Getting Good And Staying Good At (Out)Sourcing

Getting Good And Staying Good At (Out)Sourcing

Alan McSweeney

November 24, 2013 2

Increasing Trend In Outsourcing Non-Core Functions

• Increasing and continuing trend of organisations moving from in-house solution delivery to sourcing solutions externally

• Intended to improve operational efficiencies by using external suppliers’ perceived abilities to provide cost-effective, fit-for-purpose solutions quickly using the right technology

• Responsibility and accountability for solution delivery and operation stills lies with the acquiring organisation

November 24, 2013 3

Acquisition Trends

• Greater level of acquisition

• Greater acquisition of services with lengthier service relationships

• “Under the Cover” acquisition/outsourcing in the form of cloud/XaaS

− Cloud leading to ad hoc proliferation of outsourced services as business functions bypass what is perceived as slow, expensive IT

November 24, 2013 4

Divestment Of Non-Core Functions

• Organisations divesting themselves of what they see as non-core functions

• Application of Coase’s Law on the Nature of the Firm− A firm will tend to expand

until the cost of organising an extra transaction within the firm become equal to the costs of carrying out the same transaction on the open market

− When it is cheaper to buy the service externally it will generally be bought externally

CoreOrganisation

Functions

NonCore

Function

NonCore

Function

NonCore

Function

NonCore

Function

NonCore

Function

NonCore

Function

NonCore

Function

NonCore

Function

November 24, 2013 5

Divestment Of Non-Core Functions

• Shrinking core competency focus as organisations move from in-house solution delivery to sourcing solutions externally

ShrinkingCore

NonCore

Function

NonCore

Function

NonCore

Function

NonCore

Function

NonCore

Function

NonCore

Function

NonCore

Function

NonCore

Function

November 24, 2013 6

(Out)Sourcing Zone Of Opportunity

• Outsourcing zone of opportunity represents a challenge for both suppliers and for the acquisition function

• What is the size of the outsourcing zone?

• How do you identify your outsourcing zone and then take appropriate action?

• Fundamental question as to the nature of the organisation

NonCore

Function

NonCore

Function

NonCore

Function

NonCore

Function

NonCore

Function

NonCore

Function

NonCore

Function

NonCore

Function

November 24, 2013 7

(Out)Sourcing/Acqusition

• Greater acquisition of solutions from external suppliers rather than in-house

• Aimed at improving operational cost-effectiveness and efficiency

• External suppliers seen as being able to provide solution more quickly, at lower cost and using suitable technology

• Acquiring organisation still needs to retain accountability for solution

November 24, 2013 8

Questions For Acquisition Function

• What value, if any, is outsourcing creating?

• What are the measures for evaluating outsourcing success and value and are they being achieved?

• Who owns and manages the outsourcing relationship(s)?

• How well are the efforts being managed?

• What are the risks and are they being managed effectively?

• What other new outsourcing opportunities should we pursue?

• How are lessons learned from outsourcing experiences applied elsewhere?

• How do we decide what other services to outsource?

• Does the approach to outsourcing help maximise value while minimising risk?

• Are standard methodologies and approaches used to manage outsourcing selection and implementation?

November 24, 2013 9

Avoiding The Outsourcing Value Lost

Outsourcing Potential Value

Lost Outsourcing Potential Value

Outsourcing Value Achieved

Lost value due to unachieved planned, savings, inadequate performance, rework and

additional costs and inefficiencies

Costs more than expected, delivers less

than expected

Lost value can be 30%-60% of originally expected

November 24, 2013 10

What Are The Real Costs Of Outsourcing?

• How realistic are the costs and benefits of outsourcing?

• How much is the desire to outsource leading to inaccurate estimates, either deliberate or just wishful thinking?

• How much is the desire to outsource at any cost causing strategic misrepresentation - deliberate distortion of actual costs?

Errors In Costing

• Cost estimates are rarely accurate

−What we know about most projects is that they either or both overrun on costs and deliver less than expected

− Cost overruns are generally caused by a mix of errors in the initial cost estimates and deliberate distortions in order to cause the decision to be made



Procurement ≠ Acquisition

• Acquisition is not just about having a separate procurement function that manages supplier selection/ tendering with narrow and singular focus on cost

• Procurement focus leads to a disconnect between selection and subsequent delivery

• Effective acquisition means taking a much wider focus than just a financial arrangement


All Too Often Procurement Throws A Solution Over The Wall To Delivery

Procurement Delivery

Beware Of The Externalities Of Procurement-Lead Acquisition and Outsourcing

• Externalities are costs that procurement-lead initiatives give rise to but which are paid for elsewhere

• Apparent cost-savings from procurement’s viewpoint lead to costs during implementation and operation



It Is Not All About The Money

• Successful outsourcing is not about getting the lowest price at all costs

• It is about getting the lowest price for a sustainable solution under a reasonable contract from a skilled and experienced service provider

• An outsourcing arrangement is not a once-off economic business deal that automatically implements itself after the parties sign the contract

• It is an continuous commercial relationship with long-term economic and strategic consequences and impacts for both the supplier andthe outsourcing organisation that depends on the choices the parties make and their subsequent behaviour

• An unwise choice can have serious and enduring negative consequences

Outsourcing Transaction Costs

• There are (hidden/overlooked) costs associated with sourcing a service externally− Selecting the wrong supplier− Costs of writing contract− Costs of enforcing contract− Having a poor service contract that results in hidden cost and/or reduced

service− Overlooking personnel issues− Loosing control over the outsourced activity− Management, quality assurance and supervision overhead− Implementation and termination costs− Loss of flexibility− Loss of integration between applications and data− Data extraction costs− Security framework implementation

• Effective transition to outsourcing requires full knowledge of costs –current and future



Getting Costs and Benefits Right Is Very Important

• Small error in costs will accumulate and become substantial over the life of the contract


A Small Error Over Time Becomes A Big Error

• Difference between what was expected and the actual costs can exceed the entire original cost where costs are poorly estimated and controlled


Outsourcing Death Spiral

Naive And Simplistic

Expectations

Over-Dependence On Service Provider As

Strategic Partner

No Governance Model

Insufficient Understanding Of Current State Of Services Being

Outsourced

No Defined Outsourcing

Strategy

No Service Catalog

No Defined Future

Operating Model Or

Architecture

Oversimplification Of Outsourcing

Process

Underestimated And Unquantified

Resource Commitment

Invalid Assumptions

Unarticulated Expectations

Incomplete Contract

Incomplete SLAs/OLAs

Insufficient Management And Oversight

Lengthy Negotiations

Unanticipated And Large Out-

Of-Scope Services

High Management

Resources And Costs

Backsourcing/ Insourcing/

Circumvention of Arrangement

Development Of Parallel IT

Services

Constant Renegotiations

Breakdown Of Relationship

Pitfalls Of Outsourcing

• Lack of management commitment to getting outsourcing right

• Limited or no knowledge of outsourcing methodologies and approaches

• Lack of an outsourcing communications plan

• Failure to recognise the business risks of outsourcing

• No using external sources of knowledge and experience

• Not allocating effective and skilled internal resources

• Rushing through the initiative to get the outsourcing arrangement in place at any cost

• Not understand what it takes to make the supplier productive

• Poor relationship management with supplier and within the organisation

• Not communicating the operation of the outsourcing relationship to the organisation


Myth Of Outsourcing “Strategic Partnership”

• Don’t do business with friends

• Don’t become overly friendly with those you do business with

• Outsourcing is a business relationship that will come to an end

• Keep a strong business focus at all times

Making An Explicit Decision On Where You Want To Be On The Outsourcing Spectrum


Efficiency/ Utility

Make It

Cheaper

BusinessEnhancement

Make It Better

Transformational

Make Me Money

Increased Scope and Complexity of Outsourcing Arrangement

Primary focuses on cost control and cost reduction,

with the aim of maintaining consistency in

service delivery

Concerned with organisational productivity and with improving

performance leading to achievement of organisational goals

Characterised by a greater partnership between the service provider and the organisation that is focused on innovation

and new business, changing the way in which the organisation operates and uses technology

Making An Explicit Decision On Where You Want To Be On The Outsourcing Spectrum

Efficiency/ Utility

Make It

Cheaper

BusinessEnhancement

Make It Better

Transformational

Make Me Money

Increased Scope and Complexity of Outsourcing Arrangement

Focus on Buying Focus on Tactical Sourcing with Some

Organisational Restructuring

Focus on Strategic Sourcing With Substantial Organisational Change


Change In Relative Importance Of OutSourcing Objectives Over Time


-20 -10 0 10 20 30 40 50 60 70 80 90 100

Reduce Costs

Increase Service

Flexibility and Scalability

Support and

Enable Growth

Gain Access to

New Technologies

Transform Processes

Align Support Function

with Strategy

Improve Process

Efficiency

Improve Compliance

Capabilities

Drive Organisational

Culture Change

Gain Access To

Talent and Capabilities

You Start Looking to

Achieve This

You Evolve Over Time Into Looking At

Achieve This

Outsourcing Effectiveness At Achieving Business Benefits


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Reduce Operating Costs

Meeting Regulatory

Requirements

Standardising Processes

Supporting More Effective

Organisation-Wide Operations

Gaining Access to

Capable Talent

Forcing Change Into

Business Operations

Transforming Processes

Gaining Access to

New Technologies

Gaining Access to

Analytical Capabilities

Providing Innovation

Very Effective Somewhat Effective Not Effective

Outsourcing Effectiveness At Achieving Business Benefits

• What is initially important is not what becomes important

• Learn lessons from the experience of others to define exactly what you want of your outsourcing arrangement


Important Supplier Selection Factors

November 24, 20130% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Financial Stability

Track Record Of Standard

Operational Services Delivery

Delivery Talent That Add

Values Beyond Standard Operations

Knowledge of Specific

Industry Processes

Ability to Support Change

Management and Governance Needs

Culture of Supplier's

Delivery Organisation

Ability ty Transform and

Reengineer Existing Processes

Global Delivery Scale

and Flexibility

Ability to Provide

Innovation

Ability to Support Business

Outcomes Rather Than FTE Pricing

Ability to Provide

Analytical Insight

Ability to Promote

Gainsharing Initiatives

Brand

Mission Critical Important But Not Critical Somewhat Important Not Important


Important Supplier Selection Factors

• Use these factors to evaluate suppliers and look for proven competence and referenceable delivery


Strategic And Operational Skills Of High Performing Acquisition-Oriented Organisation


Governance Service Delivery Business Vision Architecture

Internal IT Function Management

External IT Function Business Alignment

Business System Thinking

Contract Management

Effective Contract Enablement and Acceleration

Informed Product and Service Acquisition

Vendor Development

Architecture Planning and Design

Relationship Building and Maintenance

End-to-End Systems and Technology View


• Define the systems, information and processes needed to deliver on business requirements and optimally acquire and operate them

• Define and manage the architecture blueprint for the evolving platform that hosts operational systems and processes

• Manage external supply and acquisition

• Manage sourcing strategy

• Understand the external services market and develop and maintain the skills to select, engage and manage internal and external IT resources and services

• Identify the potential added value from IT service suppliers


Areas Of Importance For Outsourcing Organisations During Outsourcing Implementation and Operation

OngoingInitiation Implementation CompletionAnalysis

Service Transfer


Outsourcing Planning

Outsourcing Agreements

Service Transfer

Service Provider Evaluation

Sourced Services Management

Outsourcing Completion

Outsourcing Strategy Management

Governance Management

Relationship Management

Value Management

Technology Management

People Management

Knowledge Management

Organisational Change Management

Threat Management

Skills To Look For In Outsourcing Service Providers During Outsourcing Implementation and Operation

OngoingInitiation Implementation Completion


Service Design and Deployment

Service Transfer

Service Delivery

Contracting Service Transfer

Knowledge Management

Relationship Management

People Management

Performance Management

Threat Management

Technology Management



Business ITSupplier

Ecosystem

IT Mediates Between the Business and the Supplier

Ecosystem, Acting as a Lens Focussing Business Needs on

Appropriate Suppliers

IT Needs To Focus

Appropriate Services on Appropriate

Suppliers

Decisio

n in P

rincip

leAnaly

se

Mark

et Rese

arch

Select

ion a

nd Deci

sion

Nego

tiatio

n

Servic

e Desi

gnTra

nsitio

n

Servic

e Deliv

ery

Refresh

Lack Of Focus During Key Outsourcing Stages Leads To Loss Of Value


Value Gap Cause by “Fire and

Forget” Approach to Outsourcing

Loss Of Interest During Key

Implementation and Operational Stages

Level of Focus,

Attention and

Interest

Outsourcing Is Not Just For Christmas …

• … It is for a good chunk of your (business) life

• An overemphasis on the act of outsourcing rather than on the long-term nature of the business relationship that will follow will lead to trouble

• The selection process and the tender are not ends in themselves: they are means to an end


Outsourcing And Due Diligence

• Perform due diligence as part of negotiation/service design/transition stages:

− Discover and become familiar with organisation culture and

− Build trust

− management style

− Confirm any assumptions

− Verify costs and business case

− Identify additional risks not already documented

− Validate the transition plan

− Validate the infrastructure

− Validate the operational approach

− Identify any additional opportunities

− Ensure no transaction-breaking reasons

• Consider taking an M&A approach to implementing outsourcing


Lots of Scope To Get Acquisition Wrong

• Inadequate management

• Unarticulated end-user needs

• Insufficiently defined requirements

• Poor supplier selection

• Defective contract definition

• Deficient underlying technology selection

Outsourcing Relationship Management Officer (ORMO)

• Develop and manage outsourcing strategy

• Oversees outsourcing projects and manage portfolio of outsourcing arrangements

• Continuously appraise the portfolio of outsourcing initiatives to calculate their business value, avoid redundancies in effort, manage risks and develop and report metrics

• Conduct feasibility analyses for outsourcing initiatives across the organisation

• Ensure that there is consistency in outsourcing objectives and business objectives

• Conduct reviews/assessments/lessons learned and manage knowledgebase

• Ensure compliance with standard outsourcing methodology and process to maintain a standard operational framework


Capabilities Of A High Performing Acquisition Function

• Acquisition Project Capabilities

− Capabilities and associated practices relating to activities concerned with to establishing, executing, and ensuring the transition of an acquisition project

• Acquisition Organisational Capabilities

− Consists of cross-project capabilities related to defining, planning, deploying, implementing, monitoring, controlling, appraising, measuring and improving processes

• Acquisition Support Capabilities

− Capabilities that help implement generic practices and assist processes and work products described in more than one other process areas

• Acquisition High Skilled Capabilities

− Capabilities for quality and process performance, monitoring variation in processes, evaluating the impacts of proposed process changes, and systematically deploying processes across the organisation


Specific Acquisition Capabilities And Their Relationships

Configuration Management (CM)

Process and Product Quality

Assurance (PPQA)

Measurement and Analysis (MA)

Decision Analysis and Resolution

(DAR)

Quantitative Project

Management (QPM)

Organisational Performance Management

(OPM)

Organisational Process

Performance (OPP)

Causal Analysis and Resolution (CAR)

Organisational Process Definition

(OPD)

Organisational Process Focus (OPF)

Project Planning (PP)

Requirements Management

(REQM)

Agreement Management (AM)

Solicitation and Supplier Agreement

Development (SSAD)

Acquisition Requirements

Development (ARD)

Acquisition Technical

Management (ATM)

Acquisition Verification (AVER)

Risk Management (RSKM)

Acquisition Validation (AVAL)

Integrated Project Management (IPM)

Acquisition High

Skilled

Capabilities

Acquisition Project Capabilities

Acquisition Support Capabilities

Acquisition

Organisational

Capabilities

Project Monitoring and Control (PMC)

Organisational Training (OT)


Key Acquisition Capabilities

• Agreement Management

• Acquisition Requirements Development

• Configuration Management

• Measurement and Analysis

• Project Monitoring and Control

• Project Planning

• Process and Product Quality Assurance

• Requirements Management

• Solicitation and Supplier Agreement Development

• Acquisition Technical Management

• Acquisition Validation

• Acquisition Verification

• Decision Analysis and Resolution

• Integrated Project Management

• Organisational Process Definition

• Organisational Process Focus

• Organisational Training

• Risk Management

• Organisational Process Performance

• Quantitative Project Management

• Causal Analysis and Resolution

• Organisational Performance Management


Acquiring Acquisition Capabilities – Focus on Skills That Add Value

Acquisition Technical Management (ATM)

Organisational Process Performance (OPP)

Organisational Performance Management (OPM)

Acquisition Validation (AVAL)

Quantitative Project Management (QPM)

Causal Analysis and Resolution (CAR)

Acquisition Verification (AVER)

Organisational Process Definition (OPD)

Organisational Process Focus (OPF)

Organisational Training (OT)

Integrated Project Management (IPM)

Risk Management (RSKM)

Decision Analysis and Resolution (DAR)

Acquisition Requirements Development (ARD)

Agreement Management (AM)

Project Monitoring and Control (PMC)

Project Planning (PP)

Requirements Management (REQM)

Solicitation and Supplier Agreement Development

(SSAD)

Configuration Management (CM)

Measurement and Analysis (MA)

Process and Product Quality Assurance (PPQA)

Initial Sets Improving Skilled and Experienced Very Capable

Acquisition Skills and Capabilities

Summary

• Understand the size of the outsourcing zone

• Identify your outsourcing zone and then take appropriate action

• Beware of proliferation of “Under the Cover” acquisition/outsourcing in the form of cloud/XaaS as business functions bypass what is perceived as slow, expensive IT

• Get costs right by being realistic

• Procurement ≠ Acquisition

• Successful outsourcing is not about getting the lowest price at all costs

• Avoid the outsourcing death spiral

• Making an explicit decision on where you want to be on the outsourcing spectrum

• Develop an approach to outsourcing due diligence

• Learn lessons from the experience of others to define exactly what you want of your outsourcing arrangement

• Avoid lack of focus during key outsourcing stages

• Understand and develop the capabilities of a high performing acquisition function

• Appoint a Outsourcing Relationship Management Officer (ORMO)



More Information

Alan McSweeney

http://ie.linkedin.com/in/alanmcsweeney