INFORMATION TECHNOLOGY: MANAGEMENT ISSUES IN …

INFORMATION TECHNOLOGY:

MANAGEMENT ISSUES IN OUTSOURCE CONTRACTS

by

DIRKIE COETZEE (8907151)

MINI-DISSERTATION

submitted in partial fulfilment (25%) of the requirements

for the degree

MAGISTER COMMERCII

in

BUSINESS MANAGEMENT

in the

FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES

at the

RAND AFRIKAANS UNIVERSITY

JOHANNESBURG SUPERVISOR OCTOBER 2004 PROF N LESSING

Coetzee Information technology: 2004 Management issues in outsourcing contracts

ii

Preface

Writing this particular mini-dissertation has been a challenging yet fulfilling assignment

due to the extreme work pressures and changing of positions and location that

occurred during my M.Com studies at the Rand Afrikaans University.

The background to this mini-dissertation is in the context that I have spent 16 years in

the information technology industry and particularly the information technology (IT)

outsourcing environment and have planned, implemented, participated in- and

managed many IT outsourcing contracts in South Africa and internationally. During

these valuable experiences it became clear to me that the issues that occur within

these contracts are always similar and as such I developed a framework for myself,

based on the experience gained, and known research, in order to assist in making

sure that all elements were taken into account when engaging and managing an IT

outsource contract. This framework has been used in a consultative approach for

both local and international customers and within my company, where relevant and

applicable, and is as such a tested model although it has been adapted and expanded

upon.

It would have been impossible to complete this mini-dissertation without a solid

support base of peers, friends and family. In particular I want to thank Professor Nic

Lessing for assisting and guiding me, but also for putting up with my frequently

changing schedule. To my parents that have always unconditionally supported my

academic aspirations. Also to the company I work for, Siemens Business Services,

for the support and time required to further my studies.

I wish to especially thank my wife, Linda, for the never-ending support and love she

gives me and for not ever complaining about the long hours and effort I had to put in to

complete this study. She is an amazing person. Lastly, I want to thank God for the

opportunities and abilities He has given me.


iii

Table of contents

Preface ......................................................................................................................... ii

Table of contents.......................................................................................................... iii

List of figures and tables ...............................................................................................v

List of acronyms ...........................................................................................................vi

Synopsis...................................................................................................................... vii

Sinopsis........................................................................................................................ ix

Chapter 1: Orientation ............................................................................................... 1-1

1.1 Background to management issues in information technology outsourcing ... 1-2

1.1.1 Information technology outsourcing................................................................ 1-2

1.1.2 Business process outsourcing........................................................................ 1-6

1.2 Research problem statement.......................................................................... 1-7

1.3 Research objectives ..................................................................................... 1-11

1.4 Research methodology................................................................................. 1-15

1.5 Closure ......................................................................................................... 1-15

Chapter 2: The information technology outsourcing life cycle and its associated.... 2-17

Synopsis.................................................................................................................. 2-18

2.1 Background to the management issues in outsource contracts ................... 2-19

2.2 Problems that arise in the information technology outsourcing phases ........ 2-21

2.2.1 Initiation phase ............................................................................................. 2-22

2.2.2 Due diligence and contracting phase ........................................................... 2-28

2.2.3 Transition phase........................................................................................... 2-32

2.2.4 Execution and operations phase .................................................................. 2-36

2.2.5 Termination phase........................................................................................ 2-40

2.3 Closure ......................................................................................................... 2-41


iv

Chapter 3: Solution models for the information technology outsourcing life cycle.. 3-42

Synopsis.................................................................................................................. 3-43

3.1 Background to the solution models available for outsource contracts .......... 3-44

3.2 Solution models in the information technology outsourcing life cycle ........... 3-45




3.2.4 Execution / Operations phase ...................................................................... 3-72


3.3 Closure ......................................................................................................... 3-79

Chapter 4: Business process outsourcing trends, drivers and inhibitors ................ 4-81

Synopsis.................................................................................................................. 4-82

4.1 Business process outsourcing trends ........................................................... 4-83

4.1.1 Current focus areas for business process outsourcing................................. 4-84

4.1.2 Business process outsourcing growth drivers .............................................. 4-88

4.1.3 Business process outsourcing growth inhibitors........................................... 4-90

4.2 Closure ......................................................................................................... 4-91

Chapter 5: Summary .............................................................................................. 5-94

5.1 Introduction................................................................................................... 5-95

5.2 Objective 1 – management issues facing information technology ................ 5-96

5.3 Objective 2 - solution models for information technology outsourcing .......... 5-97

5.4 Objective 3 - business process outsourcing trends ...................................... 5-99

5.5 Closure ....................................................................................................... 5-100

BIBLIOGRAPHY ................................................................................................... 6-101


v

List of figures and tables

Figure 1.1 Status of cost reduction efforts 1-3

Figure 1.2 Factors influencing willingness to outsource 1-4

Figure 1.3 Reasons cancelled contracts 1-5

Figure 1.4 Factors inhibiting outsourcing 1-8

Figure 2.1 Information technology outsourcing phases 2-20

Figure 2.2 End-user expectation change 2-22

Figure 2.3 What outsourcers can do to increase receptivity to outsourcing 2-25

Figure 2.4 Contracts being renegotiated 2-38

Figure 2.5 Renegotiated contract resolutions 2-39

Figure 2.6 The mid-term crisis 2-40

Figure 3.1 Main issues that make for successful outsourcing 3-44

Figure 3.2 Coetzee solutions framework 3-46

Figure 3.3 Initiation phase 3-48

Figure 3.4 Gartner analysis model 3-49

Figure 3.5 Gartner business decision making model 3-52

Figure 3.6 Gartner’s suggestion around initiation 3-54

Figure 3.7 Due diligence and contracting phase 3-57

Figure 3.8 Gartner future outsource contract model 3-65

Figure 3.9 Transition phase 3-67

Figure 3.10 Operations phase 3-72

Figure 3.11 Gartner measurement model 3-73

Figure 3.12 Gartner business measurement model 3-76

Figure 3.13 Termination phase 3-78

Figure 4.1 Business process outsourcing with information technology 4-92

Table 4.2 Business process outsourcing contracts in 2003 4-92


vi

List of acronyms

BAFO Best and final offer

BPO Business process outsourcing

CEO Chief executive officer

CFO Chief financial officer

COO Chief operating officer

IS Information systems

IT Information technology

ITO IT outsourcing

RFI Request for information

RFP Request for proposal

SLA Service level agreement


vii

Synopsis Title Information technology: management issues in outsourcing

contracts

Author D. Coetzee

Study leader Prof. N. Lessing

Publication date 20 October 2004

Document type Mini-dissertation

Academic institution Rand Afrikaans University

Scope 25% fulfilment of M.Com (Business Management)

Related subject Information technology

Country of publication Republic of South Africa

Language English

Abstract

This study concerns the investigation of management issues within information

technology outsourcing contracts. The information technology outsourcing life cycle

is used as the flow structure for the investigation. The associated user expectations

that occur in each of the phases of the information technology outsourcing life cycle

are identified. Following the identification of the management and user expectation

issues in each phase of the outsource life cycle, the “Coetzee solution framework” is

introduced to ensure that the identified management problems are addressed in a

structured approach. The solution framework is described in the context of each

phase of the information technology outsourcing life cycle.

As business process outsourcing is emerging as a long term business solution, the

trends in business process outsourcing with the related factors that are contributing to

the growth of business process outsourcing are investigated. The inhibitors that


viii

slow down the progress of acceptance for business process outsourcing are also

investigated. The interdependence of information technology outsourcing and

business process outsourcing is also shortly reviewed.

Key words: information technology, information technology outsourcing, business

process outsourcing, management issues


ix

Sinopsis Titel Inlingtingstegnologie: bestuursaangeleenthede in

uitgeekontrakte

Skrywer D. Coetzee

Studieleier Prof. N. Lessing

Publikasie datum 20 Oktober 2004

Dokument tipe Skripsie

Akademiese instansie Randse Afrikaanse Universiteit

Onderwerp 25% ter vervulling van die M Com (ondernemingsbestuur)

Verwante onderwerp Inligtingstegnologie

Land van uitreiking Republiek van Suid Afrika

Taal Engels

Samevatting

Hierdie skripsie behels die ondersoek van bestuursaangeleenthede in inligtings-

tegnologie uitgeekontrakte. Die inligtingtegnologie uitgeektontrak lewensiklus word

gebruik as die vloeistruktuur waarin die bestuursaangeleenthede ondersoek word.

Die gebruikerverwagtinge wat gekoppel word aan elke fase in die uitgeekontrak

lewensiklus word geidentifiseer en gemeld. Na aanleiding van die bestuurs-

aangeleenthede word die “Coetzee oplossingsraamwerk” beskryf om die

bestuursaangeleenthede aan te spreek en teen te werk deur ‘n gedefineerde proses

te volg. Die oplossingsraamwerk word volgens die fases van die inligtingstegnologie

uitgeekontrak lewensiklus beskryf.

As gevolg van die feit dat besigheidproses uitgeekontrakte beskou word as ’n

aanvaarde besigheidspraktyk word die tendense en verwante groeifaktore wat die


x

besigheidsproses uitgeekontrak mark aanhelp ondersoek. Die stuitingsfaktore wat

veroorsaak dat besigheidsproses uitgeekontrakte stadig geimplimenteer word, word

ook ondersoek. Ten slotte word die noue verband tussen inligtingstegnologie

uitgeekontrakte en besigheidsproses uitgeekontrakte ook kortliks ondersoek en

bespreek.

Sleutelwoorde: inligtingstegnologie, inligtingstegnologie uitgeekontrakte,

besigheidsproses uitgeekontrakte, bestuursaangeleenthede


Chapter 1: Orientation 1 - 1

Chapter 1: Orientation

Table of contents

Chapter 1: Orientation ............................................................................................... 1-1

1.1 Background to management issues in information technology outsourcing ... 1-2

1.1.1 Information technology outsourcing................................................................ 1-2

1.1.2 Business process outsourcing........................................................................ 1-6

1.2 Research problem statement.......................................................................... 1-7

1.3 Research objectives ..................................................................................... 1-11

1.4 Research methodology................................................................................. 1-15

1.5 Closure ......................................................................................................... 1-15



Chapter 1: Orientation

1.1 Background to management issues in information technology

outsourcing contracts

1.1.1 Information technology outsourcing

The information technology outsourcing (ITO) market is about 30 years old, dating

back to early time-sharing arrangements for mainframe computer processing power.

The market leaped into the spotlight in the early 1990s when major corporations

began signing contracts worth hundreds of millions, and then billions of dollars

(Caldwell 2003:2).

According to statistics collected by Gartner (Couture & Silliman 2002:5) regarding

1055 surveyed outsourcing contracts, it is fair to say that outsourcing contracts are a

major strategic decision that has to be made by a organisation and can have a

significant and possibly disastrous effect on the profitability of the organisation if

anything goes wrong.

The following are some facts around information technology (IT) outsourcing contracts

(Caldwell 2003:8):

• The average length of IT outsourcing contracts is six years

• The average annual IT outsourcing contract value is $47 million which translates to

a total contract life value of $282 million or R1.9 billion

• The top five industries, in terms of average annual contract value, are aerospace

and defence ($88.2 million), automotive ($87.4 million), high tech ($80.5 million),

telecom ($79.9 million) and financial services ($49.6 million).



The whole concept of IT outsourcing has evolved from being a cost saving mechanism

for organisations that wished to focus on their core strengths to a competitive

advantage factor in their ability to attack their selected market. As can be seen from

figure 1.1, cost saving has not really been effective and as such organisations have

realised that IT outsourcing is not only about cost reduction any more, but about value

add and careful management thereof (Couture & Silliman 2002:12).

Figure 1.1 – Status of cost reduction efforts

Falling short of goal, 46%

On target, 54%

Source: Couture & Silliman 2002:12

While organisations still outsource to try and save cost, many now look at the value

add that can be obtained by engaging with an expert in the field of the chosen

outsource, and the streamlining that these organisations can provide. It is now more

about remaining competitive than ever before, as illustrated in figure 1.2 (Couture &

Silliman 2002:16).

However, it is not all good (Caldwell & Young 2003:5), as many outsource contracts

fail due to:

Relationship and management problems in terms of:

Incorrect expectations created before and after the contract starts



Focusing on pure cost saving, instead of looking for value add or cost

optimisation (meaning getting more for the same or less budget), thus resulting

in cost overruns

Inflexibility in contracting and costing mechanisms

Transparency and communications surrounding contract performance

Failure to deliver on the agreed service levels.

All of the above relationship issues often relate back to mismanagement, lack of

process and limited governance that the IT outsourcing suppliers or vendors are guilty

of when managing the contracts

Figure 1.2 – Factors influencing the willingness to outsource

9 14 39 38

15 17 40 29

20 7 25 49

32 7 27 34

38 11 34 18

41 5 31 23

42 6 35 17

45 5 30 20

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

Percentage of respondents

September 11 terrorist attacks

2001-2002 recession

Merger, acquisition or divestiture

An executive who previously outsourced joined thecompany

Need to reduce IT cost

My company re-engineered a business process or planneda new technology initiative

Increasing competitiveness in industry

A competitor or business partner outsourced

PositiveNegativeNeutralNA

Note: Number of respondents = 323


To emphasise the previous point figure 1.3 shows some of the most common reasons

for cancelling outsourcing contracts, in the context of complete IT outs, namely failure

to deliver on agreed service level agreements (SLA), relationship issues, cost



overruns, failure to deliver innovation and various other smaller issues in terms of

significance (Couture & Silliman 2002:22).

It is critical that the management issues surrounding IT outsourcing be tracked and

that trends are identified as soon as possible in the IT outsourcing contract life cycle,

in order to (Caldwell 2003:10):

• Help manage risk in terms of customer and supplier financial exposure, security,

resource requirements, pricing, management and contracts

• Obtain data for negotiation on service levels, pricing, and requests for additional or

new services

• Know the behaviour of other organisations in same industry or revenue range

Figure 1.3 – Reasons for cancelling contracts

410

16

24

46

9

18

18

55

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

100%

Complete IToutsource contract

Desktop outsourcecontract


Failure to meet SLAs

Relationship problems

Cost overruns

Failure to deliverinnovationOthers

Note: number of respondents = 70




1.1.2 Business process outsourcing

Many chief executive officers (CEOs) and chief financial officers (CFOs) who have

been outsourcing certain functions in a piecemeal way have begun taking a holistic

view of the benefits of outsourcing. Furthermore, they have begun taking steps to

adapt their organisations to the virtual organisation (where they do not necessarily

own all processes or assets in-house), creating a stronger focus on core business and

a network of specialised relationships for non-core, yet strategic functions. Others

continue to turn to outsourcing for transactional reasons, hoping to improve

operational performance while reducing costs at the same time (Scholl 2003a:1).

The increase in awareness and adoption of business process outsourcing (BPO)

should not overshadow the fact that BPO services are still immature and that in many

instances, early adopters of BPO are still seeking to understand their cost and

business benefits.

Summary

The background section provides information on the IT outsourcing market and some

of the problems experienced during the life cycle of an outsource project. While cost

saving was a focus in the past, organisations are looking for more value-add which

means that the outsource suppliers have to look at the structure and governance of

their contracts in order to optimise value for their customers.

In addition to IT outsourcing, organisations are starting to identify those commodity

business processes which add value to the business, but is not the core business

focus. These processes are then considered for business process outsourcing in

order to gain competitive advantage.



1.2 Research problem statement

In section 1.1.1 it became clear that many IT outsourcing contracts experience

significant problems on service level attainment, the structure of the contract, and the

management of the service relationship and communication to the users. As such:-

Research problem 1

The highest risk of outsourcing IT- or business processes to an outsourcing supplier is

the provider’s ability to govern and manage the complex arrangement through its

entire life cycle, and to enable sufficient flexibility to customers, so as not to impede

the customer’s ability to compete in their market.

In this section the first part of the problem statement will be discussed relating to IT

outsource management and the problems typically associated with IT outsourcing

contracts.

A large part of earning customer satisfaction is meeting customer promises and

expectations set before the contract was entered into. While research in general

shows that IT outsource contracts are satisfactory, serious room for improvement can

be found. Lack of cost saving is but one of the few reasons why IT outsourcing

customer satisfaction is low. Figure 1.4 shows some additional reasons that inhibit

ITO or causes low user satisfaction with regard to ITO in terms of the average

respondent responses, those respondents that are currently outsourcing, those

respondents that are considering outsourcing as an option in the next twelve months

and those that are considering it in more than a year’s time. The additional reasons

are:

• Executive management is opposed to outsourcing in general

• If job security for staff is not addressed, then satisfaction with ITO can be low

• If buy-in is not attained, then internal IT teams would be opposed to ITO



• Previous experiences by users of ITO could be negative which affects perception

regarding ITO

• Vagueness around the detail of ITO can cause fear and uncertainty

• That the costs of ITO are often higher than expected or higher than existing IT

spend

• That in-house skills are lost and that the control associated with the in-house skills

is lost

Figure 1.4 – Factors inhibiting outsourcing

0 10 20 30 40 50 60 70 80


Higher than expected costs

Loss of inhouse expertise

Concern that cost reduction won't berealised

High cost of outsourcing

Fear, uncertainty and doubt aboutoutsourcing in general

Past negative experience

Internal IT opposed to outsourcing

Job security issues

Executive management opposed tooutsourcing

Others

Inhi

bitin

g re

ason

s fo

r non

-acc

peta

nce

of IT

O

ITO inhibitors in terms ofthose respondents thatmight be outsourcing inmore than 12 months time

ITO inhibitors in terms ofthose respondents thatmight outsource in the next12 months

Inhibitors in terms ofrespondents that alreadyoutsource their desktopenvironment

All respondents in regard toITO inhibitors


Years ago, long-term IT outsourcing agreements of five and ten years were regularly

announced. Today, decade-long contracts have disappeared and largely been

replaced by one- to three-year contracts to more accurately reflect changing business

climates and rapid technology evolution.



However, even in these shorter-term contracts, the contracts frequently do not survive

intact to their end dates. More often, they are revisited, revamped, revised or restated

to reflect ever-evolving client requirements and/or the failure of clients and service

providers to adequately estimate or manage the scope of work required (Caldwell

2003:10).

As pointed out in the first research problem statement the issue of contract structure,

flexibility and service need to be investigated. Some questions that pertain to these

points and that need to be investigated are:

• Why is the scope of work very often inadequate?

• Why are service levels not adhered to?

• Why do many contracts show losses instead of forecasted profits?

• Why do pricing structures not suit the customers?

• Why do customers require more transparency in costs and service metrics?

• Why are cost savings not achieved?

• Why are IT outsource contracts cancelled?

All these questions are investigated, and the models that address them are discussed

in Chapter 2 and Chapter 3.

As discussed in section 1.1.2, organisations are reviewing their opinions as to

retaining and owning all business processes within their own domain of control. They

are taking a holistic approach to what constitutes their core business.

Research problem 2

Contrary to previous beliefs regarding business processes that give organisations a

competitive edge, business process outsource models are now fast becoming the

trend for large businesses in order to limit process risk and have experts perform

specific processes.



As was discussed in the problem statement there is much confusion as to whether

business processes are a core competitive edge to an organisation. BPO needs to be

evaluated and the true benefit needs to be identified prior to organisations entering

into BPO arrangements.

Though business process services have been delivered since the 1960s, BPO has

only emerged as a market in the past decade. Even today, the BPO market still

shows dynamic characteristics of an "emerging" market. During the transition phase

toward higher maturity in BPO, there is still significant confusion about what exactly

BPO is, how much process responsibility organisations should delegate to service

providers and how the services are delivered.

Points of confusion include the following and need to be investigated (Brown 2003:4;

NelsonHall 2003:2):

• Confusion on the buyer side — the business decision-makers (CFOs, COOs,

CEOs, purchasing managers) who are buying BPO services frequently fail to learn

from years of experience in IT outsourcing and are making similar mistakes in the

basics of outsourcing. They are carving out the wrong processes for outsourcing,

selecting providers hastily, ignoring SLAs altogether or setting inflexible service

levels.

• Confusion on the provider side — a number of service providers have jumped on

the BPO bandwagon, attracted by high-growth rates and high profile contracts, but

each provider brings a different set of skills and capabilities to the table. Many

organisations want to be in the BPO market without having any business process

capabilities at all. With such a fragmented competitive landscape, providers are

trying hard to establish a brand presence and a competitive differentiator. Some of

the legacy players in BPO are now branding their services differently to stay ahead

of the pack.



The BPO environment is reviewed in Chapter 4 on a high level in order to clarify some

of the mentioned issues.

1.3 Research objectives

Looking at the research problem one has to be able to identify some of the

management issues that arise in ITO contracts. The ITO life cycle is well established

and as such each phase can be investigated in terms of common issues that arise

during each cycle. These issues frequently appear in ITOs, but is seldom taken into

account when a new outsource is contemplated and implemented. There are also

various models and solutions that have been developed over the last decade to assist

with solving many of these issues. While these models exist they are either not known

about or often ignored when setting up an ITO contract.

The objectives of this study regarding ITO management issues are:

Objective 1: To identify the most common management issues that arise in each

phase of an outsource contract

The life cycle of IT outsourcing contracts have matured over many years and are now

widely accepted as the method for entering into, operating and exiting from IT

outsourcing contracts. However, there are many issues that are faced in managing

each of the ITO phases and these will be identified in Chapter 2. In order to achieve

the objective the following topics will be investigated:

• The life cycle of ITO contracts – which is now the generally accepted phased

approach for entering into and management of the ITO operations

• Each life cycle phase will be investigated and discussed in the context of the

typical management issues that arise during the phase:



o Initiation phase – looking at the preparation, and often lack thereof, in order

to get ready for the outsource decision and issuing the relevant proposal

request to select a vendor

o Due diligence and contracting phase – where the selected vendor engages

with the organisation to verify the data provided during the proposal request,

and the expectations are created by the vendor engaging with the

organisation, followed by setting up of the contract between the two parties

which is often problematic in terms of vagueness

o Transition phase – where the operations, staff and assets are transferred

across to the vendor and the end user expectations are at its all-time high at

which point micro management by both parties become an issue

o Execution and operations phase – where the operations are run on an day-

to-day basis and relationship management and proper governance become

critical, but is often neglected

o Termination phase – where the contract has come to a natural or unnatural

conclusion and the operations have to be transferred back to the

organisation or a new vendor, but is often hampered due to a lack of a pre-

defined process or disputes that occur on a relationship and financial level

between the organisation and vendor

Objective 2: To investigate the various solutions that are available to manage the

issues in each phase

Many of the outsourcing suppliers have defined frameworks within which to manage

some of the issues that are highlighted in Chapter 2. A consolidated framework will be

used to look at how many of the problems can be managed in each phase of the

outsourcing contract life cycle.



This objective is discussed in Chapter 3 in terms of:

• Introducing the “Coetzee solutions framework” (also referred to as the solutions

framework or framework) based on own experience and research performed by

Gartner and other sources, to address the issues highlighted in Chapter 2.

• Each phase within the life cycle is discussed in the context of this framework and

substantiated through examples and applicable research:

o Initiation phase – where the process of internal readiness is investigated

leading to a comprehensive proposal request

o Due diligence and contracting phase – where using a detailed due diligence

process, the vendor is lead to understand the exact scope of the ITO and

then focusing on setting up a flexible and comprehensive contract to govern

the ITO

o Transition phase - where a detailed joint management approach of the

transition is discussed and the importance of governance and

communication in order to maintain end user expectation is highlighted

o Execution phase – where extreme emphasis is placed on governance and

relationship management while delivering according to SLA and the need

for continuous improvements during the contract life cycle

o Termination phase – where the need for a termination plan is emphasised

and the organisation has to increase communication internally and ensure

understanding of the transitioning process back from the vendor to the

internal organisation or to a new vendor



Business process outsourcing is being introduced into organisations that have

identified specific repetitive commodity processes which were previously viewed as

strategic importance for the organisation to hold in-house, but in actual fact, while

being important to the business, is not a critical competitive edge apart from having

the process run as effectively as possible.

As such the objective of this study regarding BPO management issues are:

Objective 3: To examine the current trends in business process outsourcing (BPO)

and why organisations are considering BPO as an option to increase

competitiveness

Traditionally, business processes have been one of the elements that organisations

believed gave them the competitive edge. Now organisations are considering giving

many of these processes to third parties to run, in its entirety, on their behalf. These

trends and the reasons for entering into such agreements are discussed in Chapter 4

by looking at the following topics:

• BPO trends – BPO is discussed in general in terms of history and the current

increase in awareness and interest in BPO as an efficiency mechanism internal to

an organisation

• Current focus areas for BPO – in the context of the areas in which BPO is currently

strong and where future plans and industry requirements are focused

• Growth drivers – those elements that are allowing BPO to be adopted by

organisations

• Growth inhibitors – some of the concerns around the adoption of BPO

The linkage between BPO and ITO is also discussed in Chapter 4.



1.4 Research methodology

The research is performed from a strategic business management point of view. This

mini-dissertation comprises a literature study of the issues and management problems

within IT outsourcing contracts and investigates a framework to address these issues.

The methodology will be one of stating the issues that occur in each life cycle phase of

ITO, backed by applicable research and then proposing a framework solution, based

on applicable research, to these management issues. The BPO trends, growth factors

and inhibitors will be identified based on surveys performed in the field of BPO.

The sources of information consist of:

• Research reports from internationally acclaimed survey organisations

• The internet relating to the topic of outsource management and business process

outsourcing

Further information is drawn from many years of practical experience in the field of

outsourcing.

This study is not meant to be an exhaustive investigation of all management issues

and methodologies that are available, but to identify the most critical management

issues and a framework solution to address these issues. Business process

outsourcing is discussed in the light of the latest trend and form that are surfacing in

the market, and why organisations are considering BPO as an option.

1.5 Closure

While discussions and studies have been ongoing regarding IT outsourcing, ITO is

viewed from a customer point of view and seldom from a supplier point of view. The

complexity of managing IT outsourcing deals is often the reason for dissatisfaction.



The main issues in each of the phases in the outsourcing life cycle are identified and a

management framework is discussed to resolve some of the identified problems.

This study aims to investigate the management issues of IT outsourcing contracts and

investigate the trends that are emerging regarding BPO.


Chapter 2: The information technology outsourcing lifecycle and its associated

management problems 2 - 17

Chapter 2: The information technology outsourcing life cycle and its associated management problems

Table of contents

Chapter 2: The information technology outsourcing life cycle and its associated.... 2-17

Synopsis.................................................................................................................. 2-18

2.1 Background to the management issues in outsource contracts ................... 2-19

2.2 Problems that arise in the information technology outsourcing phases ........ 2-21




2.2.4 Execution and operations phase .................................................................. 2-36


2.3 Closure ......................................................................................................... 2-41




Chapter 2: The information technology outsourcing life cycle and its associated management problems

Synopsis

This chapter is devoted to investigating the first research objective as defined in

Chapter 1. The life cycle of IT outsourcing contracts have matured over many years

and are now widely accepted as the method for entering into, operating and exiting

from outsourcing contracts. However, there are many issues that are faced in

managing each of these stages and these will be identified and covered in this

chapter.

The life cycle of the ITO contract is first explored in order to give context to the

structure in which the ITO management issues will be described. There-after, using

the ITO life cycle phases, the management issues are identified and highlighted in the

context of the ITO life cycle, specifically in terms of the initiation phase where the

contract is moulded and formed and sufficient investigation is required to build a

proper foundation. This is followed by the due diligence and contracting phase where

all the detailed information is cross-checked and a flexible contract is set up for the

ITO. The next phase is the transition phase where the vendor assumes responsibility

for operations and the relevant resources are transferred from the organisation to the

vendor. Once transition is complete then the ITO enters the execution and operations

phase and the vendor has to ensure service level adherence and relationship

management. At the end of the ITO, the termination phase is entered and the

operations are transitioned back to the organisation.




2.1 Background to the management issues in outsource contracts

As discussed in Chapter 1, ITO is being viewed as more than merely a cost reduction

mechanism for organisations. Organisations now view ITO as a vehicle to increase

competitiveness. The Outsourcing Institute research report (Casale 2001:3) states

that “although the traditional drivers of IT outsourcing - to reduce operation costs,

improve information systems (IS) flexibility, focus on core competencies, and increase

operational efficiency - still stand, there is mounting evidence that organisations have

turned to outsourcing for more strategic reasons, including keeping up with cutting-

edge technology, building partnerships, creating value for the organisation and its

customers, and broadening infrastructure and operations”. While this is the case, ITO

however is associated with service failure, cost overruns, and relationship issues that

sometimes have disastrous effects on the profitability of organisations.

There are many failures and successes when it comes to ITO, and the failures can

often be tracked to the way in which an ITO was approached and the immediate

management of problems that arise during the ITO lifecycle. The Outsourcing Institute

indicates that in their research (Casale 2001:6), the “key concerns with buyers and

vendors - that governance issues are usually top of mind”. The institute also states

that “a lot of people used to think that once you outsourced, the tough part was over,

when in fact, just the opposite is true. Now, people are giving a lot of thought to

managing the relationship over time”.

There are essentially five main phases in an IT outsource contract life cycle as is

described in Figure 2.1. Each of these phases will be shortly described in order to

give context to the ITO life cycle phases. These phases will be used throughout this

mini-dissertation to describe the management issues, user perception problems and

the relevant solutions that are available to address the management and user

perception issues.




Figure 2.1 – Information technology outsourcing phases

InitiationPhase

Due Diligence &

ContractingPhase

TransitionPhase

ExecutionPhase

TerminationPhase

Source: Siemens Business Services 2003:1, Simmons 2004:1

• Initiation phase – this is where the organisation has decided that they need to

streamline the IT environment and as such start looking at the components they

wish to outsource, co-source or run internally. The organisation will also at this

stage typically prepare a request for information (RFI) to see what the vendors in

the market can offer. Organisations often attempt to produce these specifications

themselves in the hope to keep costs to the minimum. Following the RFI they will

typically create a short-list of vendors they feel are capable of assisting in fulfilling

their requirements. The organisation then issues a request for proposal (RFP) that

requests detailed pricing and solution descriptions. These RFPs are also often

internally generated in order to save cost. An adjudication panel within the

organisation normally evaluates the RFP and chooses best price and service fit.

One or more vendors are requested to enter into further negotiations with the

organisation.

• Due diligence and contracting phase – Once the organisation has identified the

vendor or vendors that they wish to continue working with, they open up their

environment to the vendor to investigate the environment thoroughly in order to

come up with the vendor best and final offer (BAFO). There after the organisation

evaluates the BAFOs and decides on the final vendor. Contract negotiation is then

entered into to finalise the outsourcing agreement.




• Transition phase – most vendors then enter into a transition phase whereby the

services, possibly the staff, assets, and management is handed over to the vendor.

• Execution / operations phase – Once the transition is complete the vendor

assumes the responsibility for the operations of the contracted services for the

organisation. This carries on for the full term of the contract period.

• Termination phase – Once the contract period reaches its end, the contract is

either renewed or terminated. In the event of termination, the services are either

transitioned back to the organisation or to another vendor depending on the

organisation’s experience regarding the outsource.

Each of the mentioned phases has a set of problems that arise and seem common to

all outsource contracts. While many of the problems are brushed away initially, they

often have significant influence in the longer term relationship and ability to deliver

service between the vendor and the organisation.

2.2 Problems that arise in the information technology outsourcing

phases

The problems associated with the ITO lifecycle can be linked to the Gartner

expectation curve on ITO (GartnerGroup 1999:4). The expectation curve is based on

the expectations that are set by the vendor at the beginning of the ITO, but also by the

end users within the customer who believe dramatic improvements in service levels

can be expected in very short times. Figure 2.2 illustrates the Gartner user

expectation curve with the first four phases of an ITO mapped to the various stages in

user expectation.

Each phase is discussed in the context of the problems that typically arise as time

progresses. This is not meant to be an exhaustive discussion on the issues, but

merely a short overview of some of the main problems that do occur. A solution




framework is discussed in Chapter 3 and will not be dealt with under the problem

discussion, but will be referred to.

Figure 2.2 – End-user expectation change End userexpectations

Technologytrigger

Peak ofinflatedexpectations

Trough ofdisillusionment

Slope ofenlightenment

0 6 months 1 year 3 years

Announcementof intention tooutsource

Due diligencephase

Deal is signed

Transition tovendor begins Initial problems encountered in transition

Learning curve during transition continues

Deal dynamics of SLA vs.price established

Informal renegotiations begin1. Initiationphase

2. Due diligenceand contracting phase

3. Transition phase

4. Execution and operations phase

Source: GartnerGroup 1999:4 with own adaptation (phases 1 – 4 shown)

2.2.1 Initiation phase

The initiation phase is probably one of the most important phases, but sadly and very

often the most neglected phase as well. This is often the core source of IT outsource

problems that arise later during the due diligence, contracting, transition and execution

phases. At this stage the foundation for the ITO is created and the user expectations

start forming. If the specifications and expectations are not clearly understood

internally, then there is no way it can be understood or actualised once engagement

with the vendor starts. Most organisations are guilty of not actually understanding




what they want to do and therefore ends up relying on an external party (very often the

vendor) to try and define this for them. Gartner researchers (Caldwell & Young

2003:28) have identified that “upfront conversations with straightforward disclosure of

goals and objectives for both parties are mandatory”.

This leads to the question of the strategic intent for the ITO. Organisations have to be

clear as to why they are considering entering into an ITO. Gartner (GartnerGroup

1999a:3) indicates that organisations must ensure they have established a clear

sourcing strategy before embarking on an outsourcing project and that organisations

that fail to do this, risk project delays and even project failures. The typical situation is

one of a vendor initiating a programme of convincing the executives that ITO is a

business imperative. Another typical reason is that a competitor has entered into an

ITO arrangement and the organisation does not want to be left behind. The

organisation might feel that they are paying too much for IT and that they wish to

reduce cost. The organisation might not be satisfied with the service they are

receiving from the internal IT department and they might believe that they wish to

focus on core business and not be involved in managing something they are not

expert at.

Without the strategic intent being clear, it is nearly impossible to get full buy-in from all

business owners within an organisation which immediately leads to internal politics

that substantially affect the future service relationship with a potential vendor. Buy-in

is critical, as ITO affects all parts of an organisation and as such must be an overall

organisation decision which should not be taken lightly. Research (Harris 2002:31)

has shown that it is critical to “build consensus, and gain strong and explicit

administration backing - if the project goes off-schedule or over budget, broad support

will be critical”.

Once the strategic intent is established it is important that the objectives to be

achieved are clearly identified. These will form the basis by which the ITO is

measured and evaluated and assist in setting the expectation across the organisation.

The management team within the organisation should define this to ensure full




understanding and context across all areas. Harris (2002:4) indicates that it is vital to

“identify goals and objectives very clearly, and communicate them explicitly and to

clearly define your expectations, and ensure that the organisation and the vendor

clearly understand those expectations”. This is very often driven by an individual such

as the CEO, CFO or chief information officer (CIO), and is not fully explained to the

rest of the organisation. This will once again result in a lack of buy-in and also internal

politics.

As these ITO contracts often span many years, full buy-in is required upfront as it is

very likely that some of the management team might leave the organisation (Casale

2001:3), and it will be the rest of the team’s problem to ensure that the context within

which the ITO was decided on, be transferred to new members. Many an outsource is

questioned and “attacked” by newcomers, as the business reasons for entering into

the ITO arrangement is not understood.

As one of these objectives, it is important for the team to identify exactly what

additional value they are expecting to be added by outsourcing. As is shown in Figure

2.3 research (Caldwell & Young 2003:28) has shown that all organisations want more

business-based results and that they would like more innovation. However, while this

expectation is there, little effort is ever made to quantify what the expectation actually

is.

Once the decision is made to outsource, then the organisation has to do a significant

amount of internal homework in order to ensure that the scope of the outsource is

clearly delineated in terms of precisely what is included in the outsource with regard to

services, products, people and assets. Research (Caldwell 2003:10) indicates that

outsourcers should carefully look at analysis of their environment in order to assist in

balancing their own risk exposure and assisting in understanding their environment in

terms of assets, costs and service levels. Gartner (GartnerGroup 1999a:10) also

states that organisations should take the opportunity during the strategy and initiation

phase to thoroughly evaluate the financial, organisational, delivery and technical

status of their current environment. This will be needed throughout the process to




contract signature. Proposals based on vendor assumptions about an organisation are

not a good basis for vendor evaluation.

Figure 2.3 – What outsourcers can do to increase receptivity to outsourcing

0% 20% 40% 60% 80% 100%


My company would be more receptive tooutsourcing if we could be contractuallyguaranteed business-based performance

results

My company would be more receptive tooutsourcing if we could be contractually

guaranteed a certain level of cost reduction

My company would be more receptive tooutsourcing if innovation can be guaranteed

My company would be more receptive tooutsourcing if outsourcers were more

flexible

AgreeNeutralDisagree

Source: Caldwell & Young 2003:28

It must once again be stressed that as much detail as possible be put together

internally at this stage so that the exact nature of the areas to be outsourced is

understood from a financial, service and efficiency perspective. This will clarify and

sort out many issues that typically arise around the understanding by vendors once

the request for information (RFI) and request for proposal (RFP) is issued. If this is

not done properly, it is very likely that assumptions are made on the part of the vendor

which will result in confusion once contracting starts as to what is in and what is out of

scope in terms of the contract. It must be remembered that the RFI and RFP detail is

the only information the vendor will have in understanding the environment they

potentially will take over. Any vagueness results in dysfunction later during the




contracting and execution phases and is often the reason why outsourcing is viewed

as not working.

The organisation need to be clear on the service levels that they will be expecting.

They thus need to understand their existing service environment in order to, later in

the contract, measure service objectively. A major mistake when entering into ITOs is

to do so without service levels being fully defined upfront. Research (Caldwell

2003:10) also points this out as the absolute need to obtain data for negotiation on

service levels, pricing and requests for additional or new services. Often the

organisation does not have any service level arrangements in place with their own IT

and they leave it to the vendor to define at a later stage. This will create disagreement

between the vendor and the organisation and will affect user perception on delivery.

It is important that the organisation clearly understands the cost associated with

existing service levels and scope of services as this will set the cost expectations for

the RFP responses. Vagueness can result in the wrong decision being made

regarding the ITO. Caldwell & Young (2003:28) show this clearly in their research that

“client expectations for cost reduction have escalated – this has created what the

vendor repeatedly referred to as the ‘major tension’ in contract negotiations”. In

addition to this the organisation management should carefully think about the pricing

mechanism they want to use to drive the potential ITO: e.g. price per user, fixed or

variable costing, business unit billing or central billing, sliding scales depending on

user volumes etc. This is often neglected and creates friction between the

organisation and the vendor during future phases.

The contract structure and flexibility required should also be investigated at this stage

and guidelines should be included in the RFP. Figure 2.3 showed that most

organisations would prefer that outsourcers were more flexible, but once again the

quantification of what is meant by flexibility is not properly defined or investigated

leaving room for uncertainty, doubt and wrong expectations.




While the organisation will take a business perspective with regard to an ITO, the

people involved are often forgotten and left till last to deal with. This creates

uncertainty with the internal IT staff that often results in hesitance to support the ITO

once the people become aware that ITO is being considered. It is critical that the ITO

intention is shared within the organisation as soon as possible. Caldwell & Young

(2003:29) state that “being candid and honest about job security is mandatory,

communications with employees during outsourcing is critical”. ITOs sometimes fail

purely because proper communication does not take place during all phases of the

ITO and uncertainty and a lack of understanding causes personnel to try and “hijack”

the process.

Lastly, many organisations do not always realise the impact that an ITO might have on

the cost structures of an organisation. They very often do not consider or perform a

long term impact study as they have not properly investigated their own environment.

Caldwell (2003:10) says that organisations would do well to track the internal and

external contract activities to help manage risk in terms of financial exposure, security,

pricing, management and to obtain detailed data for rigorous service levels in order to

protect themselves.

The initiation phase is critical to the proper introduction of ITO into an organisation. If

any of the issues discussed are not considered and managed, the assumption on

which the ITO is based will not be clear and user expectation will be distorted in terms

of what the reality is and what the expected services are to be within the contract.

The initiation phase, refer to figure 2.2 (initiation phase), sets a high user expectation

and unless proper context is given, the expectation can border on unrealistic at this

early stage, which will affect the entire life cycle of the contract.

Gartner (GartnerGroup 1999a:7) makes a significant statement that outsourcing is too

costly and too crucial to business success to lack a proper financial analysis. When

organisations determine the return on investment for an outsourcing program, they

should augment the traditional calculations they employ, such as internal rate of return




or present value analysis, by considering other important cost or saving issues that

they might otherwise overlook. Failure to do this can lead to the wrong expectation

being set within the organisation and to outsourcing contracts that end in

disappointment.

2.2.2 Due diligence and contracting phase

The initiation phase is the foundation on which the ITO is built, but most vendors will

insist on doing a full due diligence in order to verify the details that were supplied

during the RFP. Harris (2002:18,32) has found that one of the weaknesses of

outsourcing is that the vendor does not always carefully confirm the customer’s

expectation and that the vendor does not make certain that they understand exactly

what all the customer stakeholders are expecting. This is extremely important and the

organisation and vendor should plan a careful due diligence process and agree this

prior to due diligence starting. Many organisations require the vendor to drive the due

diligence, but this does cause problems later on, as the vendor very often focuses on

those elements which they deem interesting or have core competence in and often

forget to take a holistic view of the environment especially in terms of process and

business objectives. Harris (2002:31) says that organisations do not spend sufficient

time in structuring the review, or due diligence, and also on the management of the

vendor evaluation, RFP development and contract review.

The organisation should decide as to whether they wish to take a multi-vendor versus

a single-vendor approach on the due diligence. Having more than one vendor

performing a due diligence at a time can place significant strain on the operating

environment and can potentially disrupt service, which in turn influences user

perception regarding the ITO.

Throughout all phases communication becomes more of an issue in order to manage

expectations, perceptions and to combat staff uncertainty. Communication is a major

contributor to buy-in, unless this is done effectively, buy-in is not obtained at all levels.

This can result in withholding of information by staff that feel that their positions are




potentially at stake. Gartner (GartnerGroup 1999:4) has found through their research

that organisations must evaluate and re-establish the levels of service required by

their business prior to outsourcing, thereby developing reasonable and attainable

service expectations for the vendor. By involving the end users in the process and

explaining the goals (i.e., to manage costs), the organisation will be able to institute

new levels of service that deliver the desired business results. Best practice requires

the organisation to: set user expectations for the service based on clear simple

metrics and projections (consistency reduces the degree of mistrust users feel about

technology); encourage direct customer involvement - flattening the service

organisation by including the customer in the service chain increases trust by

reinforcing a sense of equality and empowerment; and create a threshold that marks

the boundary of the support infrastructure. The vendor often uses the due diligence

phase as a mechanism to build relationships. This in turn increases user expectation

and the expectation curve, as per figure 2.2, grows steadily in terms of expectation of

services, scope and enhanced delivery.

It is essential at this stage that the exact service scope is known and user expectation

is set around this. Limiting scope is one of the biggest problems that faces both the

organisation and the vendor as the due diligence inevitably raises facets that were not

considered before, often because the organisation did not spend enough time

understanding their own environment in the initiation phase. Vague statements

around scope result in major disputes once the operations start and can also affect the

cost significantly in terms of the vendor claiming that elements are out of scope while

the organisation’s interpretation is that the element is within scope. This disrupts

operations until such time as the dispute is cleared which in turn start affecting user

perception re the success of the ITO. Gartner research (GartnerGroup 1999:17) show

that it is key that organisations perform a detailed benchmark analysis of IT costs and

competencies before soliciting the services of an outsource vendor. Harris (2002:32)

also points out that a key failing of a vendor is to very carefully confirm the customer’s

expectation and make certain that all stakeholder expectations is understood and

formalised.




Another major shortcoming in ITO is the amount of time spent on legal negotiations.

The vendor would typically have a standard contract they suggest to the organisation,

or the organisation gets an example contract from a consulting house which is then

used as a basis for negotiation. Gartner (GartnerGroup 1999a:13) has found that

contracts have become disjointed mixes of standard terms for outsourced operations,

boiler-plate language about projects, and lists of vague promises for future services.

This is an unacceptable situation. These deals are impossible for vendor or the

organisation to manage. Vendors are losing money on them. Organisations are losing

credibility with the business because of budget overruns, poor service and broken

promises.

Working out the exact details of the costing mechanisms, service definitions, service

level agreement (SLA), scope, business and technical objectives, asset lists, staff

affected, security considerations, exclusions and many other elements are the

essence of understanding of operations and responsibilities later during the contract.

It cannot be emphasised enough that this must be worked through and agreed in

detail, then communicated to the organisation so as to set accurate expectations.

Hand-in-hand with the detailed contract scope must be the definitions of the

governance structures that will be used to govern the operations of the contract and

the interaction between the organisation and the vendor. Looking at existing ITOs

throughout the world, it is very often poor governance that leads to disputes and

relationship breakdowns. Governance has to be solid from contract inception through

the contract life cycle to termination. Without proper governance, verbal agreements

and confusion reigns which cannot be healthy for a long term relationship. Research

(GartnerGroup 1999:2) has shown that one of the most common reasons for the

success or failure of outsourcing deals lies in an organisation’s ability to fully

appreciate, plan for and manage its role in the arrangement. Organisations must

establish the skills, processes, resources and tools to effectively manage their

outsourcing arrangements for the duration of the agreement.




The Outsourcing Institute (Casale 2001:6) has found that vendors and customers alike

should focus more of their effort around “paying attention to the contract and contract

governance”. They further indicate that it means having the day-to-day relationship in

a governance model that is described in writing, and that has to include an executive

team relationship, where top managers meet, perhaps on a quarterly basis, and talk

about business and technical issues. They indicate that this is a major source of

breakdown in relationships between the vendor and their customers and often lead to

chaotic effects on the business of the customer and the vendor.

Another major failing during the due diligence and contracting phase is that the

existing organisation processes surrounding IT are not investigated in detail.

Research (Harris 2002:31) on this issue indicate that organisations and vendors do

not spend enough time understanding the applications, protocols, change

management policies and procedures within the organisation or the vendor

environment. The way the affected area within the organisation operates is thus not

understood. The vendor will during transition phase define their own processes which

causes a major breakdown in operations and communication between the

organisation and the vendor.

It is further critical that the vendor physically verifies the information supplied by the

organisation and that the agreed correlation is used as a baseline. As an example it is

not acceptable that an organisation provides an asset register, which is merely an

extract from their financial system, and that this is used as the basis of the actual

physical assets, as very often these lists do not match and are not updated to the

actual equipment that is deployed due to various reasons, such as changes of

configurations, equipment being dumped and not repaired, and many other.

It is important during the contracting phase that the exact mechanism and cost

equation for future termination of the contract is discussed, agreed and documented in

detail. This is often left in the hands of the vendor which results in major financial and

service implications for the organisation at the end, or during the termination of the




contract at any point. Gartner (GartnerGroup 1999a:16) also indicates that part of the

contract strategy should include the termination mechanism which is often neglected.

At this stage the contract is typically concluded and the vendor enters into transition

mode. As per the Gartner user expectation curve, refer to figure 2.2 (due diligence

and contracting phase), expectations at this stage are reaching its highest level and

users are expecting dramatic improvements in service delivery and scope of services.

The details have probably not been effectively communicated to the entire

organisation, and as such, the agreed services and scope within the contract is not

understood by all.

The due diligence and contracting phase is critical in terms of establishing the exact

scope and baseline according to which services will be delivered and should match

closely with the initial objectives, baselines and understanding that the organisation

would have set during the initiation phase. If there are radical differences, then

caution should be taken by the organisation to re-look at their original investigations

and ensure that ITO is still the best option for the organisation.

2.2.3 Transition phase

Theoretically the exact service scope should now be understood by all and the vendor

should simply be taking over the various assets and people, and start delivering the

agreed services. However, in reality many vendors underestimate the complexity of

the environment they are “inheriting”. Gartner (GartnerGroup 1999:9) has found that

organisations embarking on major outsourcing projects fail to appreciate the

complexity of the long-term relationships they are forming. Responding to these

challenges requires IS departments to radically restructure their management model.

Vendors tend to take a simplistic and sequential approach to the transition without a

clear plan or understanding as to how to optimally use the existing organisation

processes and structures to cause minimal disruption in operations for the

organisation. One of the most common reasons (GartnerGroup 1999:2) for the




success or failure of IT outsourcing deals lie in an organisation’s ability to fully

appreciate, plan for and manage its role in the arrangement.

At this stage expectation management becomes essential as all issues start being

attributed to the vendor’s inability to deliver and is blamed on the ITO contract. The

users do not always have a clear idea of what the transition entails and expect

immediate improvement in service. Communication breakdowns at this point are

common due to operational elements taking precedence. Putting in place

governance-, relationship- and operating structures alleviates and assists in

expectation management and communication, but is very often ignored as the teams

just want to get on and do the job. This has dire consequences on the relationship,

the user perceptions and the future management of the contract. Gartner

(GartnerGroup 1999a:3) says that how an outsourcing project is managed is as critical

as what is outsourced. One of the most common reasons for the success or failure of

outsourcing deals lies in an organisation’s ability to fully appreciate, plan for and

manage its role in the arrangement. Organisations must establish the skills,

processes, resources and tools to effectively manage their outsourcing arrangements

for the duration of the agreement (GartnerGroup 1999:2). The vendor and

organisation together should focus on ensuring that the user base understands the

exact scope of services to be provided to ensure user expectations are set correctly

and also to prevent unnecessary scope creep which is often caused by

misunderstanding of the original scope.

Change management also needs to start at this stage in terms of cultural elements of

the staff involved in the ITO and the user environment in terms of the way the vendor

will be delivering and interacting with the user base. This is unfortunately often seen

by the vendor and organisation as a “soft issue” and ignored or prioritised at the

bottom of the list of priorities. The change management and communication should

be taking precedence over all during transition, as it creates understanding and thus

creates indulgence of possible error situations. Harris (2002:31) states that the

organisation should understand the vendor change management capability in order to




identify any gaps there-in which might be required over and above the normal change

process.

The staff take-over is normally an extremely sensitive issue as the staff would feel

insecure in terms of their positions, their possible performance in the vendor

environment and might even feel that the organisation has sold them out. Change

management surrounding the staff-takeover process ensures success or disaster for

the ITO at an early stage. It is often forgotten that the staff have a network of

relationships within the organisation, irrelevant of the level, and will use this actively as

either positive re-enforcement or as destructive perception creation in their attempt to

find a “safe” niche for themselves. This can cause endless problems and political

undercurrents within the end-user base. Research (Caldwell & Young 2003:29)

shows that vendors consistently expressed that being candid and honest about job

security is mandatory; communications with employees during outsourcing is critical.

It is further essential that both the vendor and the customer controls and manages

every facet of the transition so as to have absolute control over the activities in order

to ensure a smooth transition process. However this is seldom the case. Harris

(2002:32) indicates that organisations should not trust vendors to always do the right

thing. Set up a project management team that manages the plans and actions of your

vendors. This will minimise cost overruns, unnecessary consulting time and missed

deadlines. This is especially the case when taking over assets from the organisation.

The asset register from the organisation’s financial system is often taken as the

baseline and not checked or audited by the vendor. The chance that this asset

register does not actually match with the physical environment is great as equipment

configurations are often changed or components are removed without the information

reaching the finance department. This is a critical mistake made by vendors due to

them pushing to firstly get the deal done, and secondly to get through the transition as

soon as possible.

Process definition is just as important and often completely underestimated. The

mechanism used within the organisation and the new methods that the vendor will be




using to deliver is often glossed over as this is expected to merely work. This is not

the case, and is the basis for confusion between the vendor and the organisation. The

end users are worst hit by the uncertainty of how things will operate, where they

should go for assistance and what the escalation points are. In general, confusion

reigns without proper process definition, operating structures and governance being

implemented from the start.

Gartner (GartnerGroup 1999:3) has found that an organisation’s decision to outsource

is a “leap of faith” to pass control of in-house processes to a vendor. Too often,

organisations divest themselves of these responsibilities in the hope that the vendor

will correct internal business problems that have manifested themselves within the in-

house operation. Although the vendors have economies of scale as an advantage,

they have no “silver bullets” or “magic wands” for correcting flawed processes

immediately. Throughout the six to 12 month transition period after the deal is signed,

there is often considerable “thrashing” to position the customer/vendor relationship

appropriately, which can exacerbate, rather than alleviate, the aforementioned

business problems. Deals that are not established on a realistic basis and that are not

good for both parties will not stand the test of time.

At this point in the Gartner user expectation curve, refer to figure 2.2 (transition

phase), user expectation is normally replaced by user frustration and disillusionment

sets in rapidly.

Faith in the ITO is replaced by internal politics and the organisation often starts looking

for someone to blame because of the lack of success. Buy-in suddenly evaporates

and the organisation starts questioning its outsourcing decision. The reason for this is

all the issues identified in the due diligence and transition phase, and not given

attention, culminates in complete user frustration. Remedial action at this point

becomes extremely difficult as faith and trust is normally gone.




2.2.4 Execution and operations phase

Entering the operations phase is extremely difficult as the user expectations are

dropping radically and the organisation essentially enters a trough of disillusionment;

refer to figure 2.2 (execution and operations phase). At this stage everything in regard

to the ITO starts being reviewed. The main issues normally arise around price and the

related service levels. Since many organisations have not planned the initiation well

and not done their homework regarding their expectation on the environment, in terms

of costs and what the actual service levels are that they were experiencing prior to the

ITO, they assume they are being overcharged and are not receiving an equivalent

service level. Research (GartnerGroup 1999:10) has shown that while many

organisations make a huge one-time effort at the time of outsourcing, a tendency is

then to relax, assuming that what is a good deal now will be a good deal in the future.

As cost and technology change rapidly, this is very often not the case.

The question of what value is being added is brought up as an expectation, but not

necessarily understood by either the organisation or the vendor. This is not a

weakness of IT outsourcing; it is the failure of management to place outsourcing in

context with the type of value it can deliver (GartnerGroup 1999a:5).

Expectations by the organisation on assistance by the vendor with technology

direction and business IT alignment is huge, which often leads to completely

unrealistic or non-defined expectations. Expectation management and user

perception’s become more and more difficult as operations progress and as the gap

between initial user expectations and actual delivery grows. Communication is scaled

down as the vendor, and for that matter the organisation, assumes everyone knows

exactly what the outsource is about which is a critical mistake as there is normally a

constant churn of the people, and the management, that was part of the initial

decision, but that might move to different areas or leave the organisation taking the

initial contract understanding with them. The same occurs on the vendor side, and

slowly the contract starts taking a form of its own, which might have nothing to do with

the initial intent of the contract.




It is important during all stages of the execution or operations phase to enforce and

adopt formal and detailed governance and operating structures, as this is the only

control and audit ability that can be given to the initial contract, and will ensure that the

initial intent or changes there-to is well documented and agreed to in a formal forum

for future disagreements or disputes. The vendor and the organisation very often

neglect governance and end up with disputes due to verbal agreements not being

honoured or confusion caused by misunderstanding and no documentation to back

decisions or agreements. This leads directly to scope management problems within

the contract where verbal agreements are made, and it is assumed that this forms part

of the default contract scope. Even though most of the contracts specify a change

control procedure, it is very often not enforced or managed formally leading to further

scope confusion at later times during operations.

Another essential element that is also not always well thought through is what metrics

is to be measured and how these measurements tie in with the service levels the

business requires. Without proper measurement elements and targets it is also

difficult to actually benchmark the services which creates internal mistrust in the

accuracy and market relatedness of the services and pricing being delivered by the

vendor. Internal antagonists of the original IT outsourcing decision start to verbalise

their original concerns surrounding the outsource contract and internal politics can

become rife if not controlled. Gartner (GartnerGroup 1999:6) has found that two years

into a deal, organisations are facing:

• The implications of inevitable post-contract discoveries

• Business units that have forgotten about the deal and just want lower costs

• Difficulties in integrating multiple suppliers or in-house and main vendor teams

• Rapidly changing business requirements

• Difficulty in getting and evaluating vendor proposals for new requirements

• A contract that is getting significantly out of date




In many cases the problems two years into the execution phase lead to contract

renegotiations (formal or informal), as shown in Figure 2.4 and Figure 2.5, or

cancellations due to user disillusionment (GartnerGroup 1999:6). Figure 2.4 shows

that the most contract renegotiations are initiated by an unhappy organisation and

least renegotiations are initiated by the vendor. 49% of respondents have never

renegotiated their ITO contracts. For the 49% of organisations that have initiated

renegotiations the reasons stem from a lack of proper attention to detail in the initial

phases, and stringent governance and control during the execution phase. Many of

these problems can be overcome by utilising proper frameworks and doing upfront

analysis of what the organisation would like to achieve by outsourcing.

Figure 2.4 – Contracts being renegotiated

Ever renegotiated an outsource contract?(percentage of respondents)

The ITO contract is renegotiated

and the renegotiation is initiated by the

organisation, 47%

The ITO contract is renegotiated

and the renegotiation is initiated by the

vendor, 4%

Respondents that have not ever had

to renegotiate their ITO contract,

49%

Source: GartnerGroup 1999:6

Figure 2.5 shows that of those respondents that renegotiate their contracts 76% will

restructure their contracts and retain the same vendor that they initially started with.

16% of organisations will renegotiate, terminate and establish the ITO contract with

another vendor. Only 8% of respondents have terminated their ITO contract

prematurely and taken it back in-house.




Figure 2.5 – Renegotiated contract resolutions

816

76

0%

20%

40%

60%

80%

100%

Ultimate resolution


The organisation has revised theirITO contract and retained the samevendorThe organisation has revised theITO contract and given it to a newvendorThe organisation has cancelled theITO contract and took it backinhouse


A Gartner (GartnerGroup 1999a:14) example of the mid-term crisis as depicted in

figure 2.6 shows a typical IT outsource contract situation. A large international

organisation signs an IT infrastructure outsourcing deal (data centre, network,

desktop) on the basis of immediate cost reduction, the purchase of existing assets by

the vendor and transfer of IT staff. The contract allows for some changes in usage

volumes (e.g., MIPS – million instructions per second processors, disk space, seats).

The deal requires heavy financial engineering.

The vendor needs to meet service levels and cut costs dramatically. They plan to

break even between year 2 and year 3 of the 7-year deal. One year on, business

units have forgotten the deal and want further cost reduction. Contract service levels

are being met but the businesses expected more. The corporation is planning to grow

at 30 percent per year. Eighteen months on, changes are overwhelming the skeleton

staff left in place to administer the contract. The contract is already out of date and

the client initiates a benchmark. The vendor is no longer on track to make a profit.

Relationships are strained and minor re-negotiations take place to “patch up” the

relationship. A new CIO arrives and re-evaluates IT and all existing contracts. The




vendor is losing money and key staff are replaced. The contract is now seen as an

inhibitor to the organisation’s business and business units want to replace the

supplier. The supplier has met all the contract commitments. What went wrong? The

contract was not structured to meet the changing needs of the business.

Figure 2.6 – The mid-term crisis

0 5 7

Stafftransfer

Businessunit

unhappyNewCIO

Newsystemsplanned

Paysfor

assets

Losingmoney

Staffchanges

Customer30% CAGR

Vendor

Years

Source: GartnerGroup 1999a:14

2.2.5 Termination phase

The last phase is often the most neglected phase in the sense that it is hoped by both

the organisation and the vendor that this situation will never be reached where

termination has to take place. As such the exact process of termination is not

necessarily agreed upfront and an attempt is made during the actual termination to

agree a disengagement process. By this time though there are many factors that

inhibit defining a fair process as there are often many of the issues lurking as was

mentioned in the previous phase discussions.




This often results in dispute around costs, assets and staff that could regress to a

state where the vendor refuses to co-operate or buy-in to the termination process

which can result in severely disrupted service to the end-users and sometimes have a

critical impact to the survival of the organisation.

2.3 Closure

The complexity of managing outsourcing deals are often the reason for dissatisfaction.

This dissatisfaction stems from the incorrect initiation of the ITO where not enough

investigation was done by the organisation, and due to this incorrect expectations and

scope was defined. The vague scope is then translated into a contract around which

governance is not clearly thought through or properly implemented. Communication in

regard to all facets of the ITO is not always given enough attention leading to

confusion, politics and unrealistic expectations.

Chapter 3 will be dedicated to the management framework that can be used to resolve

the some of the issues identified in Chapter 2.


Chapter 3: Solution models for the information technology outsourcing

lifecycle issues 3 - 42

Chapter 3: Solution models for the information technology outsourcing life cycle issues

Table of contents

Chapter 3: Solution models for the information technology outsourcing life cycle.. 3-42

Synopsis.................................................................................................................. 3-43

3.1 Background to the solution models available for outsource contracts .......... 3-44

3.2 Solution models in the information technology outsourcing life cycle ........... 3-45




3.2.4 Execution / Operations phase ...................................................................... 3-72


3.3 Closure ......................................................................................................... 3-79




Chapter 3: Solution models for the information technology outsourcing life cycle issues

Synopsis

This chapter is devoted to investigating the second research objective as defined in

Chapter 1. In this chapter we look at the “Coetzee solutions framework” for ITO

contracts to address the management issues and user perception problems that were

identified in Chapter 2. Following the introduction of the framework, each phase of the

ITO life cycle will be discussed in the context of the solutions framework. Starting with

the initiation phase through to the termination phase the structured framework is

discussed to ensure that all the appropriate steps are followed when establishing an

ITO contract and that these steps are rigorously followed.

In terms of the initiation phase the internal readiness is investigated leading to a

comprehensive proposal request from the organisation. This is followed by the due

diligence phase where a mutually structured process is followed by the organisation

and vendor to ensure that a flexible contract can be agreed. The transition phase is

discussed with focus on a detailed joint management approach and emphasis is

placed on the importance of governance and communication in order to maintain end

user expectation. This is followed through in the execution and operations phase

where delivery is based on governance, relationship management and delivering

value throughout the ITO life cycle. The framework emphasises the need for a

termination plan at the end of the ITO.




3.1 Background to the solution models available for outsource

contracts

As stated in Chapter 2, many problems arising in ITOs are related to the organisation

and vendor’s ability to manage the complexity inherent in a long term partnership deal.

The Outsourcing Institute (Casale 2001:5) has found that organisations have

developed definite opinions that reflected business’s long experience with IT

outsourcing as depicted in figure 3.1 in terms of the fact that the four most important

points are with regard to selecting the rights vendor, structuring the contract properly.

Managing the relationships and understanding the company’s goals and objectives

they want to achieve through ITO.

Figure 3.1 – Main issues that make for successful outsourcing

44%

40%

39%

39%

0 10 20 30 40 50

Selecting the right vendor

A properly structured contract

Ongoing management of relationships

Understanding your company's goalsand objectives

Source: Casale 2001:5

The Outsourcing Institute (Casale 2001:5) also found that organisations were willing to

outsource again but the second time around, they would be sure to “pay more

attention to service levels” and “pay more attention to the contract and contract

governance.” Such responses suggest that buyers and vendors today recognise the

complexity involved in establishing and maintaining outsourcing relationships, and




have learned the importance of addressing both the hard details and the “soft stuff” of

partnering, such as culture. These issues were clearly highlighted in Chapter 2 and

backed by multiple research reports.

Each of the ITO life cycle phases will now be discussed and a framework will be

introduced to show some of the solutions that are available to solve these critical

issues.

3.2 Solution models in the information technology outsourcing life

cycle

Gartner (GartnerGroup 1999a:1) says that as organisations increasingly turn to

outsourcing vendors to provide and support their complex and changing IT

environments, the ability to build an effective sourcing strategy, select the right

suppliers and establish a durable, long-term agreement is becoming a business critical

capability. IT is rapidly expanding from a resource providing competitive advantage

(e.g., cost, time and quality) to a resource that is a competitive necessity and essential

for the survival of the organisation (e.g., marketing, sales and environmental

scanning). At the same time, the concept of a monolithic organisation owning all

products, services and channels required to address a customer’s needs is rapidly

being replaced by strategic partnerships, virtual organisations and integrated value

chains. This new environment is generating new critical success factors for IT

investment and IS departments. As organisations increasingly turn to vendors to meet

these challenges, they need to rethink how the IS organisation is run and the skills

they need (GartnerGroup 1999a:2).

The following framework, as depicted in figure 3.2, will be used to discuss the

elements required to solve the problems identified in Chapter 2. This framework has

been developed and used in various ITO contracts and is based on practical

experience. The framework is known as the “Coetzee solutions framework for ITO”

(also referred to as the solutions framework or framework).




Figure 3.2 – Coetzee solutions framework 1. Initiation phase

2. Due diligence and contracting phase

Contracting

Due diligence

Environm

ental

analysis

Financial

analysis

Operational

needs analysis

SLA

analysis

Strategic

needs /

objectives

analysis

Staffing

needs analysis1 2 3 4 5 6

Firm decisionto outsource

Clear jointdue diligenceplan

Detailed

service & SLA

description

7

Joint vendorand companyreview ofresults

Collect further information

Financial

model

8

Contract

governance &

termination

9 Value add and

business

alignment

Processes,

procedures &

policies

Technology

map

Staffing

10 11 12 13

COMMUNICATION

COMMUNICATION

3. Transition phaseTransition

Staff take-over

Asset take-over

Governance

implem

entation

Third-party

contract

take-over

Com

munication /

perception

managem

ent

Operational

set-up

1 2 3 4 5 6Contract in place

Jointlydevelopeddetailedtransitionproject plan

Joint vendorand companyreview oftransition

Collect further informationCompany to assist with transition micro-managementCompany to implement a contract management/control team

COMMUNICATION

4. Execution and operations phaseOperations

Service delivery

Measurem

ent &

performance

managem

ent

Change

managem

ent

Reporting &

communication

Continuous

improvem

ent

Staff

development &

culture change

1 2 3 4 5 6

Startoperations

Contractrenegotiation

Relationship management

COMMUNICATION

5. Termination phaseTermination

Staff take-over

Asset take-over

Third-party

contract

take-over

Com

munication

Operational

take-over

1 2 3 4 5

Terminationplan

Terminationfee agreement

COMMUNICATION

Vendor selection

Sourcing strategy

Environm

ental

analysis

Financial

analysis

Operational

needs analysis

SLA

analysis

Strategic

needs /

objectives

analysis

Staffing

needs analysis

1 2 3 4 5 6

Decision to consider outsourcing

Detailed

RFI and R

FP

7

Reviewdecision to consider outsourcing


Go aheadwith ITOdecision(full communication & buy-in)

Vendor

selection

(service, culture,

Flexibility)

8

Long term

impact /

risk evaluation

9

Go / no-goGo ahead with ITOdecision (enter duediligence & contracting phase)

Terminate ITO decisionCOMMUNICATION

COMMUNICATION

Source: own compilation




The framework starts with the initiation phase and describes the general method that

has to be followed in order to define the goals and objectives and understand the

organisation’s environment in detail. This then results in a request for information and

proposal from a vendor with the associated vendor selection.

The high level due diligence and contracting phase is then discussed followed by the

transition phase which leads to the executions and operations phase of the contract

where the actual delivery takes place. The contract comes to an end, naturally or

unnaturally, and termination has to take place.

Each one of these steps is described in the context of this framework and reference is

given to applicable research and models where available.

3.2.1 Initiation phase

The initiation phase is the most critical for any ITO contract. If the foundation and

expectation is not carefully formed in the initiation phase and communicated to end

users and stakeholders, the ITO is doomed before it starts. However, if the correct

analysis of the environment is done, the objectives and expectations combined with

the strategic intent and required long term flexibility is clearly formulated and agreed

by business, then the foundation is solid on which to start building the ITO

relationship, contract and the governance structures. Gartner (GartnerGroup

1999a:10) says that organisations should take the opportunity during the strategy

stage to thoroughly evaluate the financial, organisational, delivery and technical status

of their current environment. This will be needed throughout the process to contract

signature. Proposals based on vendor’s assumptions about an organisation are not a

good basis for vendor evaluation. Deals that are undertaken for the wrong reasons

are destined to fail. This is not a weakness of outsourcing; it is the failure of

management to place outsourcing in context with the type of value it can deliver

(GartnerGroup 1999a:5).




An interesting observation is that few of the outsource vendors seem to have a proper

mechanism or check list in place to cross-check that the organisation actually has a

clear sourcing strategy with the associated objectives and a detailed analysis in place.

Many vendors assume this has been done, which is dangerous, and just as many may

be using the vagueness factor to their benefit.

Referring to figure 3.3, there are nine steps in the framework for this phase, which is a

combination of understanding of the practical problems surrounding ITO as described

in Chapter 2, and secondly based on best practise as defined by Gartner

(GartnerGroup 1999a:10). The Gartner best practise is a reflection of steps 1 to 8 of

figure 3.3 and is shown in figure 3.4. The Gartner matrix evaluates the current status

of the environment, the to-be user needs in terms of the given dimensions, and then

evaluates how the vendor can match the envisaged user needs in terms of approach

and ability.

Figure 3.3 – Initiation phase

Vendor selection

Sourcing strategyEnvironm

ental analysis

Financialanalysis

Operational

needs analysis

SLA analysis

Strategic

needs / objectives analysis

Staffingneeds analysis

1 2 3 4 5 6

Decision to consider outsourcing

Detailed

RFI and R

FP

7

Reviewdecision to consider outsourcing


Go aheadwith ITOdecision(full communication & buy-in)

Vendor

selection(service, culture,

Flexibility)

8

Long termim

pact / risk evaluation

9

Go / no-goGo ahead with ITOdecision (enter duediligence & contracting phase)

Terminate ITO decisionCOMMUNICATION

COMMUNICATION





After some investigation around the vendor models available, specifically IBM Global

Services, EDS, Computer Sciences Corporation, Siemens Business Services and

Accenture, it became clear that these organisations view their ITO management

frameworks and methodologies as a competitive edge and as such did not wish to

divulge much information around these models. Caldwell (2003:1) has however

investigated some of the mentioned vendor models and researched 1055 contracts to

come up with the best-practise model for Gartner as described in figure 3.4.

Figure 3.4 – Gartner analysis model

User needs

Vision Financial Organisation Delivery Implementation

Current status

Vendor proposal

Approach

Capabilities Commercial Organisation Delivery Implementation


After a decision has been made by the organisation, at board level, to consider

outsourcing, the nine-step model for the initiation phase is as follows:

1) Environmental analysis – here the organisation will conduct a complete internal

audit on their IT environment in terms of staffing, hardware, software, networks,

capacity usage, performance, data volumes, facilities, locations and configuration

complexity with the view to understanding the full environment envisaged for




outsourcing in micro detail. Full inventories, asset registers and application maps

should be defined in detail with all interdependencies mapped. This can be done

by third parties, however it should be owned and cross-checked by the

organisation as any mistakes will have serious consequences to the future delivery

by a vendor.

2) Financial analysis – following the environmental analysis a full financial audit

should be undertaken to identify and account for ALL costs surrounding the

infrastructure as identified in regard to the first step. Gartner (GartnerGroup

1999a:7) says that outsourcing is too costly and too crucial to business success to

lack a proper financial analysis. There are often hidden costs in the IT environment

with procurement taking place from various areas throughout the organisation and

not necessarily being accounted for as IT. The organisation needs to understand

all these elements, including all procurement channels and third party contracts,

services and products. The organisation further need to understand their financial

obligations in terms of encumbered assets, depreciation values, staff benefits and

contingencies. This can be done by third parties, however it should be owned and

cross-checked by the organisation as any mistakes will have serious

consequences.

3) SLA analysis – once the environment and finances around the environment is

understood, it is simple to map the current service levels associated with the

relevant costs. Although some organisations have pre-defined SLAs between

business and IT, this analysis often shows the discrepancy between what is

thought is being delivered versus the actual situation. It must be noted that it is

critical that the organisation does not at this point define what their desired SLAs

should be, but that the reality is defined and mapped in terms of actual and

practical services being delivered. This can be done by third parties, however it

should be owned and cross-checked by the organisation as any mistakes will have

serious consequences.




4) Staffing needs analysis – the staff required to uphold to SLAs as defined in step 3

must be identified and their roles and activities evaluated in relation to the

envisaged ITO environment. Their full benefit structures and incentives need to be

understood as well. This is a sensitive time for the staff as they might have

become aware that the organisation is considering an ITO. Communication by the

organisation management regarding intent needs to be transparent and the

business reasons needs to be stated. This can be done by third parties, however it

should be owned and cross-checked by the organisation as any mistakes will have

serious consequences.

5) Operational needs analysis – the environment, finances, SLAs and staffing needs

should be understood at this stage. It becomes an imperative to understand what

the organisation expects in terms of operational excellence. All normal operational

elements must be investigated in terms of what the organisation would realistically

expect from a potential vendor in terms of improvements. These expectations

should be stipulated in precise detail and agreed by the business. Gartner

(GartnerGroup 1999:4) emphasises that organisations must evaluate and re-

establish the levels of service required by their business prior to outsourcing;

thereby developing reasonable and attainable service expectations for the vendor.

The staffing requirements need to be reinvestigated as well in terms of what would

realistically be required to fulfil the new expectations. This can be done by third

parties, however it should be owned and cross-checked by the organisation as any

mistakes will have serious consequences.

6) Strategic needs and objectives analysis – this step defines the strategic intent of

the ITO and should not be neglected under any circumstances. Gartner research

(GartnerGroup 1999a:8) shows that an effective business case looking at business

value linking, stakeholder buy-in in conjunction with the tangible and intangible

benefits are critical to the decision to outsource as shown in figure 3.5.

This step should be used to map out the strategic goals of the organisation and

then to investigate what is required by IT to support the achievement of these




goals. Once strategic goals and support requirements are identified, very clear

long term expectations, intent, and objectives should be defined which the ITO will

have to support for the duration of the envisaged contract. A clear gap analysis as

to how the current IT environment performs against these strategic goals should

also be detailed in order to position the real situation against the ideal situation.

Figure 3.5 – Gartner business decision making model

Stakeholder buy-in Effective business case

• CEO

• CFO

• CIO

• Business units

• IT management

• Unions

Tangible benefits

• Value linking

• People productivity

Intangible benefits

• Business

• Technical

Risks

• Business

• Technical


This must be done to set realistic expectations for future management members to

understand the history, frame of reference and context of the possible ITO, but

also as a yardstick of how the ITO has complied over time to the initial intent. This

can be done by third parties, however it should be owned and cross-checked by

the organisation as any mistakes will have serious consequences.




Gartner (GartnerGroup 1999a:4) says that ITO is a long-term decision (typically 5

to ten years) that requires an ability to:

1) align IT with business goals;

2) identify gaps in current IT capabilities;

3) understand the capabilities available in the market; and

4) determine how in-house and supplier responsibilities can best be split.

The first six steps, shown in figure 3.3, should enable the organisation to make an

informed decision on whether ITO is the correct decision to make and comprises what

Gartner would call the sourcing strategy (GartnerGroup 1999a:3), as depicted in figure

3.6. The sourcing strategy is focused on investigating the need for, and viability of,

external sourcing. It identifies the business requirements and capabilities, baselines

the current IT services, determines the most appropriate sourcing alternatives,

establishes the business case and gains buy-in from the stakeholders. The sourcing

strategy sets the direction for the entire outsourcing project and keeps the objectives

in focus.

The sequence of these steps in figure 3.3 is not necessarily important and many of the

steps could occur in parallel or in a different order. Without these steps having been

performed on a detailed level, the organisation takes a severe risk of making the

wrong decision. Gartner (GartnerGroup 1999a:3) says that their experience shows

that organisations without a clear strategy, and facing the large volumes of data and

analysis involved in an IT outsourcing project, can lose focus and develop a deal that

does not meet the needs of the business. How an outsourcing project is managed is

as critical as what is outsourced. The sourcing strategy in essence details the “what”.

If there are any queries in regard to the environmental analysis in terms of the outputs

from steps 1 to 6, as per figure 3.3, then any of, or all the steps should be repeated

until a sufficient and trustworthy view of the environment and the strategic intent is




defined. If this cannot be attained, then the recommendation has to be one of not

outsourcing.

Gartner (GartnerGroup 1999a:3), in figure 3.6, suggests the following best practise in

terms of a proper sourcing strategy and coupled to sourcing strategy a proper vendor

selection.

Once the decision is reached to move forward with a possible ITO, then the vendor

selection starts and steps 7 to 9 as depicted in figure 3.3 should be carried out. At this

point full communication with a concise view of the findings from steps 1 to 6 of figure

3.3 should be relayed to the entire organisation and buy-in needs to be confirmed prior

to the next steps taking place.

Figure 3.6 – Gartner’s suggestion around initiation

Vendor selection

Sourcing strategy

Contract development

Success is about making the right decisions, at every step, in every phase of the outsourcing life cycle


Steps 7 to 9, as depicted in figure 3.3, will now be discussed:

7) Detailed RFI/RFP – the organisation should now be in a position to issue a detailed

RFI and RFP. The RFI will be a scaled down version of the RFP and must be

used to filter out those vendors who do not have the capability to deliver an ITO of

the nature the organisation requires. The RFP, however, must be a




comprehensive description of the intent, objectives, and the full environment as

was defined in steps one to six of figure 3.3. Gartner (GartnerGroup 1999a:10)

indicates that for each solution area, the organisation needs to define their current

status and the required benefits (the vision) in the request for proposal. This will

enable the short listed vendors to design a proper response and solution which will

give the organisation a good view of the vendor’s intended approach, management

style, culture and ability. This can be done by third parties, however it should be

owned and cross-checked by the organisation as any mistakes will have serious

consequences.

8) Vendor selection – based on the detailed RFP, vendors should come up with a

comprehensive solution proposal that covers all aspects of the services that the

organisation is looking for. Gartner (GartnerGroup 1999a:10) says that the vendor

proposal should include the four areas of an IT outsourcing solution: financial,

organisation, delivery and implementation. Vendors should be carefully selected

based on the ability to deliver in terms of skills and resources (including

geographical coverage required), a track record in managing ITO contracts of a

similar size, the business partners the vendor uses, the business focus of the

vendor and their long term direction they are planning, their financial state, and

their relative revenue size in relation to the ITO (GartnerGroup 1999a:8). The

vendor should also be evaluated on their ability to add value as specified in the

strategic intent, their flexibility in terms of models and future adaptations that might

be required, and their technology plans.

9) Long term / risk impact study – once the responses have been evaluated and the

relevant vendor chosen, a full long term impact study of the solution the vendor is

proposing should be undertaken by the organisation. The organisation should map

out exactly what is being proposed and match this to the required SLA, operational

requirements and strategic intent. The risks and assumptions highlighted by the

vendor should also be quantified in order to understand the financial risk to the

organisation over the full period of the ITO. Many organisations ignore this study

and end up with the ITO actually threatening the future profitability and viability of




the business due to the implications not being understood in the vendor’s

assumptions. Gartner (GartnerGroup 1999a:12) says that organisations and

vendors are seldom willing to reveal their own risks. As a consequence, they enter

long-term outsourcing agreements with little or no visibility of the other party’s

assumptions and risk mitigation plans. Every error, misunderstanding, hidden

assumption and gap in knowledge will become a risk once the contract is signed.

Risk evaluation best practice demands a clear understanding of:

• the organisation and vendor risks;

• the mechanism by which the organisation and vendor risks relate to each other

and what risks they represent in combination;

• the plans proposed to mitigate the risks;

• the remedial measures available should a risk occur;

• the interest and responsibilities of both parties to overcome the effects of a risk;

and

• the “risk structure” (i.e., the proposed framework of contacts between the

organisation and vendor, indicating respective responsibilities). This will not be

achieved until the client and prospective vendor are mature enough to carry out

a joint and open evaluation of risks.

On completion of step 9 the organisation should review their ITO decision based on

the vendor they have selected and the solution that has been proposed. This jointly

with their long term impact study should indicate the viability of the ITO for the

envisaged period.

3.2.2 Due diligence and contracting phase

On completion of the initiation phase, and a positive decision by the board of the

organisation to continue with the ITO contract, the due diligence and contracting

phase is entered into. This phase is part of building a proper foundation for the future

ITO relationship and should be given all attention possible. Expectations are set

during this phase as the vendor will be interacting directly with all level of users




throughout the organisation in order to gain as much insight into the environment as

possible and to cross-check the RFP detail that was given. The contract structure will

result from the vendor findings combined with the initiation phase data that was

investigated. If done properly, a solid contract reflecting current business needs as

well as future strategic requirements can be formulated and used as the basis for a

constructive and mutually beneficial partnership between the vendor and the

organisation. The framework steps for this phase are depicted in figure 3.7.

Figure 3.7 – Due diligence and contracting phase

Contracting

Due diligence

Environmental

analysis

Financialanalysis

Operational

needs analysis

SLA analysis

Strategicneeds /

objectives analysis

Staffing

needs analysis

1 2 3 4 5 6Firm decisionto outsource

Clear jointdue diligenceplan

Detailed

service & SLAdescription

7

Joint vendorand companyreview ofresults


Financial m

odel

8

Contract

governance &term

ination

9 Value add andbusiness alignm

ent

Processes,procedures &

policies

Technologym

ap

Staffing

10 11 12 13

COMMUNICATION

COMMUNICATION


It is essentially a thirteen step model as depicted in figure 3.7 to cover all the issues

that were highlighted for this phase in Chapter 2. This phase should be entered with a

clear plan as to how the vendor will be able to complete the first six steps, as depicted

in figure 3.7, in cooperation with all staff within the organisation. The model is as

follows:

1) Environmental analysis – this is exactly the same exercise that the organisation

should have gone through, in detail, during the initiation phase. The step is in




place for the vendor to cross-check and to conduct a complete audit on the

organisation’s IT environment in terms of staffing, hardware, software, networks,

capacity usage, performance, data volumes, facilities, locations and configuration

complexity with the view to understanding the full environment envisaged for

outsourcing in micro detail. Full inventories, asset registers and application maps

should be defined in detail with all interdependencies mapped. This should map

back to the organisation findings, but allow the vendor to become familiar with the

environment to be taken over. It is both the responsibility of the vendor and the

organisation to ensure that this is done properly. The vendor often has speciality

fields which will cause their engineers to focus on the things they are comfortable

with. This must be avoided as the environment is mostly more complex that the

speciality fields of the vendor.

2) Financial analysis – this step is critical whether the organisation has decided to

disclose the full actual cost environment or not. If the organisation does not wish

to open their books (financial system entries and budgets) to the vendor, then the

onus lies with the organisation to check the vendor proposal against their initial

financial analysis to ensure that the vendor has covered all elements. If not, this

will cause severe relationship issues later as the vendor will battle to maintain

profitability and as such fail in the ITO services. If the organisation decides to

open its books, then the vendor should be led through a full financial audit to

identify and account for ALL costs surrounding the infrastructure as identified

under the first step. There are often hidden costs in the IT environment with

procurement taking place from various areas throughout the organisation and not

necessarily being accounted for as IT. The vendor needs to understand all these

elements, including all procurement channels and third party contracts, services

and products. The vendor further needs to understand the financial obligations in

terms of encumbered assets, depreciation values, staff benefits and

contingencies.

3) SLA analysis - once the environment and finances around the environment is

understood, it becomes fairly easy to map the current service levels associated




with the relevant costs. Although some vendors have pre-defined SLA’s between

business and IT, this analysis often shows the discrepancy between what is

thought is being done versus the actual situation. It must be noted that it is critical

that the organisation does not at this point define what their desired SLAs should

be, but that reality is defined and mapped in terms of actual and practical services

being delivered.

4) Staffing needs analysis - the staff required to uphold to SLAs as defined in step 3

must be identified and their roles and activities evaluated in relation to the

envisaged ITO environment. The staff’s full benefit structures and incentives

need to be understood as well. This is a sensitive time for the staff as they might

have become aware that the organisation is considering an ITO. Communication

by the organisation management regarding intent needs to be transparent and the

business reasons needs to be stated. The vendor and the organisation

management should communicate openly with the affected staff at this point to

ensure that the fears are managed and that unnecessary blocking of activities

does not occur by the staff.

5) Operational needs analysis - the environment, finances, SLAs and staffing needs

are now understood by the vendor from the previous steps. Now it becomes an

imperative to understand what the organisation would like to see in terms of

operational excellence. This is a step that few vendors or organisations fully

appreciate. Absolute clear understanding of these expectations goes a long way

to ensure that the vendor aligns with the service expectations of the organisation,

or jointly agrees what these expectations should be. All normal operational

elements must be re-looked at in terms of what the organisation would practically

expect from the vendor in terms of improvements. These expectations should be

stipulated in exact detail and agreed between the two parties. The staffing

requirements need to be reinvestigated as well in terms of what would realistically

be required to fulfil the new expectations. It is once again very important to

communicate the expectations, as explained to the vendor, across the




organisation in order to ensure that all staff knows what the point of departure is

from which the vendor will operate.

6) Strategic needs / objectives analysis - this step defines the strategic intent of the

ITO and should not be neglected under any circumstances. This step should be

used to map out the strategic goals of the organisation and then to investigate

what is required by IT to support the achievement of these goals. Once this is

defined, clear long term expectations, intent and objectives should be defined

which the ITO will have to support for the duration of the envisaged contract. A

gap analysis of how the current IT environment performs against these strategic

goals should also be detailed in order to position the real situation against the

ideal situation. This must be done to position expectations for future management

members to understand the history, frame of reference and context of the possible

ITO in future years, but also as a yardstick of how the ITO has complied over time

to the initial intent. It is imperative that the vendor understands this as often an

ITO is viewed as an operational element only, while it actually supports the

organisation’s ability to be competitive in the current and future business

environments it wishes to operate within.

Once steps 1 to 6, as per figure 3.7, are completed by the vendor, the organisation

and vendor should compare findings to ensure a consistent image of the ITO

environment is understood. If there are any gaps, the vendor and the organisation

should jointly investigate these by going back to the relevant step where the gap

exists. Both parties should now have a very clear understanding of the environment

and should be able to enter the contract negotiation with clear expectations and

objectives.

The contract negotiations should go through the following steps, as indicated in figure

3.7, to ensure that all elements are covered. As indicated in Chapter 2, it is critical

that enough time be spent on contract negotiations as possible to ensure that a

complete and fair contract is formulated for both parties reflecting the organisation

operational requirements and strategic intent. The organisation should take control of




contract development and structure agreements to meet their long-term needs. The

organisation must ensure their outsourcing agreements are built for continuous

change (GartnerGroup 1999a:14).

7) Detailed SLA and service description – this step is taking the output from steps 1,

3 and 5 in figure 3.7 and formalising it as the official service description with the

associated detailed SLA’s for each service area. Many vendors have standard

service and SLA descriptions. This can only be used if the mapping to the actual

SLA and service environment is understood and agreed by all. It is critical

however to ensure that a common language is used and understood by both the

vendor and the organisation in terms of some of these standard service clauses

as interpretation and definition can differ widely from what the organisation

normally uses. Both parties have to fully agree that the defined SLA and service

descriptions cover all aspects of the ITO requirements. The metrics by which the

SLA’s will be measured and cross-checked must also be defined and agreed in

detail, including the format in which it is to be reviewed.

8) Financial model – the financial model is one of the critical elements in the future

governance of the relationship. The organisation should have decided during the

initiation phase what the model for billing and financial management should be.

This step is often not given enough attention and the vendor will propose their

own in the event that a model is not available. Due to the nature of financial

discussions this can cause major problems in the relationship as both parties

have to be clear on the method of billing and how additional service costs will be

determined and billed. The transparency factor required by the organisation

should also be agreed by both parties and the format and control that are

associated with this. There are many models available which range from user-

based billing, service-based billing, business-outcome based billing or risk and

reward billing models (GartnerGroup 1999a:6). The billing model should be

carefully thought through by the organisation as the long term nature of the

contract does not necessarily allow for changes in the ITO life. The vendor and

organisation should agree the model in detail looking at any future scenario that




they can think of. The exact mechanism on increases, decreases and base line

cost changes should be agreed and documented at this stage. It is important to

state the exact objective of the billing model and the context in which the model

was decided to ensure that future management, in the event of changes,

understand why the particular model was chosen. Clear reporting and cross-

check formats should be agreed at this stage as well.

9) Contract governance and termination – in many ITOs this step is given minimal

attention although this is the topic which causes major relationship issues a year

or two into the contract. Many organisations and vendors believe that governance

is a natural fact of delivery and is finalised during the operational phases, which is

however rarely the case. It is critical that both parties negotiate the governance

mechanisms upfront in order to avoid confusion during transition. The typical

governance mechanisms should cover the strategy (contract and business

alignment), the tactical level and the day-to-day operational level. Predefined

meetings with associated mandates and agendas should be agreed and expected

outcomes should be documented. This will ensure that formal governance is

adopted from the start of the ITO through to the end. Changes to the governance

structure should only be made at the executive levels between the vendor and the

organisation.

Proper change control procedures and decision making bodies should be

established to decide on all changes, the implementation thereof and the impacts

it will have on all facets of the contract and customer. Another element that has to

be given major attention, and which is not always pleasant during contract

negotiation, is the exit or termination mechanism and procedure. Both parties

have to agree upfront exactly what the cost formula for termination will be, the

reasons why termination could occur, and the plan that will be followed for

termination. The question might be asked why this needs to be done up front, the

answer is simple that when termination does occur and the ITO has not yet

reached the end of its life cycle it is often under unpleasant relationship related

circumstances. If the termination procedure is not clearly stipulated and if there is




a relationship breakdown, it becomes a major emotional dispute and rational and

logical thought does not prevail and both parties revert to the contract. As such

both parties should make sure that they spend enough time thinking through and

agreeing the termination schedule.

10) Process, procedures and policies – the vendor often suggests that processes and

procedures be agreed during transition. This is not acceptable. Both parties

should work in detail through their respective sets of procedures and processes

that they use to govern their IT environment. A mapping should be done between

the two organisations processes and policies to understand any major differences.

Modifications should then be agreed and the new/modified procedures and

processes should be documented in the contract. This will prevent any

misunderstanding of which process or procedure will be followed given any

circumstance. Not defining these processes and procedures lead to major chaos

during transition as each party will be working from their frame of reference. Any

policies to be followed by either party should be clarified and stipulated in detail in

the contract as well. These policies typically relate to security, the physical

environment, health and safety, asset care, dress code and data security. It must

never be assumed that the vendor understands these policies, and as such

should be documented in the contract.

11) Technology map – the envisaged technology roadmap should also be defined in

the contract. Even though technology changes rapidly, the parties should both

agree on the envisaged technology route they intend on taking at the start of the

contract for the full contract duration. This will create purpose and ensure that all

stakeholders understand the end goals to be achieved by the contract. The key

part of the roadmap should include technology standards, architecture, the

application strategy, the future vision for IT and the technologies required to

realise the vision. As major technology changes occur this roadmap should be

adapted during the contract following strict change control. The initial intent is

formulated and defined in the roadmap and is as such a critical element for future

managers and staff within the organisation to understand the vision of why the




ITO was entered into. The vendor and organisation IT staff should agree this

roadmap with executive management of both parties. This will insure a common

understanding of the purpose of the contract and will as such form part of the

foundation on which the operations are delivered.

12) Staffing – this section of the contract focuses on any specialised staff or skill that

will be required to support the operations of the contract. The expectations

around the number and type of staff to support the operations should be stipulated

in the event that the contract is defined around resources. This should however

never be the case as the organisation should be buying services from the vendor

and not resources. Only specialised skill should be defined in this section. There

might be staff that will be transitioned from the organisation to the vendor where

the organisation wishes those staff to be employed for a guaranteed period of

time. The time frame and conditions under which this guarantee will apply have to

be detailed here as well. This practice is becoming obsolete as staff transitions

are becoming less frequent or organisations are retrenching or arranging

alternative placements for staff as part of the ITO. The content of this section

needs to be communicated to the affected IT staff during this process.

13) Value add and business alignment – this is probably the most difficult section of

the contract to define, but should not be underestimated as this will form part of

the perception (whether defined or not) during the ITO life cycle. If it is not

defined, it will be questioned for the duration of the contract and could potentially

cause a complete breakdown of the contract. It is the organisation’s responsibility

to stipulate what value-add is expected from the vendor from all angles, including

technology, architecture, strategy and operations. It is the vendor’s responsibility

to expand on and stipulate the detail of the organisation expectations. Business

benefit is one of the top concerns around ITO that has been identified in research,

refer to figure 2.3. The reason for this is that it is normally commodity services

that are outsourced, and it is difficult after a number of years to understand why

the organisation could not have delivered these services internally as effectively

as any third party might be. Provision is also not always made in the contract for




changing the scope of the commodity service as the service is being delivered

more efficiently after the first few months or years of the contract. It is imperative

that the service definition and the business outcome to be achieved are reviewed

periodically during the contract life span. The basic service definition should

always remain the common point of reference for the ITO. Business-output-based

metrics should always be built into the operational measurement of the contract.

Gartner best-practise (GartnerGroup 1999a:7) says that the business case should

set the brief for the outsourcing solution, focus on benefit measurement and be

continually updated throughout the life of the agreement.

The Gartner future outsource contract model (GartnerGroup 1999a:16), as depicted in

figure 3.8, is similar to the framework, as per figure 3.7, that has been described. As

can be seen from figure 3.8 the contract needs to view the entire environment

holistically and must be structured to accommodate constant change. The successful

outsourcing agreement needs to be the “gear box” between an organisation’s

business and its suppliers, manage change, remain valid throughout the term of the

agreement, provide prices and performance metrics that relate to the business,

provide transparency of information, provide effective, non-adversarial relationships,

provide active innovation, provide continuous improvement, manage the allocation of

risk between the client and the vendor, maintain control over service capability and

performance, and maintain control over costs.

Figure 3.8 – Gartner future outsource contract model

Strategy Membership Integration Equity Audit Feedback

• Goals• Direction• Policies• Procedures• Arbitration• Termination

• Skills• Resources• Supplier

selection

• Standards• Roles• Responsibilities• Service levels

• Funding• Assets• Cost control• Estimating• Pricing

• Continuous improvement

• Benchmarking• Deal evaluation• Risk analysis

• Reports• Forecasts• Lessons

learned• Analysis





The contract and due diligence phase information need to be communicated, in detail,

to the entire organisation, staff and management. The vendor has to do the same for

the staff that will be working on the contract. Communication around every element of

the contract is critical in order to form a realistic user expectation of what the contract

will deliver, the processes and procedures that will be followed and the service levels

that will be delivered. Harris (2002:4) says that some of the lessons learnt around

communication are to simply identify goals and objectives very clearly, and

communicate them explicitly. Constant communication from this point onwards for the

duration of the contract is important in order to manage user expectations. A careful

communications strategy and plan should be worked out jointly between the vendor

and organisation and should be followed religiously.

This phase sets and completes the expectations from both the vendor and

organisation in regard to how the relationship will be managed, how the contract will

be governed and what services will be delivered within the ITO. The contract will also

define the strategic intent and the context in which the ITO was decided on a formal

legal basis. The importance of this is that the contract will be the only point of

reference that a court of law or an arbitration council will use to evaluate whether the

vendor has performed what was contractually requested by the organisation.

Many vendors have pre-defined contract structures, service definitions, processes,

procedures and service level metrics in place. If these are used as the basis for this

phase then care has to be taken to make sure that the organisation understands

precisely what is meant in each of these descriptions and definitions.

Most of the global outsource vendors have got detailed due diligence templates, and

procedures for investigating the environment. Although these are best practice, the

vendor focuses on those elements in which it has core expertise. As such it is

important for the organisation, and an actual obligation, to check that the vendor

studies and analyses the environment holistically.




Once again the sequence of the steps referred to in figure 3.7 is not important as

many of these activities can be engaged in parallel.

3.2.3 Transition phase

At this point there should be a clear understanding of the operational environment

within the customer and a comprehensive contract should be in place and signed off

by the organisation board. The actual operational take-over from the organisation to

the vendor occurs during the transition phase. Any assets or personnel to be

transferred also takes place during the transition.

From this point forward most vendors have pre-defined frameworks and

methodologies that they use to govern and operate the customer environment. It is

key that the contract governance mechanisms, processes, procedures, and policies as

defined in the contract phase be utilised without deviation. The vendor frameworks, or

the elements of the framework to be used, should have been built into the contract.

No new structures should arise at this stage.

The transition phase consists out of a number of steps as per the framework

suggested in figure 3.9. It is important to note that the sequence of steps is not

important.

Figure 3.9 – Transition phase

Transition

Staff take-over

Asset take-over

Governance

implem

entation

Third-partycontract

take-over

Com

munication /

perceptionm

anagement

Operationalset-up

1 2 3 4 5 6Contract in place

Jointlydevelopeddetailedtransitionproject plan

Joint vendorand companyreview oftransition

Collect further informationCompany to assist with transition micro-managementCompany to implement a contract management/control team

COMMUNICATION





The transition phase is one of the most difficult phases as users within the

organisation expect service improvements to take place immediately. There is also an

expectation that the way in which the IT operations were delivered will change

overnight. This phase is often referred to as the “honeymoon phase” as both the

vendor and the organisation tries to please each other in all aspects of delivery and

does not always deal with operational problems that arise. The “honeymooning” is not

healthy for the long term relationship as lenience in dealing with operational problems

cause problems later in the relationship in terms of a precedent being set as to how

problems are dealt with.

The phase starts with the contract being signed and the vendor and organisation

jointly defining the transition activities, planning for the full transition period. This

cannot be lead solely by the vendor, as the organisation has an obligation to ensure

that the transition proceeds smoothly. Through communication, by the organisation

and vendor, of the activities planned and the services and SLAs to be achieved,

correct user expectations will be set. The plan that is defined must be holistic and

cover all aspects of the transition including, staff take-over, asset audits and take-over,

third party contract take-over, the operational takeover and the implementation of the

governance mechanisms. The transition plan should be accompanied by a complete

communication strategy and plan. Harris (2002:31) says that it is critical to spend

sufficient time during the pre- and post-bid process to develop a comprehensive

transition plan that provides ample time for the vendor to understand applications,

protocols and locations supported.

The steps in the framework for this phase as per figure 3.9 are as follows:

1) Staff take-over – this is a sensitive step that requires personal attention of the

management of both the organisation and the vendor. The staff affected, or at the

periphery of being affected, will be extremely uneasy with the entire situation as to

their job security, their future roles and the impact of this on their financial situation

and as such on their families. The vendor should have a specialist human




resource team available to deal with the people issues in conjunction with the

organisation’s human resource department. The staff take-over entails a detailed

mapping of benefit and salary structures, a skills mapping to the vendor staff

position structures, a gap analysis on training requirements, and any other issues

that might pertain to the labour law in the relevant country. For buy-in it is

important to negotiate these details with the affected staff and get their full support

for the process and sign-off on the outputs. Another element in this step that is

often ignored is the organisation culture, or the lack thereof, and the impact of this

on the vendor. The staff need to be inducted into the vendor environment and a

special culture change programme should be available to deal with the

transitioned staff. There are often large numbers of staff being transferred which

could radically change the vendor organisation culture overnight. If this is not

dealt with, then the vendor values and delivery standards could be affected due to

the sheer volume of people being transferred.

2) Asset take-over – the audit of the due diligence phase should be the basis for the

transfer of the assets to the vendor environment. The financial structure of the

asset purchase should be realistic and care should be taken that the organisation

does not overcharge the vendor for the assets, as this results in an indirect loan

from the vendor to the organisation (which is illegal in some countries), which the

vendor in turn recovers from the organisation over the duration of the contract.

The issue with this is the fact that future management of the organisation will have

to live with this premium, and it might not be understood as to why this type of

arrangement was entered into in the first place. The vendor should have a

complete asset database from the due diligence phase regarding the assets in

terms of age, hardware configuration and location and should, from this point

forward, maintain a strict asset change control process in order to track and

maintain all assets and any changes to them.

3) Third party contract take-over – care should be taken in this step by the

organisation and vendor to fully understand the terms, conditions, durations,

penalty structures, SLAs and cession rights of each third party contract. The




vendor and organisation should jointly meet and negotiate the cession of these

contracts to the vendor. Any legal dispute should be identified and agreements

should be reached with all third parties in order to prevent disputes later in the

operational delivery. The vendor should also question the value of each third party

contract in order to ascertain the reason for the organisation having entered into

the contract with the third party.

4) Operation set-up – during this step the operational handbook, as many vendors

refer to it, will be defined encompassing the governance structures, processes,

procedures, policies, service description and SLA definitions as was negotiated

and written into the contract. The physical delivery structures, organisational

structures, helpdesks, and systems management tools will be put in place and

phased in across the organisation. It is important that the organisation and vendor

communicates to all the organisation staff regarding what to expect with these

transition activities, and more importantly the possible impacts on service it might

have. This is critical, as user perception might become extremely negative

regarding the ITO and disillusionment could start gaining momentum unless the

impact is fully understood and appreciated by all.

5) Governance implementation – this should be implemented immediately at the start

of transition in order to create forums between the organisation and vendor to

discuss and deal with any issues that arise during transition and there-after for the

full contract period. To assist the vendor, these governance mechanisms should

be used for communication, but also to set the benchmark on reporting, and to

show the integrity of the process, in order to build and maintain the trust of the

organisation. This has to be followed rigorously throughout the contract.

6) Communication and perception management – this has been emphasised

throughout this discussion, but cannot be emphasised enough. Communication of

successes, problems and plans set user expectation and cannot be neglected or

else the Gartner user expectation downward curve, refer to figure 2.2, starts

setting in and the ITO is in trouble. Operational delivery has to match the plans




being communicated and care should be taken to ensure that a realistic picture is

communicated to the organisation staff. It is also important for the organisation’s

ITO management team and the executive management to check and endorse the

vendor communication in order to show ongoing commitment and buy-in to the

ITO decision and the long term benefits thereof.

During the transition process the organisation should assist the vendor in ensuring a

smooth transition and to manage their internal staff perception. Very often the

organisation assumes that they have outsourced and the vendor must now deal with

all the issues that arise. This is not the case and should not be underestimated.

Harris (2002:32) says that the organisation should not trust vendors to always do the

right thing. He suggests that the organisation set up a project management team that

manages the plans and actions of the vendor. This will minimise cost overruns,

unnecessary consulting time and missed deadlines. The organisation should appoint

a full ITO management team to work with the vendor at all times to ensure that the

envisaged goals are being achieved. If any of the goals are found to be unrealistic,

then this should be escalated to both the vendor and organisation executive teams to

either change or review from time to time in order to manage the impact thereof.

Gartner (GartnerGroup 1999:2) says that one of the most common reasons for the

success or failure of outsourcing deals lies in an organisation’s ability to fully

appreciate, plan for, and manage its role in the arrangement. Organisations must

establish the skills, processes, resources and tools to effectively manage their

outsourcing arrangements for the duration of the agreement.

At the end of the transition phase the organisation and vendor should review the

transition process critically in order to ascertain as to which components went well and

what needs attention into the future. Realism should be maintained at all times to

ensure correct expectations. Gartner (GartnerGroup 1999:3) says that deals that are

not established on a realistic basis and that are not good for both parties will not stand

the test of time.




3.2.4 Execution / Operations phase

Once transition is successfully completed the official start of operations is declared by

both the organisation and the vendor. If the transition set correct expectations and

occurred smoothly, then the operations have a good foundation to start with. The

operations phase is a continuous cycle of delivery, improvements and change. The

business requirements and technology will change over time and this should

constantly be revisited to ensure the relevance of the contract.

This phase consists out of a number of activities, rather than specific steps. As such,

in figure 3.10, the proposed framework is given and described thereafter. The

sequence of the steps or activities is not important.

Figure 3.10 – Operations phase

Operations

Service delivery

Measurem

ent &perform

ancem

anagement

Change

managem

ent

Reporting &

comm

unication

Continuous

improvem

ent

Staff

development &

culture change

1 2 3 4 5 6

Startoperations

Contractrenegotiation

Relationship management

COMMUNICATION Source: own compilation

1) Service delivery – this is an ongoing activity that will encompass the day-to-day

operations of the ITO. This includes the delivery of the defined services according

to the given SLAs and the strict adherence to the contract. The important facet of

this step is the consistent high quality delivery and follow-up on commitments

given by the vendor staff to the organisation users. Absolute service focus and

customer orientation is required by these staff members and the end goals and

scope of the contract should be fully understood by all delivery personnel.

Constant reinforcement of the contract scope and contract goals should be

discussed with the delivery staff and their incentive structures should be aligned to

the achievement of these goals. Their individual roles and responsibilities should




be defined in detail in the context of the contract to ensure that they understand

the part that they play with the associated dependency on them.

2) Measurement and performance management – this is a critical element to be

performed by both the vendor and the organisation. Gartner (GartnerGroup

1999:10) indicates very clearly that if you don’t measure IT, then you cannot

manage it as illustrated in figure 3.11.

Figure 3.11 – Gartner measurement model


The measurement criteria, as defined in the contract, should be rigorously updated

and the data has to be collected from the start of the contract in order for

successful measurement to be possible. The organisation and vendor need to

verify the data and ensure that the integrity is always correct (GartnerGroup

1999:11). Proper measurement is the basis for good performance management.

Performance management should be implemented at the start of operations and

maintained throughout the ITO life cycle. Performance needs to be measured and




managed holistically in terms of SLA adherence, people management, customer

satisfaction and goal achievement.

3) Reporting and communication – the agreed reports should be generated

consistently and the organisation and vendor should jointly evaluate the source

data to check integrity and to build a level of trust in regard to the reporting early in

the contract. This goes a long way to satisfy the organisation that the vendor is

performing according to agreement. Gartner (GartnerGroup 1999:10) says that

organisations and their vendors must acquire the monitoring and measurement

tools to keep their outsourcing agreements technically and financially on track, and

also to demonstrate that they are on track. The reporting must be the basis for

constant communication with the organisation users. A regular communication

plan needs to be implemented communicating the service performance, SLA

achievement, problems, successes, plans and progress against previously set

plans. This will control expectation through association with visible proof that the

data provided is correct and that plans are delivered on as promised.

4) Staff development and culture change – Attention need to be given to the

development of the transitioned staff from all facets: training, education, contract

content, methodologies and procedures. The vendor should also consistently

reinforce their culture in terms of values and delivery expectations to ensure that

the transitioned staff members become part of the vendor culture and community

as soon as possible. Rotation of staff to other vendor contracts, or even internal

vendor work, should be considered as soon as possible as this expedites the

culture change process. These staff members can cause major perception

damage in the organisation if they are unhappy as they would typically know many

of the influential users in the organisation and discuss the internal vendor issues

with these users. The opposite effect is also however true, which is why it is

important to have relevant culture change and developmental programmes in

place to ensure that all efforts are made to influence the staff positively, which will

in turn be felt by the organisation.




5) Change management – many elements of the service changes during the contract

due to technology changes, new business requirements, additional services,

revised service level requirements, assets refreshes and many other elements

associated with the contract. It is critical to keep track of all these changes and to

implement a governance forum to evaluate each of these changes, decide on the

financial and service impact, and prepare and sign-off the documentation (change

requests) in order to keep a comprehensive audit trail of all changes. No verbal

changes or agreements should be acted on in order to prevent setting a precedent

of any sorts. This is one of the downfalls in many contracts as both parties view it

as a nuisance and want to operate on a gentleman’s agreement basis. This works

well until something goes wrong, then it becomes the reason for many disputes

and vagueness in scope.

6) Continuous improvement – is something that must be a constant priority as this is

where the vendor adds additional value to the customer and ensures the business

relevance of the contract remains. Many ITO contracts are questioned due to the

lack of business benefit or business alignment, so every effort should be made to

look at all aspects of the contract continuously to ensure relevance and suitability.

Gartner (GartnerGroup 1999:16) has found this fact in their research as shown in

figure 3.12.

The organisation and vendor need to make sure that IT delivery within the contract

constantly meets the business objectives and assists in business process

improvement of some sorts or in product innovation. If this is the case the

relevance of the ITO will never be questioned.




Figure 3.12 – Gartner business measurement model


Contract renegotiation should not be seen as a threat by the organisation or vendor as

technology evolution and changes in the business environment forces constant

renegotiations and revisiting of the foundation and vision of the ITO contract to ensure

relevance and acceptance. Contract renegotiations should be a permanent agenda

item when the contract strategy is reviewed or discussed. This will give both parties

the comfort that the benefits are understood and relevance is maintained. It also

shows goodwill. Gartner (GartnerGroup 1999a:8) says that contract renegotiations in

the IT outsourcing market are becoming commonplace. This trend is not only driven

by an increasing number of agreements approaching the end of their term; it is equally

a reflection of the complexity of outsourcing deals coupled with the pace of business

change and IT development.

It is important to note that throughout the operations phase meeting SLAs does not

equal satisfying the organisation. Outsourcing vendors must consider the broader

aspect of the customer relationship, including careful listening, prompt follow-through




on commitments, and ensuring that a true partnership model is the basis for the

agreement (Harris 2002:30).

3.2.5 Termination phase

Termination normally occurs for one of two reasons:

• the contract has reached its end naturally and the organisation does not wish to

renew or to give it to the same vendor again

• the organisation and vendor has reached an impasse in terms of relationship,

service issues, business benefit or contract relevance

The natural closure of the contract means that both parties part on a fairly good

standing in terms of relationship and as such the termination is normally easier. The

second reason however is normally hostile and can involve arbitration or even legal

action. In this situation the termination is very difficult with little cooperation from both

parties and a complete breakdown in trust. Professionalism and maturity is required

to enable the organisation, and for that matter the vendor, to survive the termination

and not cause major business disruption.

Notwithstanding the reason the following are the activities that should take place

surrounding the termination. The proposed framework is depicted in figure 3.13 and

the sequence of these activities is not important.

These steps are in essence the same as the transition model, but reversed between

the organisation and vendor. Depending on the state of the asset register and the

audit trail of the technical environment and the level of the organisation involvement in

the management of the contract, it is sometimes recommended to do a reverse due

diligence process as described in 3.2.2 where the organisation fully evaluates the

environment that they will be taking back.




Figure 3.13 – Termination phase

Termination

Staff take-over

Asset take-over

Third-partycontract

take-over

Com

munication

Operationaltake-over

1 2 3 4 5

Terminationplan

Terminationfee agreement

COMMUNICATION


It is important for both parties to jointly define the termination plan to ensure

cooperation. The termination fees also have to be agreed before the termination

begins to ensure that there is no dispute regarding this during the termination

handover. The termination fees are normally a formula based on asset value, staff

costs, service time, third party contract termination penalties, legal fees, forward

profits and overheads. The activities, as per figure 3.13, are:

1) Staff take-over – in some cases the contract allows for staff utilised on the contract

at the time of termination to be transferred from the vendor to the organisation.

Once again this involves a full benefits, incentives and staff position mapping. The

same elements as discussed in section 3.2.2 should be taken cognisance of.

2) Asset take-over – some contracts allow for the assets to be bought back by the

organisation. This can be a disruptive exercise if agreement cannot be reached on

the assets required for the organisation business continuity. Once the assets are

identified, and if applicable, the same process as per 3.2.2 will take place to ensure

a smooth take-over.

3) Third-party contract take-over – the third parties used by the vendor should either

be transitioned to the organisation or the vendor should assist the organisation in




setting up new contracts to ensure unbroken service continuity. The full extent of

the third party contract terms and conditions should be understood as this normally

forms part of the termination calculation. The organisation should fully understand

the services that are being delivered by the third parties and the impact it would

have to cancel versus cession of these contracts.

4) Operational take-over – Here the services are transitioned back to the

organisation. Care should be taken to understand all the shared infrastructure and

technology that the vendor utilised to get economies of scale between its contracts.

This can amount to a costly investment for the organisation to recreate these

shared services if the technologies or shared staff were not included in the

termination deal.

5) Communication – communication should intensify on the part of the organisation to

keep users pacified in that major service disruptions will not occur and what the

plans are to ensure this. This will give comfort and assist in cooperation by all to

ensure a smooth termination.

Termination need not be complex if an agreed plan is developed and disputes are

handled according to the original contract termination process definition. The

termination to a large extent depends on the maturity by which both organisations are

approaching the issues. The vendor should at all costs ensure a smooth termination

as this ensures good market perception for future deals. The organisation should

assist in this process.

3.3 Closure

This chapter positioned the Coetzee framework based on research and practical

experience to overcome most of the issues identified in Chapter 2. The framework

dealt with the initiation required by the organisation and the follow-up and detailed

environmental analysis by the vendor. The contract is a mutually defined description




of intent and service leading to a transition which is jointly managed by the

organisation and vendor. The operations are run under strict governance, and change

management is a constant in association with contract renegotiations if required.

Relationship management and communication is a common thread throughout in

order to manage user expectations. The termination is a joint plan that is defined in

the contract.

Chapter 4 will investigate the business process outsourcing (BPO) trends and some of

the reasons as to why BPO is entered into.


Chapter 4: Business process outsourcing trends, drivers and inhibitors 4 - 81

Chapter 4: Business process outsourcing trends, drivers and inhibitors

Table of contents

Chapter 4: Business process outsourcing trends, drivers and inhibitors ................ 4-81

Synopsis.................................................................................................................. 4-82

4.1 Business process outsourcing trends ........................................................... 4-83

4.1.1 Current focus areas for business process outsourcing................................. 4-84

4.1.2 Business process outsourcing growth drivers .............................................. 4-88

4.1.3 Business process outsourcing growth inhibitors........................................... 4-90

4.2 Closure ......................................................................................................... 4-91



Chapter 4: Business process outsourcing trends, drivers and inhibitors

Synopsis

Gartner Dataquest (Scholl et al. 2003:1, Scholl 2003c:6) defines business process

outsourcing (BPO) as the delegation of one or more IT-intensive business processes

to an external provider that, in turn, owns, administrates and manages the selected

processes, based on defined and measurable performance metrics.

This chapter is devoted to investigating the third research objective as set out in

Chapter 1. Traditionally business processes have been one of the elements that

organisations believed gave them a competitive edge. Organisations are now

considering giving many of these processes to third parties to run, in its entirety, on

their behalf. As such this chapter investigates the trends in business process

outsourcing in terms of the history and the areas that are currently being focused on

for business process outsourcing. There are specific drivers that are stimulating the

growth in regard to business process outsourcing and these are highlighted within this

chapter. On the down side there are a set of inhibitors that are slowing down the

adoption of business process outsourcing. Lastly the link between business process

outsourcing and information technology outsourcing is shortly discussed.



4.1 Business process outsourcing trends

Business process outsourcing (BPO) was validated in 2002 as, despite the difficult

economic environment, a significant number of large contracts were signed and

executive-level interest in BPO rose dramatically (Scholl 2003a:1). Many CEOs and

CFOs who had been outsourcing certain functions in a piecemeal way began taking a

holistic view of the benefits of outsourcing. Furthermore, they began taking steps to

adapt their organisations to the virtual organisation, creating a stronger focus on core

business and a network of specialised relationships for non-core, yet strategic

functions. Others continue to turn to outsourcing for transactional reasons, hoping to

improve operational performance while reducing costs at the same time (Scholl

2003a:1).

The increase in awareness and adoption of BPO (Scholl 2003a:1) should not

overshadow the fact that BPO services are still immature and that in many instances,

early adopters of BPO are still seeking to understand their cost and business benefits.

Though business process services have been delivered since the 1960s, BPO has

emerged as a market only in the past decade. Even today, the BPO market still

shows dynamic characteristics of an "emerging" market. During the transition phase

toward higher maturity in BPO, there is still significant confusion about what exactly

BPO is, how much process responsibility organisations should delegate to service

providers and how the services are delivered.

The provider BPO pipeline is growing (Scholl 2003a:3), but contract signings are not

always realised. Most providers interviewed by Gartner in 2002 claim that their

pipeline of BPO business is larger than ever before. But there is definitely a big gap

between the level of interest in discussing outsourcing opportunities and the

realisation of these opportunities. Many providers claim that only a small percentage

of the leads they receive are actually qualified and will lead to a real contract.



However, service providers have high growth expectations for their BPO service lines

and were optimistic on their results for 2002.

Although business process outsourcing (BPO) has gained visibility in the IT services

industry only in the past four or five years (Scholl 2003b:1), the service offering itself

has existed for decades. Companies have been outsourcing services such as

payment processing, payroll processing, contract manufacturing and logistics for more

than 50 years. Given the downturn in the overall IT services market since 2001, one

sector has been relatively stable, maintaining a steady value proposition —

outsourcing. Outsourcing is the bright spot in the IT services market, offering a

compelling business value proposition for organisations as a means to gain

operational efficiency, focus on core expertise, improve efficiencies and potentially

reduce IT costs.

4.1.1 Current focus areas for business process outsourcing

The following points are the findings of Gartner (Scholl 2002:2, Scholl 2003a:3) in

terms of the current areas on which BPO is focused at present:

• The primary focus of BPO activity in 2002 was in the area of human resources.

Both Gartner Dataquest's (Scholl 2002:2) user research and contract signatures in

the market at large underscore this trend. Demand for aggregated human

resources outsourcing services is becoming more prevalent — the aggregation of

multiple human resources processes into one outsourcing contract (for instance

payroll, benefits and human resources records management). Demand for

outsourced human resources services is concentrated in payroll and benefits

outsourcing, but several companies expect to increase their level of outsourcing for

education and training.

• Demand for finance and accounting outsourcing is not as high as demand for

human resources outsourcing. Most of the finance and accounting demand

remains fragmented, focused on the transactional components of accounting —



accounts receivable and accounts payable. In finance and accounting, demand is

concentrated in tax management, followed by management accounting and

general ledger.

• Other processes that are commonly outsourced across organisations include

logistics, warehouse and inventory management, campaign design and

communication planning, market segmentation, customer data analytics and

telesales and telemarketing.

• In the state and local government sector, most commonly outsourced processes

are claims processing, credit card processing and ticket collections.

• The 2002 Gartner survey (Scholl 2002:2) indicates a much more diversified

spectrum of BPO target markets than in 2001. Whereas BPO providers were

almost unanimously targeting global 500 companies in the financial services sector

in 2001, they are expanding their array of opportunities in 2002. This probably also

indicates demand is emanating from new buying centres. Financial services and

large corporations are often among the first to try out new business models. Now

other vertical markets are formalising their adoption of BPO and a number of

providers are adapting to the "verticalisation" of BPO demand.

• BPO providers continue to primarily target large corporations but the focus on mid

market companies is increasing. In 2002, 64 percent of survey respondents' BPO

revenue came from large clients (more than $500 million in revenue) compared

with 75 percent in the 2001 survey. Another 36 percent of the 2002 sample

targeted companies with less than $500 million in revenue, compared with 25

percent in the 2001 sample.

NelsonHall (2003:21) confirms the previously mentioned focus areas for BPO in that

the top three service types which provide the greatest opportunities for vendors within

North America BPO were:



• customer management services – 47%

• human resource outsourcing – 21%

• health programs (e.g. Medicaid) – 10%

The top three BPO service types by market share of total contract value for 2002

were:

• customer management services – 37%

• local government specific processing – 23%

• financial services specific processing – 19%

The interesting points are that NelsonHall and Gartner differ on the main focus of BPO

as NelsonHall found that customer management services are the highest focus area.

The interpretation, scope and grouping of specific services are the main reasons for

this difference in that Gartner breaks down the customer management services into a

granular level and as such does not group these elements together, while NelsonHall

groups these activities together thus getting the larger result for customer

management services.

BPO adoption is occurring on a global basis (Scholl 2003a:3). Demand emanating

from Europe and Asia/Pacific remains fragmented and requires a strong local

presence, but these regions are accelerating their adoption of BPO. The United

Kingdom has been one of the leading countries in taking up BPO, even compared with

the United States or any other country, but the adoption of BPO in continental Europe

is still limited by several cultural and legislative factors. Demand in Asia/Pacific

remains concentrated in a small number of countries (Australia, New Zealand,

Singapore and Malaysia), but early signs indicated that 2003 might be the true kick-off

year for BPO in Asia / Pacific.

Brown (2003:2) says that BPO pure-play vendors and process specialists are winning

the wallet and mind share of small and medium sized business buyers of BPO. Pure



plays generate all of their revenue from BPO and are known for comprehensive

service delivery across the breadth of a process area (such as human resources and

finance and accounting). Process specialists are known for being focused on a

singular process (such as payroll within human resources). Conversely, most BPO

providers with an IT outsourcing heritage (such as CSC, EDS and IBM) and

consultants (such as Accenture, Deloitte Touche, and Cap Gemini Ernst &Young)

derive virtually all of their revenue from large market organisations. To date, these

organisations have yet to engage the small and medium business sector in a

meaningful way.

As indicated before, vendors dedicated to BPO, also referred to as pure-play BPO

vendors, are companies that generate all of their revenue from BPO. This is in

contrast to a host of IT services organisations that may have some measure of BPO

competency as a part of their services portfolio (for example IBM and EDS) but do not

solely focus on process outsourcing. Generally, they have a comprehensive view of a

process area (such as human resources) and provide bundled offerings, including

process transformation and process management.

Although some of these companies offer BPO services that are heavily IT-intensive

and IT enabled to serve their customers, others are more asset- or labour-based.

None of these specialists are IT companies by design. Rather, they are increasingly

turning to IT-based tools and services to enhance the speed and efficiency of the

processes they support. Services become replicable and are resulting in mass-

customised process utilities, which leverage IT and the internet as a significant

delivery medium for their services. This is where the link to Chapter 2 and Chapter 3

becomes relevant in the sense that BPO actually faces all the same problems in

governance and relationship as that of ITO. This is mainly because a large

component of BPO always relies on the IT infrastructure and systems required to gain

the sold efficiencies for BPO. ITO is thus always a subcomponent of BPO. The entire

framework described in Chapter 3 is as such relevant to solve the similar types of

problems in BPO.



4.1.2 Business process outsourcing growth drivers

The following growth drivers were identified for the BPO market worldwide (Scholl

2002:2, Scholl 2003a:3, Scholl 2003c:6, Scholl et al 2003:1):

Driver 1: Enterprises around the world are attempting to focus their investments

on their core business processes and are increasingly looking at

outsourcing non-core business processes. Across all processes, the

primary drivers to BPO are the need to focus on core business, improve

service levels and shorten implementation time before reducing

transaction costs.

Driver 2: The strongest pain points for companies prior to outsourcing across all

processes were the time spent on daily operations, the lack of

integration across processes and the high cost of transaction

processing.

Driver 3: The economic downturn and increasing competition is putting cost

pressure on organisations that attempt to optimise their internal

operations by reducing the cost of transaction processing in non-core

areas.

Driver 4: In some industries, a shift in regulatory environment is leading

organisations to achieve even higher cost efficiencies in operational

management and to focus on their front-end processes. This is true in

the financial services, utility and telecommunications industries.

Driver 5: Industry consolidation continues to create opportunities for outsourcing

as back-office functions become redundant after a merger or an

acquisition.



Driver 6: New technology and media are creating opportunities for outsourcing

entire lines of products and services using these new technologies, such

as online payroll, online benefits administration, online order

management, online transaction processing, and so on. Globalisation is

driving multinational organisations to outsource business processes to

local service providers to gain local process expertise (for example, in

finance or human resources management).

Driver 7: The high level of competition is making markets more volatile. This

makes it more sensible for companies to outsource to third-party service

providers to ensure better upward and downward scalability.

Driver 8: Early adopters of BPO services, primarily large organisations, continue

to expand their relationships to include new process areas. For example,

companies that have outsourced their payroll functions begin to

outsource other human resources or finance and accounting functions.

96% of the Gartner survey respondents are either very satisfied or

satisfied with their BPO relationship.

Driver 9: Maturity in BPO service providers are increasing

• BPO suppliers are solidifying their market offerings. The number of suppliers and

the diversity of their offerings are increasing, providing more choice to late

adopters, particularly in the small to medium size business market and new vertical

industries.

• The demand and supply of BPO services are beginning to mature in Western

Europe and Asia/Pacific, including in Japan.

• Time to plateau or also referred to as the adoption speed is currently estimated to

be between 5 to 10 years.



• Justification for adoption speed: BPO is a very fragmented market. Some areas,

such as payroll and check processing, are mature and already working well. The

entire acceptance curve over time for BPO is likely to be flatter than that of other

services, and spread out over a longer period.

4.1.3 Business process outsourcing growth inhibitors

While there are many growth drivers as listed in 4.1.2 there are also several growth

inhibitors (Scholl 2002:2, Scholl 2003a:3, Scholl et al. 2003:1):

Inhibitor 1: As in the IT services markets, the BPO market is experiencing the

impact of geopolitical instability and economic uncertainty. Many large

BPO contracts were stalled or postponed, and will not be signed until

late 2003 or 2004. The sales cycle for BPO had been decreasing in

2000 and 2001 but increased in 2002 to average at about 12 months.

Gartner Dataquest expects the sales cycle to stay in the one-year range

for a majority of large contracts.

Inhibitor 2: The first wave of BPO adoption by large organisations will come to the

five-year mark at the end of 2004, during which many contracts will be

renegotiated and possibly re-issued to the wider market for selection of a

new vendor. Although some of the contracts will be expanded to include

new process areas, the overall impact of the renegotiation will be a slight

slowdown in BPO growth in 2005.

Inhibitor 3: The growth in the offshore delivery model for BPO services will produce

a deflationary impact on the revenue of BPO providers, as end users

begin to negotiate contracts with the new offshore pricing models in

mind. The growth in offshore delivery capabilities will have a positive

impact on the volume of BPO contracts, but the total impact of offshore

services will be slightly negative on the growth of BPO revenue as early

as 2003. The small to medium business market will be slower to adopt



BPO in a significant way than large organisations. Demand for BPO in

the small to medium business remains fragmented and dependent on

new solution implementations. The growth in new delivery modes for

BPO will not reach maturity until after 2005.

4.2 Closure

BPO opportunities for IT services providers remain strong (Scholl et al. 2003:1),

supported by the following factors:

• BPO is growing faster than any other IT services segment.

• Outsourcing is becoming the primary channel for selling other IT services, as

opposed to discrete, project-based services.

• BPO services give access to new buyers within user organisations and expand the

IT services opportunity.

• The world is gradually moving toward a scenario in which BPO contracts are

channels to market for a number of other IT services lines as shown in Figure 4.1.

However, not all IT services providers are positioned to sell BPO services. The

combination of people, process and technology expertise, as well as the ability to sell

to business buyers (beyond the IT department) will be important in determining a

provider's success in the BPO market.

This BPO market is experiencing noticeable momentum (Scholl 2003b:1) in terms of

wider user acceptance and the emergence of new service-offering categories, as well

as a proliferation of providers from which to choose. Service providers offer BPO for

hundreds of business processes. Some of these service offerings are stable, while

some are just emerging and are, therefore, largely untested.



Figure 4.1 – Business process outsourcing with information technology outsourcing as a sub-component

Source: Gabler, Young & Gunasekaran 2002:1

This growth can be illustrated by the number of contracts established in 2003 as

indicated in Table 4.2. The majority of contracts are in North America and Europe

where acceptance seems to be the highest and gaining pace.

Table 4.2 – Business process outsourcing contracts in 2003

Region Number of contracts

Contract value ($m)

Market share (%)

North America

Europe

Oceania

Asia

Latin America

89

67

4

5

2

9,447

5,863

425

139

25

59,4

36,9

2.7

0.8

0.2

Total 167 15,899 100

Source: Scholl 2003b:1



BPO is definitely around to stay and will continue to grow significantly as organisations

seek more innovative ways to remain competitive. The main commodity processes

such as human resources and some of the financial backend processing are typical

processes that can and will be outsourced more and more as organisations are no

longer viewing these processes as strategic, but merely as a business support tool.

This being said, it is clear that many IT service providers are trying to deliver BPO

services, but are not necessarily expert at this. The supply side will take some years

to stabilise and be bedded down into mature services. At the same time many

organisations are still hesitant to outsource traditional internal processes due to a

possible perceived loss of control.

Due to this uncertainty that exists, similar mistakes are made in entering into BPO

contracts as are made when engaging in ITO. As such the same precautions as

discussed in Chapter 2 and Chapter 3 should be taken note of when entering into

BPO to prevent some of the disasters that have taken place in the ITO arena.

The following and last chapter will be an overall summary of the first four chapters.


Chapter 5: Summary 5 - 94

Chapter 5: Summary

Table of contents Chapter 5: Summary .............................................................................................. 5-94

5.1 Introduction................................................................................................... 5-95

5.2 Objective 1 – management issues facing information technology ................ 5-96

5.3 Objective 2 - solution models for information technology outsourcing .......... 5-97

5.4 Objective 3 - business process outsourcing trends ...................................... 5-99

5.5 Closure ....................................................................................................... 5-100



Chapter 5: Summary

5.1 Introduction

This mini-dissertation has shown that organisations now view ITO as a vehicle to

increase competitiveness. Organisations have turned to outsourcing for more

strategic reasons, including keeping up with cutting-edge technology, building

partnerships, creating value for the organisation and its customers, and broadening

infrastructure and operations (Casale 2001:3). In many cases ITO however is

associated with service failure, cost overruns, and relationship issues that sometimes

have disastrous effects on the profitability of organisations. Some of the main

business issues that cause ITO failure are incorrect expectations created before and

after the contract starts, focusing on pure cost saving instead of looking for value add

or cost optimisation, thus resulting in cost overruns, inflexibility in contracting and

costing mechanisms, transparency and communications surrounding contract

performance and lastly failure to deliver on the agreed service levels. Many if these

issues relate back to relationship issues, mismanagement, lack of process and limited

governance that the outsourcing vendors are guilty of when managing the contracts.

Similar to the ITO market, BPO services have been delivered since the early 1960s.

Even today, the BPO market still shows some of the characteristics of an "emerging"

market. During the transition phase toward higher maturity in BPO, there is still

significant confusion about what exactly BPO is, how much process responsibility

organisations should delegate to service providers and how the services are delivered

(Brown 2003:4).

Taking the background given into account, the objectives of this study regarding ITO

management issues was established and discussed in Chapters 1 to 4.



5.2 Objective 1 – management issues facing information technology outsourcing contracts

The first objective covered by this mini-dissertation was to identify the most common

management issues that arise in each phase of an outsource contract. This objective

was discussed in the context of the information technology outsourcing contract life

cycle, which is a well known and the generally accepted view of entering into and

operating an ITO contract. It was stated that the life cycle consists out of 5 clear

phases: the initiation phase, the due diligence and contracting phase, the transition

phase, the execution or operations phase and lastly the termination phase.

Using the life cycle phases, each of the phases was investigated in terms of

management issues and user expectations that are set during each phase. In terms

of the initiation phase it was clear that sufficient effort lacked on the part of the

outsourcing organisation to define and understand their environment and to establish

a clear business case for outsourcing along with obtaining the associated buy-in from

the organisational stakeholders. The due diligence phase brought out the aspect that

this cannot be a one-sided affair from the vendor alone, but had to be a jointly

managed initiative by the organisation and vendor. It was further found that minimal

effort was spent on the contract structure, flexibility there-in and definition there-of.

This led to vagueness and as such dispute.

During the transition phase it was found that user expectations were typically not

managed and that the organisation started abdicating its direct operational role within

the ITO contract environment. Due to wrong user expectations that were created,

user disillusionment starts setting in within the user-base as progress is not shown as

quickly as expected. After the transition process the operations phase starts and is

clouded with the vagueness of the contract, incorrect user expectations, governance

problems and relationship management issues. This culminates in issues surrounding

termination as the termination process is often not negotiated thoroughly upfront.

What became clear during the discussion around the management issues were that

the main problems centred on governance of the contract, relationship management,



service level adherence and lastly the comprehensive communication required for

maintaining user perception and user expectations.

5.3 Objective 2 - solution models for information technology outsourcing contracts

The second objective covered by this mini-dissertation was to investigate the various

solutions that are available to manage the management issues as was identified in

Chapter 2 for each phase.

To deal with these issues the “Coetzee solutions framework”, referred to as the

solutions framework or the framework, was introduced in Chapter 3 as a holistic

approach to solving the issues as was identified in Chapter 2. This framework

supplies a process to systematically work through the information technology

outsourcing life cycle and to ensure that every aspect is covered to prevent the

management issues and user expectation issues surrounding ITO. Using the

solutions framework each of the ITO life cycle phases were discussed in terms of the

process steps that has to be followed to ensure ITO success.

In the initiation phase the process of internal readiness was discussed leading to a

comprehensive proposal request. This entailed working through 9 steps of the

solutions framework covering: environmental analysis, financial analysis, SLA

analysis, staffing needs analysis, operational needs analysis, strategic needs and

objectives, detailed definition of an RFI and RFP, vendor selection and lastly the risk

impact review.

The due diligence and contracting phase consisted of 13 steps and dealt with the

cross checking of the organisational detail provided in the RFI and RFP by the vendor

and the contract definition around the detailed environment definition. The steps

were: environmental analysis, financial analysis, SLA analysis, staffing needs

analysis, operational needs analysis, strategic needs and objectives, detailed service

and SLA definition, the contract financial model, the contract governance and



termination structure, the processes, procedures and policies, the technology map,

staffing issues and the value add definition that the ITO would bring to the

organisation.

The transition phase dealt with the detailed joint management of the transition

activities and the importance of governance and communication in order to maintain

end user expectation. The framework for the transition phase consisted of 6 steps

which were: the staff take-over process, the asset take-over, the transitioning of third

party contracts, the operational set-up, the implementation of the governance

mechanisms and the communications plan that is required to manage user

perceptions and user expectations.

With regard to the operations phase extreme emphasis was placed on governance

and relationship management while delivering according to SLA and the need for

continuous improvements during the contract life cycle. The steps discussed was that

of service delivery, the need for formal measurement and performance management,

proper reporting and communication of performance, the development of the staff and

the need for constant culture change for the transitioned staff members, the need for

constant formal change management to contain scope and lastly the need for

continuous improvement around the contract deliverables.

Lastly, the termination phase was discussed in the context that there is the need for a

termination process and plan and that the organisation has to step up communication

internally and ensure understanding of the transitioning process back from the vendor

to the internal organisation or to a new vendor. The steps within the framework were:

the staff take-over back to the organisation, the asset take-over, the third-party

contract take-over, the operational transition back to the organisation and the

communication plan around the termination.

The “Coetzee solutions framework” emphasised the holistic approach to governance

of the contract, relationship management, service level adherence, flexibility and

value-add and lastly the comprehensive communication required for maintaining user

perception and expectations.



5.4 Objective 3 - business process outsourcing trends

The third objective covered by this mini-dissertation was to examine the current trends

in business process outsourcing (BPO) and why organisations are considering BPO

as an option to increase competitiveness.

This topic was discussed in the sense that business process outsourcing is being

introduced into organisations that have identified specific repetitive commodity

processes which were previously viewed as strategic importance for the organisation

to hold in-house but in actual fact is not a critical competitive edge apart from having

the process run as effectively as possible.

BPO was discussed in terms of the current focus areas that are currently prevalent in

the market. The main areas of business process outsourcing were that of human

resource management, finance and accounting. There were various other areas, but

not commonly accepted and very often based on geography with North America being

the leading BPO market.

The 9 drivers behind the growth of BPO were then identified as follows: organisations

wish to outsource non-core business processes in order to focus, organisations were

tired of spending their time on repetitive operations which added little value; increasing

competition is forcing organisations to investigate better means to achieving internal

efficiencies; shifts in the regulatory environments is raising costs which can only be

addressed through additional internal cost reductions, mergers and acquisitions create

redundancies; new technologies are facilitating business process outsourcing; BPO

offers scalability in highly volatile markets; existing BPO contracts are being expanded

and lastly BPO vendors are becoming more mature.

The 3 inhibitors that are contributing to the slow adoption of BPO was also discussed

and are as follows: due to political and economical instability many BPO contract

decisions were postponed; renegotiations of existing BPO contracts will also slow



BPO adoption down and lastly off-shoring models are starting to appear and are being

investigated as alternatives. As such this might delay country specific BPO contracts.

The conclusion was that BPO is definitely around to stay and will continue to grow

significantly as organisations seek more innovative ways to remain competitive. The

main commodity processes such as human resources and some of the financial

backend processing are typical processes that can and will be outsourced more and

more as organisations are no longer viewing them as strategic, but merely as a

business support tools. The strong link between ITO and BPO was also established

and as such the relevance of the proposed solution framework as covered in Chapter

3 for similar problems that would occur in BPO as occurs in ITO at the moment.

5.5 Closure

This study was not meant to be exhaustive, but merely a highlight of the typical issues

that occur in an ITO. The “Coetzee solution framework” was built on practical

experience within the ITO environment and based on research conducted by leading

survey and research companies such as Gartner in the field of ITO. The emphasis of

the framework is on contract governance, relationship management, detailed

environmental knowledge and flexibility in the approach to the contract with continued

emphasis on improvement and joint management between the vendor and the

organisation. ITO is a definite working model that can add to the competitiveness of a

company, but is fully dependent on the management and relationship between the

organisation and the selected vendor.

The BPO environment has been around for many years, but has to yet be understood

and brought to its full potential. BPO and ITO is however similar and significant

learning can be taken from the mistakes made by the industry in ITO in order to

prevent a similar situation occurring in BPO.


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