Linda Cohen

Outsourcing Strategiesand Challenges

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Copyright © 2003

Outsourcing Happens… Take Control or Be Left Behind

Key Issues

1. What are the current trends in outsourcing?2. What should be externally sourced, and what is

the risk?3. How will IT organizations skill up to multisourcing

in the future? 4. How can you assure quality service in a

multisourced enterprise?

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Speed & Scale

IT Access

Cost Reduction

IT Reduction

Business Value

IT Expansion

ERP

MainframeMainframe

Web Services

Internet

1970 1980 1990 2000 2010

Time Sharing

Infrastructure Outsourcing

FacilitiesManagement

Applications Outsourcing

Process Outsourcing

ASP

Transformation

PCClient/Server

Disruptive TechnologiesCopyright © 2003

Outsourcing Generations: Historical Overview

Future Prospects: The Bottom Line

8 102

40

20

4

Gro

s s M

a rg

in (

%)

Relative Growth: CAGR (%) 2000-2005

Business Process and Transaction Management9.1% CAGR

IT Management Services

8.4% CAGR

Development and Integration

5.4% CAGR

Consulting 4.1% CAGR

Education/Training

5.6% CAGR

Software Maintenance7.1% CAGR

Hardware Maintenance1.7% CAGR

6

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Service provider must continuously reduce

cost per unit of service

LaborTechnology

and Processes

Start

YES

Is the Deal Profitable?

InvestmentMoney

$$ $ $$$$

$$

To reduce costs requires investment $

Ensuring long-term investment requires

adequate profitability

Profit$

$$$$

Margins

• No incentive for SP to invest

• Investment stops• SP’s margins

shrink further• Service quality

deteriorates over time

• Enterprise client suffers

• SP must either raise prices or terminate deal

NO

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

Mass Customization Rules

Level of Customization

Applications

Process

Infrastructure

Yesterday Today Tomorrow

Custom Codeand

Integration

Custom Infrastructure

CustomizedSingle-

Company Processes

Semi-Custom Infrastructure

Semi-Custom Code and Custom

Integration

Semi-Custom Process by Company

Common Infrastructure

Noncustom Code and Integration

Standard Horizontal Process by

Vertical

Future

High Medium Low

Mass- Customized Code and Integration

CommonInfrastructure

Standard Horizontal

Processes by Vertical

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Sourcing Strategy Identification Criteria development Organization fit Selection process Partnership

opportunities

Governance model Metrics Payment models Terms and conditions Provision

for changes

Relationship Performance

assessment Goals: reach business

objectives, efficiency,quality, innovation

Transition

Evaluation and Selection

ContractDevelopment

SourcingManagement

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

Phase

1

Phase 4 Phase

3

Phase 2

Strategic Tactical

Gartner’s Sourcing Life Cycle

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A sourcing strategyis the starting

point for mapping disruptive business

change into effective changes to the

operational environment.

The strategy should be

revisited frequentlyto ensure that

no misalignmentis allowed to develop.

How is a Sourcing Strategy built?

ImplementationPlan

Assessment ofChange Capability

Stage 1—Discovery and Identification

Strategy and Performance Review

Skill & Knowledge Capital Review

Business Alignment Assessment

Risk Identificationand Review

High-Level Market and Pricing Review

StrategicGap Analysis

Stage 2 —Analysis and Conclusions

Sourcing Scenario Establishment

Identification of MostViable Alternatives

Selection of Risk- Optimal Scenario

Develop Sourcing Principles

High-LevelSourcing Strategy

BusinessCase

Stage 3 —-Implementation

Planning

DetailedSourcing Strategy

Retained Function Improvement and Development Plan

Retained Function Improvement and Development Plan

OutsourcingAction Plan

OutsourcingAction Plan

Sourcing Governance Plan

Sourcing Governance Plan

Org. Restructure and Skill Acquisition PlanOrg. Restructure and Skill Acquisition Plan

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CIO

ESP PrimeContractor(s)

RetainedInternal ISCompetencies

Best-of-BreedSubcontractors

IT Managementand Governance

IT Core Value

Outsourcing or Insourcing or Joint Venture

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New Realities: IT as Broker

Business (B)B1 Understanding business

practices and approachesB2 Understanding business

organization, politics and culture

B3 Behaving commercially

B4 Understanding and analyzing the competitive situation

B5 Managing projectsB6 Managing change in

the business resulting from IT applications

B7 Planning, prioritizing and administering work

B8 Communicating/listening and gathering information

B9 Focusing on customers

Behavioral (H)H1 Leading, inspiring and

building trustH2 Thinking creatively and

innovatingH3 Focusing on resultsH4 Thinking strategicallyH5 Coaching, delegating

and developingH6 Building relationships/

team-workingH7 Influencing and

persuadingH8 Principled negotiatingH9 Resolving conflicts and

problemsH10Being adaptable

Technical (T)T1 Understanding existing

systems and technologyT2 Designing and

developing applicationsT3 Applying procedures,

tools and methodsT4 Integrating systemsT5 Designing technical

architectureT6 Understanding emerging

technologies

Six Nine 10

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Use Gartner’s Checklist of 25 IS Competencies

Share of skills of IS staff (%)

0

10

20

30

4050

60

70

80

90

100

2000 2001 2002 2003 2004

Product and technical skills

Business management skills

IT management skills

The Business“IT Partner”and SourcingGovernance

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The Skills (R)Evolution

Effectiveness-Focused

Efficiency-Focused

Competitive Advantage

Relationship Complexity

80%

15%–17%

3%–5%

Where the service volumes

are now

BusinessValue Enhancement

Utility

Transformation

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Three Types of Service Expectation

Time

Go

als

Key:= Planning/Negotiation and Vendor Evaluation

Utility

Enhancement

= Peak Performance

Co

mp

lexi

ty

= Inflection Points = New/Revised Contract

Stage 1Enhancement

Transformation Stage 2Enhancement

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Partnerships Change Over Time: Know When It’s Time to Change

Transformation

Enhancement

Utility

Service Recipient Service Provider

• Efficiency and continuous improvement• Optimum value at a competitive price• Preferential partner status

• Competitive advantage• Enhanced revenue• Premier or exclusive partner status

• Continuous optimization• Competitive parity or advantage• Preferred partner status

• Predictable, recurring revenue• Predictable profits• Extend relationship

• Brand enhancement • Business expansion and revenue growth• Profits commensurate with value delivered

• Revenue and profit enhancement• Referenceable engagement• Repeatable knowledge• Extend relationship

Establish Mutual Agreement on the Benefits for Each Partner

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Contractual Management Dominates

Relationship Management Dominates

Utility

Relationship Impact

BusinessValue

Key:

= Relationship Management

= Contractual Management

= The Partnership

TheContract

Enhancement

TheContract

Transformation

TheContract

Importance of ‘the Contract’ vs.‘the Relationship’ in Partnering

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BusinessValue-Add

Relationship

Cost Efficiency

Utility

Straightforward

Contract Management

Different Contract Arrangements Stress Different Competencies

Technology

Competencies

Business

Competencies

Behavioral

Competencies

Transformation

Enhancement

Complex

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BusinessValue-Add

Relationship

Cost Efficiency

Utility

Transformation

Straightforward

Contract Management

Enhancement

Different Contract Arrangements Stress Different Competencies

TechnologyCompetencies

BusinessCompetencies

BehavioralCompetencies

Complex

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BusinessValue-Add

Relationship

Cost Efficiency

Utility

ComplexStraightforward

Contract Management

Different Contract Arrangements Stress Different Competencies

TechnologyCompetenciesBusinessCompetencies

BehavioralCompetencies

Transformation

Enhancement

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One or Many ESPs? Look Within

Strong supplier management and integration capacity

Needs top performance from selected suppliers

Cannot attract a single large vendor

Best-of-Breed

Adequate supplier management

Lacks the resources and infrastructures for multisupplier integration

Wants flexibility for supplier selection

GeneralContractor

Understands supplier management

Lacks the resources and infrastructures for multisupplier integration

Wants to select key suppliers

PrimeContractor

Inexperienced with multisupplier management and integration

Protracted procurement process

Can attract a single large provider

Single Source

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Recommendations

• Embrace the idea of a multisourced environment to support business needs, and re-skill IT to effectively manage and optimize external provider relationships.

• The IT services market offers everything but maturity. Risk management is fundamental to every IT sourcing evaluation.

• Employ the sourcing life cycle as the key to successful business operations.

• Master sourcing governance and management to deliver seamless business operations.

Copyright © 2003