manage the motivation of the staff in order to get their buy-in for the outsourcing decision, which is essential for the transition.

Obviously rumors spread around amongst the staff but keeping them informed kept the risk of any unwanted departures to a minimum.

From an operational point of view, the transition had to be done as smoothly and as transparently as possible. The customers should attend the courses as they've always done. Most of the training locations are the same, although Accenture has subleased them. The instructors have been transferred to Accenture, but are continuing their teaching activities. The administrative activities remain with Sun and therefore, for example, the enrollment and invoicing process didn't change from a customer perspective.

In the US the transition was already scheduled for September 2003, while in EMEA it took several months longer to get all the contracts and local service agreements (LSA) signed. Two transition dates were scheduled for EMEA, December 2003 and January 2004.

Because it took longer than expected to finalise the LSAs and get the signatures from each country manager.

Results This contract has been in place for over 18 months. Both parties have had enough time to get used to a lot of new processes and any necessary adjustments to the contract have been implemented. The majority of the transferred staff have accepted their new employer and are continuing their efforts in the training business as expected.

Because the relationship with Accenture is continuously improving and the original transition worked out well, other parts of the business are being outsourced. The Centers of Learning Excellence (CoLE) were transferred in 2005. By doing this, the high-end customer training and the internal technical training (ITT) are now delivered by Accenture as well.

Regardless of this transition, the business itself continues to develop and now we face other challenges - to add new businesses to the contract (for example, remote laboratory capabilities - the 'live virtual classroom').

Conclusions By outsourcing the training delivery to a global delivery partner, Sun was able to achieve its goals of reducing the space of Sun buildings, adjust the headcount numbers by transferring the people within the scope of the project to the global delivery partner and in accordance with regional legal requirements.

Finally, SES retained responsibility for Sun's intellectual property, while the delivery of its content is in the hands of partners, in compliance with Sun's philosophy.

Another valuable lesson learned from experience was the need for regular meetings on all levels, in order to react quickly to address any impending concerns. A close view of the development of the project is essential.

The flexibility to make adjustments is crucial,

though be prepared that this in itself leads to lots of new meetings and conference calls across all organisational levels.

Last, but not least, it is important that the two parties involved create, maintain and enjoy a trusted relationship. You must create a level of understanding which enables the two partners to address all the small and large issues which regularly and inevitably pop up and enables you to resolve them to obtain mutually positive result.

About the Author 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.

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OUTSOURCING IN GERMANY MAIN LEGAL AND COMMERCIAL ISSUES IN LOCAL OR MULTI-JURISDICTION ARRANGEMENTS

Following the path taken by the US and UK-based companies over the past few years, German companies increasingly use outsourcing to consolidate internal operations and systems into common platforms and processes. The growth in outsourcing activity in Germany involves not only IT and communication services, but also business processes, e.g. securities transactions, payment transactions and loan administration, manufacturing, audit and finance, human resources, procurement and facilities management services. Offshoring, i.e. outsourcing to service providers located in low cost countries such as India, China or Indonesia, has been greeted enthusiastically, however, Germany has not yet seen many offshoring projects (other than singular software development projects). Rather German companies have discovered the CEE countries (= Central Eastern European countries) as 'near-shore' destinations. However, most projects in Germany are not cross-border in nature.

Dr. Joachim Schrey Rechtsanwalt, Partner Clifford Chance

Legal Work Starts Long Before Negotiation of Contract While outsourcing can generate significant value if structured and managed effectively, it may also create significant risks in connection with and following the transfer of operations to the service supplier. Therefore, it is important to collect all relevant data with respect to the existing environment to identify any legal and commercial issues that may arise.

Internal Due Diligence In order to collect relevant data and to identify legal and commercial issues and risks, the outsourcing customer (the 'Customer') should diligently review its business unit currently producing the respective services. This includes collecting data regarding all relevant tangible and intangible assets, but also reviewing all contracts with third party suppliers (e.g. licensors, lessors, maintenance service suppliers, landlords etc.), which the Customer is considering transferring to the service supplier.

In Germany, specific requirements apply for the transfer of certain assets, i.e. the inclusion of lists in the transfer agreement in which each asset piece is clearly identified.

The transfer of real property in Germany requires notarisation, which may lead to a need to notarise the entire agreement.

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The transfer of contracts under German law often requires the prior consent of the contract counter-party, which is a timeconsuming process to collect required consents prior to signature of the agreement.

Transfer of Employees When transferring business to a service supplier, employees are often the most important 'asset'. In Germany - as in all EU member states - the Acquired Rights Directive (ARD) applies, which was transformed into national law by sec. 613 a German Civil Code.

German Labour Courts diligently follow the jurisdiction of the European High Court of Justice in the interpretation of the Acquired Rights Directive so that German law leaves some room to structure the deal in one-way or the other. In multi jurisdiction agreements, however, the ARD-related legal situation has to be assessed and reflected on a country-by-country basis since the interpretation and the scope of applicability differs from country to country.

Selection of Service Provider (a) Regulatory Aspects If the Customer's business is subject to industry specific regulations, such as those applicable in the financial sector, it is also important to ensure compliance with the local regulatory regime. In Germany, sec.

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25a of the German Banking Act (Kreditwesengesetz, 'KWG') imposes specific requirements as regards to the service supplier's ability to perform in terms of quality and quantity. The management of a financial institution has to evaluate the performance of a service supplier prior to entering into an outsourcing arrangement.

It must be able to prove its evaluation activities vis-ĂĄ-vis the Federal Banking Authority (Bundesanstalt fĂźr Finanzdienstleistungsaufsicht, 'BaFin').

Although it has not yet been finally transformed into national law, the paper 'Outsourcing in Financial Services' published by The Joint Forum in February 2005, comprises nine 'Guiding Principles' applying also to the insurance industry which requires an 'appropriate due diligence in selecting third-party service providers' too. (b) Impact of the Sarbanes-Oxley Act The Sarbanes-Oxley Act 2002 (SOX) may apply to German companies if (a) they are registered according to sec. 12 of the US Securities Exchange Act 1934 (i.e. are listed on a US stock exchange or (b) have at least 300 shareholders residing in the US. It may also apply to significant German subsidiaries of listed companies. SOX and its supporting legislation have potential importance to both outsourcers and their customers. The most important impact of SOX on outsourcing arrangements results from sec. 404 (management assessment of internal controls), according to which the Securities Exchange Commission (SEC) shall prescribe rules requiring each annual report to contain an internal control report, which shall (i) state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and (ii) contain an assessment, as of the end of the most recent fiscal year, of the effectiveness of the internal control structures and procedures for financial reporting.

Moreover, an independent auditor of the Customer is required to opine on management's assertion over internal control in addition to the auditor's opinion on the fair presentation of financial statements. In order to make its annual assertion on the effectiveness of its internal control, management will be required to document and evaluate all

controls that are significant to the financial reporting process (sec. 404 SOX). If Customer uses a service supplier to process transactions, host data or other significant services, Customer's management will look to the service supplier for information on the design and operating effectiveness of the service supplier's controls. Customer's management will either need to conduct an evaluation of the service supplier's controls, or it may obtain a SAS no. 70 auditor's report from the service supplier, to gain an understanding of the service supplier's control. Service suppliers that have Customers or want to acquire Customers to which SOX will apply, should therefore expect an increase in demand for information on its controls. Vice versa, Customers should diligently review the internal control and reporting processes potential service suppliers already have in place. Although SEC issued new SOX compliance guidelines on 16 May 2005 which should provide IT service suppliers with some relief in terms of the number of IT controls to be assessed yearly, SOXcompliance will be one of the most important factors in selecting a service supplier.

DEAL STRUCTURE In outsourcing arrangements within Germany, parties usually use a deal structure comprising of a transfer agreement setting out the principal commercial terms for the transfer of assets, contracts and employees and a service agreement setting out the

In multi-jurisdiction arrangements, the deal structure should reflect the need for both central control and local implementation. In many multi-jurisdiction arrangements a global master agreement setting out the principal commercial and legal terms of the arrangements including global reporting lines and governance structures are combined with local implementation agreements on a country-by-country basis.

SERVICES Scope of services The reason why many outsourcing deals, in the past, were seen very critically and some experts held the position that nearly 50% of the (IT) outsourcing deals did not achieve their initial economic goals, is that parties had not defined the scope of services thoroughly enough. Therefore, one of the first things a Customer should do when preparing an outsourcing project is to scope its own services and the service levels it is currently achieving.

An incomplete description of services, however, will lead to an incomplete range of services being rendered which (i) makes the Customer's management dissatisfied with the supplier's services; and (ii) leads to a steady flow of work orders generating additional costs for the Customer. Furthermore, the parties have to keep pace with either the often dramatic changes in scope of the market place (avoiding that the outsourcing contract is out-of-date before it has been signed) and should retain the benefits of outsourcing even in an everchanging environment. Therefore, parties should devote a lot of their attention to defining procedures on how to keep the arrangement 'flexible', fair and attractive to both parties even in a permanently changing environment.

Instruments in how to keep both parties motivated to follow a high rate of business change can be gain sharing or incentives to deliver continuing, maximised benefits.

In multi-jurisdiction arrangements, the deal structure should reflect the need for both central control and local implementation.

Service level agreements

principal commercial terms applicable to the provision of services which may be formed by several documents (e.g. the master service agreement, several exhibits on the second level, addenda on a third level). This modularisation makes it easier to properly implement any future changes by just replacing the relevant document with a newer version.

More or less the same applies to the definition of service levels: For many Customers it is often difficult to clearly identify their existing service level baselines since historic data is not available, measuring procedures are not implemented and costs are not allocated to services and service levels.

Moreover, business departments in a Customer's organisation are often reluctant to clearly define their service level expectations

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in relation to the business impact of the services concerned.

If and to the extent that the Customer cannot define the scope of the services and service levels required prior to signing, it usually makes no sense to tie down the services and service levels required under the outsourcing arrangement by reference to 'a standard market practice' since outsourcing is always a tailor-made individual solution.

have to agree how to implement the necessary tools, audit rights and to provide necessary data and reports, to enable the Customer to comply with SOX. The implementation of ITIL processes (Information Technology Infrastructure Library) will not be sufficient; additional control mechanisms will be necessary to fully comply with the framework of SOX legislation.

Data Protection and Privacy Issues

AUDIT RIGHTS AND OBLIGATIONS, IN PARTICULAR IMPACT OF SOX One of the major tasks of Customers entering into an outsourcing arrangement is to have the necessary commercial and operational processes and instruments available to ensure that it is able to effectively

Data protection compliance for the processing of personal data in Germany or within the EU or EEA member states is governed by the European Data Protection Directives (directives 2002/58/EC,97/66(EC and 95/46/EC)). To the extent that the German Data Protection Act is applicable, it generally allows data processing on behalf of a Customer which requires, however, the

Companies to which the SOX requirements apply, must realise that having outsourced certain services, which are relevant for their SOX-compliance does not mean that their responsibility for compliance is outsourced, rather it remains responsible under SOX. manage its supplier and the risks relating to the outsourced services. For example the circular issued by BaFin interpreting the rights and obligations under sec. 25 a KWG requires that financial institutions establish a dedicated organisational unit within their organisation to monitor the services rendered, to control the processes within the service supplier's organisation. Outsourcing a service not only means restructuring the Customer's organisation vis-Ă -vis a service supplier; but also an internal restructuring, e.g. implementing procedures, how to request; additional or changed services (including saying goodbye to the 'Hey-Jo' principle), to place work orders with the service supplier etc., all of this in a structured, well documented and controllable manner.

Companies to which the SOX requirements apply, must realise that having outsourced certain services, which are relevant for their SOXcompliance does not mean that their responsibility for compliance is outsourced, rather it remains responsible under SOX. The parties

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Customer's right to give binding instructions on how to process individual-related data. In multi-jurisdiction arrangements, it is worth noting that several EU member states offer their citizens greater levels of protection.

Multi-jurisdiction arrangements covering nonEU/EEA countries, the data transfer from Germany thereto must comply with additional requirements, which are reflected in the European Commission standard clauses.

Cross-border arrangements with US-based service suppliers can be facilitated if the US service supplier has adopted the 'Safe Harbour' framework.

In addition to the applicable data protection regimes, several industries in Germany have to take into consideration, special criminal law-based privacy regimes, including sec. 203 German Criminal Code.

Termination, (Re-)Migration In Germany, parties are in principle free to agree upon termination rights for breach, change of control, convenience etc. The right

to terminate an agreement for a good cause (for an important reason), however, is mandatory under German law so that it cannot be excluded. Unfortunately, German law does not define a catalogue of 'important reasons', so that the parties should define a noninclusive catalogue of instances when an important reason shall be deemed to be given (e.g. if the service supplier should not meet agreed service level with a significant grade of under performance and for a significant period of time).

Following termination, the transfer of the services back to the Customer or another service supplier is critical. Nevertheless, in many cases parties simply forgot to agree upon terms and conditions for such (re-)migration scenarios. A (re-)migration to the Customer or to another service supplier is usually a highly sophisticated procedure which has to be diligently planned. The parties should be aware that they will not be able to define the migration scenario in every detail at the beginning of the arrangement; it will rather be a separate project, which has to be initiated long before the final date of expiration.

Liability German law provides for some restrictions as regards limitation of liability and a very strict regime if liability is limited in standard terms. Often, customers tend to achieve an extremely broad range of protection, e.g. through a high level of liability from the service supplier. A high level of liability will increase the costs of the services and often also requires a higher level of customer's management.

SUMMARY In summary, the implementation of an outsourcing arrangement within Germany requires long-term and diligent preparation as well as the consideration of many legal and commercial issues in a fair, detailed and 'flexible' agreement. The level of complexity increases in multi-jurisdiction outsourcing arrangements. Particular compliance issues arise if the customer is subject to SOX, which has produced and continues to produce a continuous flow of guidelines and standards. joachim.schrey@cliffordchance.com

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EVOLVING OUTSOURCING THROUGH VALUE CHAIN ANALYSIS

The concept of outsourcing provides customers with a business proposition compelling to both executives and managers: the supplier offers to take over operations and perform to the same or a higher standard, for the same or a lower price.

But how can a supplier, an outsider with little understanding of the inner workings of the customer's operation, deliver more for less - especially against the customer's own workforce which is unencumbered by profit margins? The answer lies in the limited number of options available to balance cost and effectiveness satisfactorily.

Elizabeth Weir Partner Pillsbury Winthrop Shaw Pittman LLP

Keeping the right balance is not easy, and, in a demanding economic environment, continuous improvement at an operational level is essential. Managers are constantly seeking ways to implement change to deliver or support company objectives, and the solutions to achieve this must be continually 'sourced' from the viable options. The problem is, there are only a few such options: 1 Do Nothing. Used when the value of change does not warrant its cost. Often overused, leading to the perception that there is a fundamental breakdown within the organisation.

2 Change It (alone). Basically, re-tooling by developing new processes, and training existing staff and/or hiring the requisite skillsets. For the right type of change, this entails the least disruption for the operation, but places the burden squarely on the operation itself to identify and implement change.

3 Change It (with assistance). Typically used when large-scale change is required and the requisite know-how - how to perform the change, what the end result should be is not available internally. Upside: the leading consultants are knowledgeable of the level of effort required to effect change

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and can utilise best practices. Downsides: these engagements can last 9-12 months plus, are costly, do not come with guaranteed results, and are often highly disruptive. While suitable for order-ofmagnitude change, for truly large-scale operations the advisor may not have sufficient knowledge of applicable best practices or may lack the ability to impose change effectively.

Outsource It. Re-engineering + guarantee.

The customer determines what functions it would like a supplier to perform and contracts for the provision of those services for a price. As price and pricing mechanisms are pre-agreed, the customer can focus on the remainder of its operations and leave changing the outsourced component to the supplier.

Today, where an operation must rapidly acquire capabilities necessary to deliver bestin-class, risk-mitigated change on-time and on-budget, an outsourcing contract is often the most rational approach in the face of uncertainty of future outcomes. Outsourcing appears to be here to stay and will continue to grow by providing a broader spectrum of services and integrating closer with customers' operations.

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ISSUES With commercial-grade outsourcing now in the middle of its second decade, customers now expect more from outsourcing than a supplier maintaining the status quo at a lower cost. To appreciate why it has taken so long to come to this seemingly simple conclusion, understand that, while the theory behind outsourcing has the customer specifying the outputs and the supplier how to achieve them, the theory has rarely been put into practice.

There are many explanations for this, but the most compelling is that leading-edge adopters learned to survive by mitigating risks inherent in change. As one of the largest risks in the early outsourcings was the supplier's ability to perform adequately, it made sense for the supplier's obligations to be highly controlled.

Rather than describing the supplier's solution to achieve the customer's objectives, outsourcing contracts based the scope of work on a detailed description of the customer's operations. This was highly negotiated.

Suppliers did not want to take on more responsibility (risk) than customers had done historically, and customers did not want to be charged additional amounts for any services which had been performed internally, but which were not described in the scope of work.

As each new outsourcing customer was as interested in mitigating outsourcing risks as its earliest adopters, the words and the mechanisms supporting the outsourcing process became de rigueur. For information technology outsourcing (ITO), this produced a set of established services for performing the various IT components. These components, 'towers', appeared to facilitate benchmarking, ushering in inevitable commoditisation and focus on price as the primary differentiator between suppliers' offerings. Over time, this led the outsourcing industry to the conclusion that, if towers were commodities, selecting the best supplier for each tower ('best-of-breed' sourcing) would achieve the best possible service at the lowest cost.

suppliers two seemingly obvious, incontrovertible objectives, except‌. such a transition requires a comprehensive re-tooling of the outsourcing industry (suppliers, consultants, lawyers, benchmarkers, etc.). The manner in which an outsourcing transaction is produced is well-established and does not easily lend itself to achieving these objectives, for a number of reasons, including: 1 Schedule of Work. As discussed above, this is based on what the customer does today, so what is done today should be done by the supplier tomorrow. But why then outsource? If simply to achieve the same for less, using history to describe the future is reasonable, but what if the customer wants more or better than they have today?

Basing the schedule of work on historical activities requires articulating, accurately and comprehensively, what is done today (no mean feat) and, as nothing has otherwise changed, the wording is generally heavily negotiated. Further, the customer's additional requirements (i.e., the 'more' or 'better' elements) must also be documented, triggering more negotiation.

for this: (1) the practice of defining the schedule of work, based on a snapshot of what the customer's operation was previously doing, unless specifically including a well-developed set of change activities; and (2) failure either to specify the customer's objectives upfront or to develop the basis for future change. (a) Re-defining the Schedule of Work.

Base it on industry-standard processes, rather than past performance, and include appropriate mechanisms to allocate responsibility for the various aspects of change. (b) Lack of objectives/change mechanism.

This requires a fundamental change in the sourcing process. Currently, most 'sourcings' are designed to ensure the suppliers competing for a customer's business are all bidding on the same work, or even to price implementation of customer-developed solutions. While this may work for certain smaller customers or problems with well-known solutions, it is not designed to leverage suppliers' access to subject-specific knowledge and their experience.

Neutral terminology that both parties can use to describe the relevant operations is essential.

What is needed is a shift to outcomeoriented outsourcing. Rather than telling the supplier what the customer does today, describe the supplier's obligations and objectives that the supplier must meet.

Instead of judging by price alone, the suppliers' full depth of abilities would be on display for review, selection and contractual obligation.

Towers of Service. Based on the successful principles of business process re-engineering, identifying value-creation opportunities cannot be achieved by considering the macro level. Rather, the operation must be disaggregated to its base processes to understand what an organisation is doing and how it interacts internally and with others.

Developed initially for pricing purposes, 'towers' are generally groupings of various technologies or other things on which processes are performed. While beneficial for developing pricing constructs, this has institutionalised the belief that towers are somehow compartmentalised and therefore safe to source individually.

Unfortunately, this has contributed significantly to service delivery failure and customer dissatisfaction. The tower-based

SYMPTOMS So is tower-oriented sourcing the endstate? 'Yes' for some, but, resoundingly, 'no' for those on the leading-edge, seeking to advance the practice by: (1) creating value from outsourcing arrangements rather than simply reducing cost; and (2) shifting from relationships characterised by limited accountability to more broadly defined, predictable relationships with outsourcing

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Neutral terminology that both parties can use to describe the relevant operations is essential. If this were based on best practices promulgated by the appropriate standards-based organisations, customers could be assured that what they do (not how they do it) would be adequately described, and suppliers, usually proclaiming their use of best practices, would be free to perform without risk of contractual non-compliance with the schedule of work. Further, since the supplier needs to change the way in which the underlying services are performed in order to deliver cost reduction, describing the customer's recipe is superfluous.

Customer Objectives. A key customer complaint is that suppliers do not, without additional (revenue) incentive, voluntarily make meaningful changes to the environment. There are two main reasons

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A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships

mindset results in the development of a sourcing strategy focusing simplistically on which tower(s) should be outsourced, rather than considering the full spectrum of base processes and analysing the relevant operation to determine the right sourcing approach to achieve required objectives.

By splitting an operation by tower, processes that span the various towers (of which there are many) are broken, requiring the customer to provide the glue to integrate now-separated processes into a coherent function.

For the customer, this benefit is rarely achieved. Assembling the best parts does not necessarily create the best result, as the interoperability of the parts is lacking.

By default, the customer inherits the problem of making it work - not what it intended.

Customers also discover that they lack the stamina to undertake this number of outsourcing transactions.

A mechanism to help the customer and its suppliers understand the impact of a planned outsourcing on the totality of the operation is required. By looking at

While work processes may be organised vertically, they move horizontally across the operation. The key to value-creation is a process-oriented approach, not tower-based segmentation.

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Even more damaging is the value destroyed by the tower mindset.

Businesses have worked hard to tear down silos in product production and reap the rewards: look at car manufacturers reengineering the development process for products; retail banks realising business benefits from packaging and co-ordinating financial products. While work processes may be organised vertically, they move horizontally across the operation. The key to value-creation is a process-oriented approach, not tower-based segmentation.

What is needed is a mechanism from which the key sourcing decisions at each stage (e.g., strategy, transaction, operation) can be made. By using a common denominator across the sourcing lifecycle: (a) the re-work inherent in developing different tools and documents for each stage is eliminated; (b) the potential for gaps/overlaps in sourcing the operation is significantly reduced; and (c) critically, value can be created by ensuring key processes are, wherever possible, left intact or analysed as to how the various delivery actors can achieve the desired outcome.

Best-of-Breed Sourcing. For varying reasons, customers, advisors and even some suppliers like the concept of best-ofbreed sourcing: customers - assembling the best suppliers is perceived to generate optimal results; advisors - this produces more deals; and suppliers - this creates more opportunities to get business.

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the whole rather than simply the portion to be outsourced, it should be possible to identify the linkages and interactions required to manage the whole effectively.

Governance. As outsourcing has grown in popularity, the issues that both parties have in trying to develop symbiotic relationships have multiplied. To date, the cure has been to increase the level of governance. But, the type of problems producing greatest customer/supplier friction are not appropriately solved this way; they require solutions at an operational level, in other words, some means of allowing both parties to understand high importance interactions which can either create or destroy value.

Accordingly, the sourcing process should be modified to identify and document, with substantial specificity, the intended interactions and how each should be addressed. A supplier's willingness to develop such interactions and standard process for identifying, documenting and implementing them should, for the customer, be a key selection criterion.

SOLUTION Pillsbury Winthrop Shaw Pittman has developed a second generation methodology for approaching large-scale, complex outsourcing transactions. This methodology, through consistent application of a value chain construct, provides a rigorous yet flexible structure that can be applied to the

management of the entire sourcing lifecycle. It can be applied equally to outsourcings and renewals/renegotiations, as well as consolidations, acquisitions and divestitures; ITO and business process outsourcing (BPO).

The key attributes of this patent-pending methodology are: 1 The construction of an operating model for the entire operation - the 'retained' as well as the 'sourced' components - identifying all service delivery actors (internal and external) and allocating them to specific functions. Contrast the traditional scoping model focussing solely on the components to be sourced without the context to make strategic and transactional decisions.

2 The operating model is expressed as the full spectrum of processes specific to the organisation's operations (a 'value chain').

The IT value chain contains over 70 processes (e.g., change management, security architecture, standards development, communications operations).

For each, the model identifies the elements on which such processes are enacted (e.g., PCs, telephones, routers, circuits, servers, applications, third-party contracts).

3 The processes are defined, where possible, using terminology provided by standardsbased organisations (e.g., ITIL, PMI, SEI, TTGI). Feedback from suppliers, as well as actual experience, indicates this approach can dramatically shorten the time required to negotiate scope.

4 Applying the operating model to a specific outsourcing, the scope of the transaction is defined by processes and elements, rather than towers. This approach provides a complete mapping of how the sourced functions fit into the customer's organisation and enables areas of interaction between supplier(s) and customer to be identified. Once identified, the level of complexity and risk can be evaluated and, if necessary, either the scope adjusted or interaction models developed before contract signature. This helps ensure the relevant supplier is accountable for end-to-end responsibility for outsourced processes, reducing postsigning implementation risk.

5 The approach is designed to facilitate the capture of data such as personnel, equipment, applications, etc., using the same organisational structure in which the scope is defined. This aligns the data with the customer's view of its existing

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organisation, making data collection easier, and providing the precise information needed by suppliers to design informed service and price proposals.

By organising the scope of a transaction along process lines, the methodology makes it easier to identify where service level requirements are needed and/or assess whether service level coverage is adequate. Moreover, it provides a mechanism to link price to scope, thereby resolving some of the more heated customer/supplier discussions.

By employing a construct referred to as the 'Three T's' (T3) - Transfer, Transition and Transformation - the methodology provides customers with a tool to express desired outsourcing objectives to assist supplier proposals to respond to customer needs without unduly restricting suppliers' creativity in solution-development.

As indicated below, T3 provides, depending on the particular stage, the rationale for the outsourcing and its objectives.

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Lastly, the methodology addresses the substantial shortcomings associated with reliance on governance alone as the cure for a poor relationship. Governance models are insufficient to resolve the operational issues that tend to generate bad relationships.

Accordingly, the methodology identifies the areas which, as a result of sourcing decisions, may cause friction and utilises detailed interaction models to design and enhance the desired manner of interchange between the parties.

CONCLUSION The standard outsourcing paradigm, 'I (the outsourcer) will perform the same services you previously performed, to the same or higher standards, for the same or a lower price', is predicated on history, requiring suppliers to understand what the customer was previously doing, the level of performance and its cost.

Obtaining the necessary facts is timeconsuming, expensive and subject to potentially divisive negotiations.

Contract Effective Date

End of Transition

The alternative approach described above revolutionises the entire outsourcing process by applying to it 'value chain' analysis. Instead of focusing on history, the methodology decomposes the relevant business practices along a value chain, and maps these processes to a uniquely-created "span" describing the factors of production used in these business processes across relevant geographies and businesses. The resulting matrix can then be used to develop a scope/operating model and appropriate service measures for the proposed outsourcing relationship. Together with interaction models depicting the potentially high-friction customer/supplier contacts and a pricing model relating pricing metrics to delivery obligations, this creates a customersupplier relationship organised around how the customer's business actually operates.

Revolutionary.

End of Transformation

End of Term

Transfer Asset, People, Knowledge

Transition Technology Change, Best Practice Implementation

Target Achieved

Transformation Operating Model, Business Process Operate “Future�

As Is, Where Is Operate As Is, Where Is

Figure 1.

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Solution Index

Solution Index

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Solutions Index A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships

ACS

Atos Origin

CSC

IBM

SBS

Simmons & Simmons

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p99

p72

p60

p20

p28

p84

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.

www.simmons-simmons.com

Simmons & Simmons is a leading international law firm with over 1,000 legal staff in 19 business and financial centres across Europe, the Middle East, Asia and the US.

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