The Outsourcing Project

The Outsourcing ProjectA CxO Research Initiative

Published by CxO Research LtdCover Price £199

Achieving

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A CxO Research Initiative

Business

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www.cxoeurope.com

Achieving

throughCompetitive Advantage

Collaborative Partnerships

Achieving



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A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships

contents

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Section 1Strategy

8 The Opportunities, Threats and Challenges Facingthe CFOs of Global OrganisationsDr. Martin Fahy – National University of Ireland

12 The Birds And The Bees: The Evolutionary Future ofThe CIOGary Barnett – Ovum

15 A Guide to Outsourcing ReadinessRebecca Scholl – ACS Europe

18 Aiming High in Financial Services OutsourcingNeil Smith – Risk Management, Deutsche Bank

20 IBM Global Services - Full Service, on DemandOutsourcing CapabilityIBM – PROFILE

23 Finance & Accounting: The Coming Wave OfConsortia BuyingJoe Vales, Gil Parker – Vales Consulting GroupRich Tinervin – Tinervin Advisors

28 Outsourcing with Siemens Business Services - Builton TrustSBS – PROFILE

30 Finding Inspiration in IndiaSteven Ferrari – Prudential

33 Driving Innovation by Leveraging OutsourcingRelationshipsJean-Louis Previdi – Gartner Executive ProgramsCatherine Peyralbe – Gartner Consulting

36 Innovation Sourcing: Increasing Business ValueWithin Outsourcing RelationshipsTrevor Clifton, Joe Benaroya – IBM

40 BPO in Germany: A reality checkKatharina Grimme – Ovum Deutschland

43 Gales of Creative Destruction - or Looking atOutsourcing from a Strategic PerspectiveJuergen Weigand – WHUPeter Kreutter – WHU GRID

46 Taking a Strategic Approach to Sourcing: What ismy Sourcing Strategy?John Buscher – TPI

49 Shaping Deals that Last - Principles of Dynamic OutsourcingDavid Thomas, Simon Knowles – CSC

53 Utilising Outsourcing Practices to Gain In-SourcedSuccessRobert MorganJohn Clements – Morgan Chambers

57 Approaching The End of The Road - Preparing forThe Natural Termination of an Outsourcing ContractGeraldine Fox – Compass

60 For Dynamic, Innovative, Results-DrivenOutsourcing Solutions, Talk to CSCCSC – PROFILE

62 Enabling Document Process Outsourcing in theCorporate Document EnterpriseBrian R. Miller – InfoTrends/CAP Ventures

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NB All illustrations within thispublication can beviewed at a larger scaleat the above website

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Section 2Governance

68 Outsourcing Governance: A Key To Business SuccessTim Cummins – IACCM

72 Turning Client Vision into ResultsATOS ORIGIN – PROFILE

75 Building for the Future Through OutsourcingUlrich Engelhardt – KarstadtQuelle

77 Demand Supply Management in IT OutsourcingPartnerships - Governance in Action!Erik Beulen – Atos Origin

82 An Outsourcing Partnership Should be About MoreThan Just Saving Money!Stephen Calvard – IND

84 Delivering Innovative Outsourcing SolutionsSIMMONS & SIMMONS – PROFILE

87 IT Outsourcing Governance: Implementing Core is CapabilitiesLeslie Willcocks – Warwick UniversityDavid Feeny – Templeton College, Oxford

91 The Implementation of Utility Computing within anOutsourcing RelationshipMichael Symonds – Atos Origin

95 Outsourcing Governance and RegulatoryCompliance - Can they Co-exist?Nick Andrews – EquaTerra Europe

99 Technology-Based ResultsACS – PROFILE

100 Corporate Governance - Outsourcing andOperational Risk in the Financial Services andInsurance SectorPeter Brudenall Jeremy Storer – Simmons & Simmons

103 Sun's Experiences of Outsourcing its EducationalServices to a Global Delivery Partner Stephan Gropp – Sun Micro Systems

106 Outsourcing in Germany - Main Legal andCommercial Issues in Local or Multi-JurisdictionArrangementsDr. Joachim Schrey – Clifford Chance

109 Evolving Outsourcing Through Value Chain AnalysisElizabeth Weir – Pillsbury Winthrop Shaw

Pittman LLP

114 Solution Index

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The Advisory

Panel

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David BarrettHead of IT and Telecoms practicegroup, London, Simmons & Simmons

David joined Simmons & Simmons in 2000 and heads the IT and Telecoms practice group in London. He also heads the firm's global TMTindustry sector group.

David Barrett is a leading figure in the world ofoutsourcing. Besides being recognised as a lawyerwith international experience in outsourcing, he isalso regarded as a 'thought leader' in all mattersto do with outsourcing and the globalisation ofservices - particularly in respect of informationtechnology. David has worked extensively withoffshore outsourcing providers in India and nowChina together with company and governmentbodies outsourcing to international destinations.

David is a member of the World OutsourcingCouncil (the only lawyer to be on that body) and isDeputy Chairman of the International Associationof Outsourcing Professionals. He is also listed as aleading individual in the “Chambers Guide to theLegal Profession”; “Who's Who in the Law” and in“The World's Leading Lawyers”.

David received his legal education in the UKand USA.

Joe BenaroyaGeneral Manager, Strategic Outsourcing, EMEA. IBM

Joe Benaroya was named General Manager,Strategic Outsourcing, EMEA in January 2003 and has total P&L responsibility for the IBM IToutsourcing businesses across EMEA. Joe joinedIBM in 1978. He has had wide experience andresponsibilities, from marketing representative toVice President of Global Sales for the PC Division.Along the way he was one of the pioneers of ISSC,the predecessor to the current IBM Global Servicesbusiness. During his career, he has been basedboth in the United States and in Europe.He rejoined the European division in 2002 as the Executive responsible for all Global Servicesengagements within the Retail, Wholesale,Transportation, Airlines and Consumer PackagedGoods industries. His most recent post before thiscurrent one was General Manager, IBM GlobalServices Distribution Sector in EMEA.

John BuscherPartner, TPI

John Buscher is a Partner at the world's largestglobal sourcing advisory company, TPI. John hasover 24 years of finance and business experienceand he has been instrumental in helping largecorporations achieve their sourcing aims byproviding advice and guidance in setting sourcingstrategy, managing large outsourcing transactionsand ongoing sourcing management activities.John's area of expertise includes the informationtechnology outsourcing (ITO) and business processoutsourcing (BPO) as well as shared servicesstrategies across a wide range of industry sectors.

Before joining TPI, John held various managementpositions at EDS and Perot Systems. In his last role,he worked as a Business Development Manager.He was responsible for needs assessment,financial analysis, financial costing,application/system software evaluation, hardwareevaluation, data centre operations and creativeproblem solving.

Stephen CalvardIT Director, IND

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

He joined the Ministry of Defence in 1970 andworked for 10 years on electronics research anddevelopment at the Royal Aircraft Establishment.In 1980 he worked for 5 years on technical supportto Naval Defence Systems before moving to Londonin 1985, where he was the project manager on arange of major guided weapons systems.

In 1990 he became a Scientific Advisor with theCentral Scientific Staffs in MOD, Whitehall. In 1992he was transferred to the Defence ResearchAgency where he held the post of Director ofEngineering Services.

From 1994 to 1998 he was the MOD's ITDirector in Defence Intelligence in the Old WarOffice, Whitehall.

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

Stephen has one son and one daughter and livesin Guildford, Surrey.

Steven Ferrari Service Development Director,Prudential

Steven has been with Prudential for three years.Recently, as Service Development Director, he isresponsible for the business development of theMumbai offshore centre that now employs over1000 people; outsourced policy administration inthe UK; and Customer Service Account Managementfor Distribution Partners, namely financial advisers,banks and employee benefit consultants.

Previously as Offshoring Director, he wasresponsible for setting up the Mumbai centre withmajor workstreams including company, propertyand IT infrastructure set-up; HR & ChangeManagement; Migration and Business Continuity.

Former employment included three years at AXAUK as Business Development Director for OffshoreService Centre in Bangalore (AXA BusinessServices) fulfilling the customer servicing needs ofAXA companies in the UK, Japan and Australia.

Prior to AXA, Steven spent three and a half yearsat PwC as a senior consultant in the ManagementConsulting Division for Financial Services -Strategic Change, specialising in strategy reviews,cost reduction, process improvement, outsourcingand offshoring.

Stephan GroppDirector, Global Education BusinessPartners, Sun Microsystems

Since October 2004 Stephan Gropp isresponsible for managing the education businesspartner relationships on a global basis for SunMicrosystems. Before that he was the SeniorDirector of Sun Educational Services in EMEAbeing responsible for the entire education businessin that region. Together with his team he led theoutsourcing project of the instructor led training toAccenture in 2003 in his timezone. He joined Sunin 1998 as General Manager for EducationalServices in Germany/Austria. Mr. Gropp has beenin the IT industry for more than 25 years. He hasbeen a Director of Consulting and Training serviceswith Informix in Central and Eastern Europe. Priorto that he was at Amdahl for 15 years where heheld various support positions as Soft andHardware specialist, including 5 years as TechnicalSupport Manager for Central Europe.

Les Mara Head of Business ProcessingOutsourcing EMEA, HP

Les has a 25 year career in the ServicesIndustry, with deep knowledge and expertise inConsulting, Systems Integration and Outsourcing.Over this time Les has worked in most IndustrySectors and with many significant organisationsthroughout Europe on challenging business change& Outsourcing programmes.

For the past 5 years Les has focused his effortson developing the BPO Services market in Europe.

Les has clear views on what is driving the rapidgrowth in demand for BPO and is passionate aboutthe customer service and the delivery of successfulbusiness outcomes.

Brian Miller Associate Director InfoTrends/CAP Ventures

Brian Miller is an Associate Director forInfoTrends/CAP Ventures' European ProductionWorkflow Solutions Consulting Service. With anextensive background in content, processautomation, and high technology markets, Mr.Miller has strong skills in the design and executionof research leading to actionable strategic insight.Prior to his present role at InfoTrends/CAPVentures, Mr. Miller managed a private strategicresearch consultancy. He also directed theTechnology Research Centre at The McKennaGroup, overseeing design and execution ofstrategic primary and secondary market researchfor a broad array of clients through thedevelopment of strategic recommendations. Priorto McKenna, Mr. Miller performed strategic andmarket research related roles at McKinsey &Company's Canadian practice and Razorfish. Heearned a Bachelor of Science Degree inManagement/Marketing from Babson College.

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The Advisory Panel

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Roger Arthur CoxVice President Gartner Research

Roger Cox is a vice president and distinguishedanalyst, in Gartner Research where he specialisesin outsourcing. Previously with Gartner Consulting,he was responsible for Gartner's StrategicSourcing Solutions in EMEA. Prior to joiningGartner in 1998, Mr. Cox worked for IBM GlobalServices EMEA, and has worked in outsourcing,both in North America and across Europe, sincethe early 1990s. He came into the IT industryfollowing a 16-year career as a consultant andproject manager in the construction industry.Mr. Cox holds a bachelor's degree in civil andstructural engineering from the University ofSheffield, is a Chartered Engineer, a member of the Institution of Civil Engineers, and a Member of the Chartered Institute of Marketing.

John DainSenior Vice President GlobalManaged Operations, Atos Origin

John Dain has responsibility for all majorinternational outsourcing and the company'sservice portfolio. He has 30 years experience inthe IT industry and combines a broad technicalknowledge with sound business and managementexperience. John's main focus is to create aworking environment that challenges the technicaland innovative capabilities of all staff, is qualitydriven, and based on sound financial success.

He joined Philips Electronics in 1971 and wasappointed General Manager in 1986. In 1990 hewas appointed Regional Manager Philips C&PAsia/Pacific, and from 1990 to 1997 successfullyestablished companies in Australia, China, HongKong, Malaysia, Singapore and Taiwan. With thecreation of Origin he was responsible for mergingthese companies into the new organisation andfrom 1997 to 1999 was responsible for companyoperations in Brazil.

In 1999 John was appointed Vice Presidentresponsible for worldwide sales and marketing forManaged Services. In 2000 Atos Origin wasformed and in 2001 he was appointed to hispresent position. In 2001/2 he led the team thatsuccessfully won the largest outsourcing contractever completed by a European IT service company.

Ulrich EngelhardtCIO Karstadt Warenhaus AG

Ulrich Engelhardt is Managing Director of theItellium Systems & Services GmbH, responsible forconsultancy and systems integration for the Over-the-Counter Retail business of KarstadtQuelle andalso CIO for Karstadt Warenhaus AG, covering some160 department stores and sports shops.

After studying education and mathematics,Ulrich Engelhardt, in 1987 founded the company'SHE Information Technology AG' in Ludwigshafen.Until 2003 he developed SHE into one of theleading companies in the area of IT - Security,first as managing director and later as chairmanof the board.

From 1987 to 1991, he was also active as alecturer for mathematics and businessadministration at the university of Mannheim inGermany and carried out research at the chair ofbusiness administration and operations research.

Mr. Miguel Ribeiro FerreiraGroup Financial ControllerElectricidade De Portugal, SA

Mr. Miguel Ribeiro Ferreira was appointed headof our planning and control, consolidation,accounting and tax office of EDP Energias dePortugal in August 2003. From August 2001 to July2003 he was head of treasury, consolidation,planning and control, accounting and tax issues ofNovabase Group (a Euronext/Lisbon listedcompany). From April 1993 to July 2001 he wasresponsible for BCP Group's consolidation andfinancial & prudential reporting (a Euronext/Lisbonlisted company). From September 1991 to March1993, he served as an Audit Staff at PriceWaterhouse Audit Department. Mr. Ribeiro Ferreiraholds a management degree from Lisbon's InstitutoSuperior de Gestão and post-graduate degree inadvanced corporate finance from UniversidadeCatólica Portuguesa, Lisbon.

Jean-Luc MolesDirector, IT Infrastructure, EMEAMotorola

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

He started his career with the computermanufacturing and distributing company SperryUnivac. He then joined ITT Data Systems, working inthe area of mainframe computing and data networks.

Jean-Luc joined Motorola in 1986 as NetworkManager for Southern Europe and rose throughthe organisation to become Director, ITInfrastructure Europe Middle-East and Africa,supervising up to 400 employees and contractorswith a $ 70 million budget.

This activity has been outsourced to CSC andJean-Luc leads the Regional EMEA Governancebody in charge of managing the execution of theoutsourcing contract.

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

Robert Morgan Director, Business & BrandDevelopment, Morgan Chambers

Part of the City's 1980s deregulation andliberalisation, Robert worked with variousOutsourcing vendors. As Outsourcing steadilybecame more sophisticated and a genuinelystrategic Client decision, he helped found MorganChambers (1994) the first independent, end-clientcentric, practitioner led Sourcing advice andsupport consultancy. CEO from 1999 - 2004, he isnow responsible for group Business and BrandDevelopment within Europe.

Christian OeckingPresident of Global IT Outsourcing,Siemens Business Services

Christian Oecking is a member of the ExecutiveBoard of Siemens Business Services GmbH & Co.OHG and is responsible for the IT outsourcingbusiness of Siemens Business Services globally.

He is especially interested in the strategicaspects of outsourcing projects and in their effecton the value of the respective partner companies.Christian Oecking is a recognised author andspeaker on the subject of strategic outsourcing.

Before joining Siemens Business Services in1998, Christian Oecking worked as Director ofBusiness Development at EDS DeutschlandGmbH. He is a graduate in civil engineering andstudied mechanical engineering at the Universityof Dortmund.

Rebecca Scholl Director Of Strategy ACS Europe

Rebecca is Director of Market Strategy for ACSin Europe. She is responsible for developing ACS'BPO value proposition in Europe, providing marketintelligence, assisting on overall marketing effortsin Europe, helping form partnerships, identifyingacquisition candidates and developing influentialbusiness relationships in Europe.

Prior to joining ACS in 2004, Rebecca was the principal analyst at Gartner, Inc. covering the BPO market.

During her five years at Gartner, Rebeccapublished numerous reports on BPO MarketTrends, including The Rise of BPO in 2000 (2001),BPO at the Cross-Roads (2002), BPO Validated:Verticalization and Aggregation Accelerate (2003).

Prior to Gartner, Rebecca was a senior consultantat BIPE in France, specialising in the pharmaceuticaland telecommunications industry segments.

Rebecca earned a master of science degree inmanagement from the Community of EuropeanManagement Schools at the Ecole des HautesEtudes Commerciales (HEC) in Paris and a degreein international economics at the Institut d'EtudesPolitiques de Paris. She is fluent in English, French,Spanish, and Russian.

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Thank YouWe would like to thank all those members of theoutsourcing industry worldwide, who have beenso generous with their time, advice andassistance during the production of this book.There are too many to mention by name – butyou know who you are!

Achieving Competitive Advantagethrough Collaborative Partnerships

©CxO Research Limited

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The Advisory

Panel

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Neil SmithChief Operating OfficerRisk Management, Deutsche Bank

Neil Smith is the Chief Operating Officer forDeutsche Bank's Risk Management division. Sincejoining DB in 1996, Neil has led numerousefficiency drives, including outsourcing initiativesfor both low level data process and high valueknowledge-based services. Prior to DB, he spentthree years at Credit Suisse, two as head of itscollateral management group and a year as Headof European Equities within product control. Neiltrained as a chartered accountant with KPMG andupon qualifying spent three years with the Instituteof Chartered Accountants of Scotland as both alecturer and manager of the London trainingcentre. He has a BA in business studies from theRobert Gordon University, Aberdeen.

David ThomasVice President, European BusinessDevelopment, CSC

Mr. Thomas is a vice president within CSC'sEuropean Business Development group, aspecialist unit focusing upon large-scaleoutsourcing transactions and acquisitions.

Mr. Thomas has been in the IT industry for morethan 20 years. He has worked for a number ofglobal companies and has held senior positions insales management, international marketing,business strategy and acquisitions. He has workedwith a financial services focus for over a decade -within capital markets as well as retail finance. Hehas a deep understanding of outsourcing - of bothIT and business processes. Mr. Thomas has a BScin Pure Mathematics and Economics.

Richard TinervinFounder and Managing Partner,Tinervin Advisors

Rich Tinervin has over 30 years experience ininternational and U.S. financial services as anexecutive officer of the following dominant, marketleading companies. Unique to his accomplishmentsand vision has been the ability to manageinstitutional and retail services businesses; havingbeen at the forefront of leveraging the intersectionbetween individual and institutional investors.

CITIGROUP, INC., New York, NYManaging Director, Global Retirement Services

CHARLES SCHWAB & CO., INC., San Francisco, CAExecutive Vice President

FIDELITY INVESTMENTS, Boston, MAExecutive Vice President

NCNB CORPORATION (BANK OF AMERICA),Charlotte, NCExecutive Vice President

THE BANK OF NEW YORK, New York, NYSenior Vice President

Since electing early retirement from Citigroup,Rich formed Tinervin Advisors as an independentconsultancy to asset management organizations toinclude leading the adoption of business processoutsourcing. Primary clients include one of the topthree global investment banks, and nationalrecruiting and strategy firms focused on theretirement and wealth management industries.

Leslie WillcocksProfessor of Information ManagementWarwick University Business School

Leslie has an international reputation for hiswork on e-business, information management,IT evaluation and information systems outsourcing.He is Professor of Information Management and E-business at Warwick Business School, AssociateFellow at Templeton College, Oxford, and holdsseveral visiting professorships. He is co-author of24 books and over 150 refereed papers in journalssuch as Harvard Business Review, SloanManagement Review, California ManagementReview, MIS Quarterly, MISQ Executive. In February2001 he won the PriceWaterhouseCoopers/MichaelCorbett Associates World Outsourcing AchievementAward for his contribution to this field. He is aregular keynote speaker at internationalpractitioner and academic conferences, and hasbeen retained as adviser by major corporationsand several government institutions in the UK, USAand Australia. Books include Global IT Outsourcing(Wiley, 2001) and Intelligent IT Outsourcing(Butterworth, 2004)

Joseph Vales Senior Partner of Vales Consulting Group

Joseph Vales is Senior Partner of ValesConsulting Group, and is best known in thebusiness community for his strategic businessthinking about marketing and sales, hisoutsourcing industry expertise, and his passion tohelp clients generate bottom-line results.

Vales Consulting Group is a strategic advisoryfirm providing marketing and business developmentservices to the top managements of Fortune 500companies, outsourcing service providers, andprofessional organizations for launching newproducts/services and building successfulbusinesses. The consulting firm is widely recognizedfor its extensive experience in the informationtechnology and business process outsourcing fieldsas well as for its leadership in the advancement ofoutsourcing as a management practice.

During his 30-year career, Joe held seniormanagement and consulting positions in strategicplanning, new business development, marketing,and sales with PricewaterhouseCoopers, PriceWaterhouse, Citibank, Shearson Lehman Hutton,Booz Allen & Hamilton, and others. He bringsclients special expertise in business/marketingstrategy, professional services, financialinstitutions, and consumer products.

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

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Section 1

Section 1www.cxoeurope.com

Stratergy

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SECTION 1 Strategy

THE OPPORTUNITIES, THREATS ANDCHALLENGES FACING THE CFOS OFGLOBAL ORGANISATIONS

cost causation, better understanding of thedrivers of net operating cash flows, andunderstanding of relative competitive position.

How can we configure a finance deliverymodel to meet the needs of the diversegroups? Figure 2 presents a Finance ServiceDelivery Framework designed to highlightthe challenges, opportunities and threatsfacing CFO's in delivering value from theFinance function.

Understanding the Customers for Finance Services

The starting point for any Financetransformation project is to understand theclients/markets and customers. Finance hasboth internal 'customers' in the form of thesenior executive team but also the differentbusiness functions that it must collaboratewith on an on going basis such asR&D/Product development, Operations/SCM,HR, Marketing/Brands etc. Increasinglyfinance is called upon to 'partner' with theseexecutives to help them understand;• Which parts of the firm (products, segments,

customers, etc) are creating value• What's driving cash generation• How are we doing relative to the

competition• How do we confirm the business model to

deliver shareholder value

What has gone wrong? Part of the problemlies with the increasing focus on complianceand regulations such as the Sarbanes Oxleyact, IFRS and Basel II. These have placedrenewed emphasis on controls andstewardship with the result that financeprofessionals are finding it difficult to devotetime to value added decision activities, such aschannel and customer profitability analysis.With the renewed pressure for riskmanagement, internal control and assurancefinance professionals are struggling to delivershareholder value.

Delivering FinanceServices - Vision meetsexecution.

All of the research and thought leadershipon the future of the finance function of the lasttwenty years, places better businesspartnering at the top of the wish list. Researchconducted by the author over the last threeyears however, suggests that financeprofessionals have a very incomplete and poorunderstanding of what business executives,shareholders, and other stakeholders expectand want from their Finance Function. Whilestewardship, and control are key priorities forregulators the key issues for businessexecutives centers around better decisionsupport in the form of increased insight into

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

Dr. Martin Fahy senior lecturer in Accounting andInformation SystemsNational University of Ireland

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SECTION 1Strategy


Finance must also deliver transactionprocessing, risk management and assuranceservices/products to these groups.

Finance also has a role in liaising andcollaborating with external 'customers' such asthe providers of capital (Investor relations),regulators, and other stakeholders (employees,society), suppliers, and customers. While someof the services offered to external groups willfocus on simple routine transactions such aspayables, increasingly finance professionalsare expected to collaborate in improvingsupplier relationship management and to helpsupply chain partners to improve their valuecreation potential.

While many finance professionals wouldlike to think that they have a fullunderstanding of their 'customers', researchby CIMA suggests that finance has failed toaddress the wider needs of manystakeholders. In understanding our'customers' we need to;• Carry out objective fact based needs

assessment across all finance customers• Assess the quality of the current service

offerings including benchmarking againstbest in class and through customersatisfaction surveys

• Identify Gaps and improvementopportunities

• Continually monitor and respond to thechanging customer needs.

Once we have a full understanding ofcustomer needs we can begin to designproducts/services that address those needs.

Configuring the service/product mix In the past Finance Professionals have

excelled at providing Transactional andOperational Finance and have in recent yearsused ERP, workflow technologies andstructures such as shared service centers todeliver costs savings in these areas. Theprecise mix of product offerings will depend onthe needs of the 'customers'.

In developing service offerings Financeprofessionals need to put in place mechanismsto monitor the demands for different servicesand adapt to changing market conditions. In thisregard the Finance Function must continuallyevaluate the stream of new techniques, andtools and accounting regulations to ensure theyare meeting client requirements.

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Getting the Right Delivery Channel.The appropriate delivery channel for

getting finance services to customers is one,which has received considerable attention inrecent months. What activities should becarried out by Finance staff in the businessunits and what can realistically be moved toshared services/BPO? Do we need specialistteams in areas such as tax/vat etc or can weoutsource those activities? Can FinanceProfessionals within the business units deliverall the strategic decision support or is theirmerit in setting up special teams within thecorporate centre, or maybe we should retainconsultants? All of these questions areconcerned with what is the most appropriatedelivery channel for our finance services.

However, with the increasing capability ofBPO vendors and the success of many sharedservices in expanding their reach and range interms of functionality, more and more servicesare being delivered from SSC/BPO facilities.Research indicates that • Shared services are a well established part

of the finance architecture• The focus is shifting to optimisation through

single instance, single process andconsolidation in pan regional centres

• The reach and range geographically isextending

• Single high volume low cost location is anaspiration for many firms

• SSC/BPO enjoys a significant penetration inareas such as payables, payroll, fixed assetsand T&E, split for O2C, GL invoicing andother areas

• Analysis and reporting resides largely withthe operating sites and Group/corporate

• The benefits of SSC's are primarily operationaland transactional, impact on businesspartnering is minor and may be negative

• Workflow and e-enabled processes areemerging as standard

Self-service is becoming an increasinglypopular delivery channel for finance services.

Corporate Centre

Consultants

Business Unit

Specialist Team

Strategic Decision Support

Budgeting, ForecastingConsolidation, Reporting

Treasury, Asset managementProject costing, Activity-based mgmt

Performance MeasurementCustomer and Channel profitability

Value Change AnalysisManaging for Value

Transactional and Operational Finance

Purchase to Pay, Order to cash

Fixed Assets, Inventory, Consolidation, Record to report

Reporting, Treasury, Costing, Travel and expenses

Payroll

Risk, Control and Assurance

Risk managementCompliance and SOXRegulatory reporting

Internal AuditInternal Control

Finance Systems Finance Structure Finance Proceses

HumanResources

Manufacturing

Distribution

Sales

Brand &Marketing

Research

ProcurementCapitalMarkets

Bank

SupplierSupplier

Supplier

CustomerCustomer

Customer

Regulators

OtherStakeholders

Business Process Outsourcing

Virtual Self Service

Shared Service Centre

Infrastructure

Products/Services

Delivery Channel

Clients/Market/Customers

Figure 1. The Finance Service Delivery Framework

Tra nsa ctiona l and Ope r ationa l Financ e Strategic De cision Support

Budgeting, ForecastingConsolidation, Reporting

Treasury, Asset managementProject costing, Activity-based

mgmtPerformance Measurement

Customer and Channel profitability

Value Change AnalysisManaging for Value

Risk, Control and As sur anc e

Risk managementCompl iance and

SOXRegulatory reporting

Internal AuditInternal Control

Purchase to Pay,Order to cash

Fixed Assets, Inventory, Consolidation,

Record to reportReporting, Treasury, Costing,

Travel and expensesPayroll

Figure 2. The Finance Service Delivery Framework


StrategySection 1

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Substantial numbers of organisations useself-service billing and account enquiry forclients but increasingly BI/reporting tools aremaking it possible for the self-service modelto be extended to the more analyticalapplication areas.

Getting the Infrastructure Right - Systems,Processes and Structures.

Many firms have spent the last ten yearspreoccupied with finance process redesignand single instance ERP projects. While theprojects have played a role in reducing financecosts they are not an end in themselves. Atpresent IT costs account for almost $14,000 ofFinance FTE costs each year. The evidence to-date suggests that those firms that implementsingle instance ERP, workflow and paymentstechnologies as well as effective reportingtools are more likely to achieve world-classlevels of performance for their organisations.

Threats and TrendsThe Finance function faces a number of

key challenges in the coming decade. Thesecan be summarised as follows.

Business Process Outsourcing and SharedService Centers• While SSC/BPO is a well established part of

finance reaping the benefits requires aproactive programme of benefitsrealisation. In the absence of a BRcontinuous improvement programme thebenefits set out in the original business casewill not be achieved.

• The choice of location is a complex issuerequiring trademarks between labor costs,regulation/risk, tax and infrastructure.While comparative advantage matters suchas culture, distance, time, cost and otherfactors means that one location doesn't suitall organisations.

• Increasingly SSC/BPO projects will beincreasingly 'multi-tower' with firms optingto move a number of shared businessservices to an SSC/BPO framework at thesame time.

• The business case for SSC/BPO isincreasingly around shareholder valuecreation through better working capitalmanagement and optimisation of the assetbase rather than through purely FTE savings.

Technology and Tools• While single instance is increasingly a

prerequisite for reaching best in classfinance many firms seem incapable of the

change programmes needed to makereaching a single instance a reality.

• Workflow technology remains veryrudimentary but overtime, sophisticatedsoftware will dramatically alter many of theSSC/BPO processes and move firms slowlytowards zero touch processes.

• The next wave of investment will focus onleveraging the data assets trapped at theoperational level with the focus onBIU/CPM tools with particular emphasis onsupporting value chain modeling, customerand product profitability analysis andunderstanding cash flow drivers.

• Collaboration will be a key theme inemerging technologies. As global standardprocesses become the norm managers indifferent geographies will use standardisedbusiness process management tools toprocess transactions and carry out analysis.

• Demand for best of breed financeapplications will continue even in the faceof consolidation in the ERP market

People and Place• The growing acceptance of the comparative

advantage enjoyed by low cost locations suchas India, China and Central Europe will leadto a continued migration of finance activitiesto these locations. However, the combinationof culture and the need for the providers ofstrategic decision support to work closelywith business managers, will see a significantamount of non-transactional finance activitystaying on-shore

• The current hub and spoke architectureswith the corporate centre as the focus ofattention, which characterise the financefunction today, will gradually be replacedby a more web based peer-to-peerstructure in finance. Lines of business andmatrix driven structures will see thereporting to CFO's becoming more dottedline and the reporting to SBU directorsbecoming more solid.

• Finance literate MBAs and commercialmanagers will present a serious challengeto the artificial monopoly on financedecision-support which financeprofessionals currently enjoy. Professionalpublic accountant's qualifications willbecome increasingly irrelevant in thedecision support space and will becomecommoditised in the control and assurance'space'.

• Finance activities are likely to becomeincreasingly 'footloose' in the same

manner, as manufacturing has movedacross the globe driven by comparativeadvantage, labor arbitrage and taxadvantages.

• The role of the CFO will increasingly be splitbetween a chief controller and a chieffinance strategist.

Global Single Processes• Process improvement initiatives such as six

sigma, EFQM and TQM will increase thepressure to deploy global single processes.However many firms will lack the changemanagement capability to drive home theimplementation of these.

• Lights out zero touch processing willremain elusive and is more likely to emergefrom the BPO vendor's pursuit of improvedmargins than from explicit strategies byindividual finance professionals.

Customer Service and Quality of Service• Finance professionals will face increased

pressure to embrace service quality andcustomer service driven approaches to thedelivery of finance activities. The drive forshareholder value combined with the growingavailability of outsourcing alternatives and theincreased focus on world-class benchmarkswill force finance professionals to embracethe discipline of the market place.

• Finance professionals will need to developtheir relationship management skills as theyincreasingly find themselves in 'customer'facing roles.

• The narrow focus of traditional SLA's willbe replaced by much broader performancemeasurement of the finance effectiveness,with the focus shifting from efficiency intransaction processing to effectiveness indelivering decision support.

Business Partnering• Finance professionals will face stiff

competition in the market to providebusiness partnering. MBAs, consultants,finance literate marketing managers andtraditional strategists will all offer insightsand analysis capability.

• Those finance professionals that areuncomfortable with change will findirrelevance even more uncomfortable.

Things you can do tomorrow to delivershareholder value from Finance.

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


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keeping the agenda focused on the importantissues and not just those that are interesting.Too many of the finance professionals that Imeet say they haven't got time to deal with theimportant strategic issues. You're paid to dealwith the important issues.

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

In the past too many of the changes thatwe have implemented have seen the previousapproaches remain in the shadows. We needto drop the old when we introduce the new.Organisational learning may be the order ofthe day but unlearning the old ways is the firststep in moving forward.

Key an eye on wider strategic changes thatmay effect your finance transformation

Strategic initiatives such as mergers andacquisitions have derailed many financetransformation projects. Be prepared tochange the plan and embrace newchallenges

Finance needs to become interesting and fun

Increasingly graduate students areattracted to marketing and strategy rolesbecause they perceive them as moreinteresting and fun. The finance function of thefuture will only work if it can attract talentedpeople and that means making the workinteresting and fun.

what that strategy/vision is - CFO's need to have a clearly stated strategy

for finance in terms of the customers/marketsthey will serve, the products they will provideand the channels they will use to provide thoseservices. This vision needs to becommunicated simply and clearly to managersacross the organisation and to finance staff

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

As part of the strategy development weneed to engage with our 'customers'. We needto move out of the finance department and getcloser to our customers, understanding theirneeds and responding to their analysisrequirements.

Make transaction processing a non-eventToo many finance professionals are

fighting a loosing battle to hold on totransaction processing in the differentgeographies. This battle is lost and isirrelevant. Country controllers need toembrace their new role as providers ofstrategic decision-support and get on with it.Automation, BPO and lights out processingwill continue to create the space we need toadd value.

Keep the agenda focused on important,rather than urgent or interesting, issues

John Barbour a strategy consultant andacademic has highlighted the importance of

About the AuthorDr. Martin

Dr. Martin Fahy is a senior lecturer in Accountingand Information Systems at National University ofIreland, Galway. He is a fellow of the Institute ofChartered Accountants in Ireland and holds a Ph.D inBusiness Information Systems from UniversityCollege Cork. He is a recognised thought leader inthe areas of Shared Service/BPO and FinanceTransformation. Organisations that he hasadvised/consulted to include Michelin, Oracle, CODA,HSBC, and Bank of Ireland.

He has written extensively on the areas of SharedServices, ERP systems and emerging issues inFinance. His most recent books include BeyondGovernance (published by Wiley 2005 ) ERP Leveringthe Benefits (a joint venture with CIMA and PWC),Strategic Enterprise Management Systems (alsopublished in US by the AICPA and in Australia) andShared Services an executive briefing(co-authoredwith Andrew Kris and published by FT Pearson).


THE BIRDS AND THE BEES : THEEVOLUTIONARY FUTURE OF THE CIO

argued that IT is now a commodity that is onlycapable of delivering very short-termcompetitive advantage.

But Carr's early thesis missed a crucialpoint. While it is clear that a huge proportionof the IT that we have and use provides nodifferentiation at all, a small proportion of itcan, if properly exploited, provide us with avery significant commercial advantage. Wecan use IT as a differentiator either by applyingit in a better way, or using it more efficiently thanour competitors. The secret lies not in giving upon IT innovation as Carr proposes - it lies infiguring out which IT is a commodity and whichis capable of delivering competitive advantage.

The only intelligent response fortechnology users is to embrace 'Techno-Pragmatism', and not to give up on technologyas a means of obtaining strategic advantage.Instead users need to focus on business

The extinction of CIO-asaurus Rex

The role of CIO is facing extinction as aresult of a sea change in the way we viewtechnology. This change in the environmentrequires this beast to evolve if it is to survive.So what are the changes that will result in theextinction of the CIO? There are two hugedrivers that are pushing the classical CIOtowards terminal decline.

The age of Techno-Determinism, duringwhich the erroneous belief that all innovationdepends on technology held sway, has nowbeen replaced by Techno-Cynicism.Commentators like Nicholas Carr (who wrote

the seminal article 'IT Doesn't Matter' for theHarvard Business Review in 2003) have calledtime on the deeply ingrained but false beliefthat 'Technology = Competitive edge'. In hisarticle, and then his subsequent book, Carr

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

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

Gary BarnettResearch DirectorOvum

This lumbering beast has been dimly aware for yearsthat the key to delivering value lies in establishing much

closer links to the business and in differentiating betweenIT as a commodity and IT as a competitive weapon.

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processes and apply technology to thoseprocesses in a discriminating manneraccording to the level of competitivedifferentiation that they deliver.

The second factor that will lead to theextinction of the CIO is the growing gulfbetween 'the business' and the IT department.This is by no means a new issue. Indeedconcerns about the ability of IT to properlydeliver business requirements (or from theother point of view - concerns about the abilityof the business to properly express itsrequirements) have been with us since theinstant the mainframe was first switched on alittle over 40 years ago. For four decades we'vewatched this gap widen and have discussedthe challenge without actually achieving anyreal success in bridging it. Of course we'vemade countless half-hearted attempts butmuch like the promises we make everyJanuary to go to the gym regularly, earlyenthusiasm quickly fades as we discover thatsolving this problem is going to require a lotmore effort than we are willing to put in.

These challenges however, are too muchfor CIO-asaurus Rex. This lumbering beast hasbeen dimly aware for years that the key todelivering value lies in establishing muchcloser links to the business and indifferentiating between IT as a commodity andIT as a competitive weapon. But it has beenmanifestly unable to revise its technologicalview of the universe.

Enter evolutionOver the next five years the genus Cio-

asaurus Rex is going to be replaced by twonew species; Bees and Birds. Bees will beresponsible for the delivery of core IT and willbe solely measured on the level of service theydeliver and the amount of money they spendto deliver it. Bees will be the unsung heroes ofIT, playing a largely unnoticed role (unlessthings go wrong) in ensuring that theenterprise continues to function. Despite theirvalue and importance, Bees are unlikely tomake it to the boardroom - let alone the bigcorner office with a big brass plaque saying'CEO' on the door.

Birds, on the other hand, will wear suitsnot lab coats. Birds will be responsible forbusiness processes, innovation and changemanagement. They will not be measured interms of Cost, but in terms of Return OnInvestment. Birds will be allowed to spendmoney on innovation, provided it results indefinite business results. Birds will sit on the

board, and will stand as good a chance as anyof getting the top job. Bees will, for the mostpart, report to Birds.

Another crucial thing to know about Birdsis that they don't necessarily need to have atechnical background, indeed many of them won't.

Birds can and will come from commercialor supporting functions within the enterprise.Their talent lies not in understanding theintricacies of technology - but in understandingwhat it is that the business needs to do in orderto differentiate itself and then being able tofigure out, working with the Bee, what thismeans from a technical perspective.

Bees buy technology,Birds buy businessoutcomes

This splitting of the traditional CIO role hasan important impact on the way technologiesand solutions are going to be bought, and howthey should be sold. Bees are not in thebusiness of taking risks, they don't buy'solutions' they buy technology. Bees have tojustify expenditure within a single budgetperiod, and they know the cost of everything.Bees don't want advice on technology, they justwant to buy the technology they've chosen.

When buying technology Bees will beprimarily concerned about cost and risk. Theyneed reassurance that the proposition is goingto save them money without putting their SLA

based performance targets at risk.When dealing with Colleagues, Bees will be

uncomfortable when talking about 'businessstrategy' and 'change'. Bees care passionatelyabout the success of the enterprise they supportbut they do it in very technology-centred terms.At meetings Bees will be anxious to explainwhy technology 'X' is superior to technology 'Y'.Some colleagues may interpret this as anattempt to demonstrate their superiorknowledge and expertise, but in most cases itwill be because the Lizard genuinely caresabout the difference between 'X' and 'Y' - evenif it means little to the business.

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Birds, on the other hand, are mostconcerned with innovation and businessprocess change. Birds don't want to hearabout technology, and they are deeplysceptical about the word 'solution' - what theywant to know is how the business will benefit.Birds make excellent programme managers,they can grasp the real issues associated withbusiness change and care as much for thecultural questions as they do the technical.

The Bird creates a challenge for mosttechnology vendors, the shift from atechnology sale to one focussed on businessoutcomes is a big one. Technology companiesand service providers have long used the term'solution' when they've sought to beef up atechnology sale. But in many cases they'vetried to deliver a business outcome basedmessage simply by throwing some technologyinto a colourful box. When selling to the bird,vendors have to understand precisely what thegoals of the prospect are, and at times they'llhave to do this even when the prospect isn'tcompletely clear about his or her goals.

Every organisations needsboth types

Another way to differentiate between thebee and the bird is to say that bees areconcerned with operating technology, whilebirds are interested in exploiting it. Bees areinterested in 'things' and Birds are interestedin 'outcomes'.

These two perspectives go hand in handand smart organisations will ensure that theyhave both types. Bees will run the systems, beresponsible for maintaining them and forprocuring elements of the system (orcomponents of it) on a simple cost/qualitybasis. They will have job titles like 'Head ofservice delivery' or 'Head of IT operations'.

Birds will be the primary interface betweenthe business and technology, they will have jobtitles like 'Head of Business Process Change'.They will employ Bees to support them from atechnology perspective, and they will spendthe majority of their time embedded within the

Another way to differentiate between the bee and thebird is to say that bees are concerned with operatingtechnology, while birds are interested in exploiting it.Bees are interested in 'things' and Birds are interested

in 'outcomes'.


StrategySection 1


business - thinking about it, and proposingimprovements to it.

Just as both roles are essential they shouldboth be valued equally. The fact that the Beeisn't likely to be a natural CEO should notundervalue the importance of the work he orshe does. The Bee keeps the organisationrunning and should be well rewarded fordoing so.

Successfully exploiting the relationshipbetween the birds and the bees depends onknowing what should be stable, and whatneeds to change

The difference in the focus andresponsibilities of Birds and Bees is vested indifferentiation. Bees look after processes andtechnologies that may be necessary but whichdon't help the organisation to differentiateexcept in terms of how much they cost. Birds,on the other hand, will look after the processesand applications that do help the organisationto differentiate competitively.

If you take the Retail Banking sector as anexample; a huge proportion of the processesthat retail banks need to support arecompletely non-differentiating except in termsof how much they cost. Almost every 'coreactivity' of a retail bank be it chequeprocessing, account management, electronicpayment or tax accounting is non-differentiating in that every bank has to do thesame thing in more or less the same way.Indeed, in many cases they have to do thesethings in the same way because bankingregulations insist that they do so. Banks do notcompete on the basis of the way they processcheques but their profits are affected by theamount of money the bank spends processingthose cheques. Banks compete on the basis ofthe quality and breadth of the products thatthey sell and the way in which they managethe relationships that they have with theircustomers. In this scenario the Bee will betasked with delivering those core processeseither internally or (increasingly) by managingoutsourcing agreements with third parties.Birds on the other hand will be responsible fordelivering the changes in systems and

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

So the first step in establishing 'who doeswhat' is to decide which activities are 'Utility'and which are 'Differentiating'. A key test is toask 'would we ever use this process in ourmarketing?' - Retail banks don't advertise thefact that they're great at processing chequesthey advertise the fact that they have greatcustomer service.

Having established which activities areUtility versus those that are Differentiating therelative responsibilities of the Birds and theBees become clear. Give the Bee control of allof the Utility activities, along with a mandateto stabilise them and lower their cost. Give theBird control over the delivery of differentiatingprocesses along with a mandate that isexpressed in business terms - Wallet share,incremental revenue, profit.

The ability to distinguish between theprocesses that you 'have to have' but whichdon't help you compete versus the processesthat make you different in the market placehas long been seen as a key attribute ofsuccessful businesses. The evolution of therole of CIO takes us a step closer to formalisingthis process and the organisations thatsuccessfully draw a line between the Birds andthe Bees will be the long-term winners.

For existing CIOs and those who aspire toone of the roles that this evolution creates,there is a dilemma; which path should anaspiring CIO choose? For most it isn't actuallya question of choice, some CIOs have anatural affinity with the business while othershave a great handle on technology. To a greatextent natural selection will play a role, Bird-like CIOs will build a team of businessanalysts and bees, while Bee-like CIOs willfind themselves reporting to the COO or headof business process change. The crucial thingfor technically oriented CIOs is that the role ofBee doesn't represent failure, and it might bepreferable to taking on the task of dealingwith the business and driving businesschange.

About the AuthorGary Barnett

Gary Barnett a Research Director, with expertise inon-demand technology, Open Source, IntellectualProperty, Application Development and Middleware.Gary directs Ovum's research into open source, on-demand technology, focussing on the strategic issuessurrounding technology selection, best practice, andstrategy. He has written and contributed to manyovum reports, including;

UK Financial Services Sector: The Market forSoftware and IT Services, Linux:Into the mainstream,Application Servers: Creating the Web-enabledEnterprise and Ovum Evaluates: EnterpriseMiddleware.

Gary has worked on numerous projects for OvumConsulting providing advice to end-user organisationsin the UK, Europe and United States on technologyselection and strategy.

He has advised technology vendors ranging fromthe leading IT companies to start-ups on topics suchas product strategy, competitive analysis andbusiness planning.

Examples include providing advice to:• A technology start-up on business planning and

pricing strategy• Clients in the finance, manufacturing and

government sectors on infrastructure andtechnology strategy

• Vendors on product strategy, competitivedifferentiation and product evaluation.

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

Gary is frequently quoted in the worldwide tradepress and writes columns for several IT relatedpublications. He is a well-known speaker atconferences, topics as varied as 'The future of theCIO', 'IT Doesn't matter?' and Outsourcing.


SECTION 1 – Strategy

A GUIDE TO OUTSOURCING READINESS

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can be grouped in two main categories -environment (macroeconomic factors) andenterprise (microeconomic factors). The setsof characteristics are outlined in table 1.

Environment FactorsBusiness dynamics vary from industry to

industry - some are more regulated thanothers, some are more sensitive to time tomarket, some are facing more competitivepressure than others.

Environment factors are industrycharacteristic - that affect not only your ownorganisation but multiple companies in thesame industry. The recent history of BPO inEurope has shown that it generally takes onelandmark deal per industry to launch a waveof outsourcing in that sector, i.e. one largeBPO contract signed by a 'market setter' thatwill then lead other organisations to follow.

The outsourcing market is generallyindependent of economic cycles, growing ingood times and in bad times. Some of theearliest and largest BPO contracts were signedin 1999, in a high growth economy, whereasmany of the recent contracts were signedsince the recession, so it would be erroneousto think that BPO adoption will disappear if theeconomy and growth pick up. The nature ofthe contracts will change if the economy doespick up - we will see more deals focused oninnovation and technology adoption ratherthan simple cost cutting initiatives. However Iwould consider that economic growth at amacroeconomic level does not influenceoutsourcing adoption in any significant way.

This article examines some of the keyfactors that have an impact on the outsourcingdecision and analyzes the factors that aremost likely to stimulate a positive outsourcingexperience. For users who have been 'told' bytheir top management to 'do a BPO deal', it isuseful to compare your own organisation withothers with similar backgrounds in order toidentify your readiness to outsource. Thisguideline is by no means meant to replace adetailed analysis of your company's sourcingstrategy. It is just a brief checklist fororganisations that want to identify whetheroutsourcing 'makes sense' for them.

The factors affecting outsourcing readiness

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

Rebecca SchollDirector of Market StrategyACS Europe

Environment factors Enterprise factors

Competition SizeDeregulation IT outsourcingGeography GovernanceProvider landscape Shared ServicesBenchmarks Technology Champion

Table 1. Outsourcing Readiness Characteristics

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Typically these landmark deals have an impactbeyond their industry - especially forhorizontal functions such as HumanResources or Finance & Accounting - but theindustry characteristics have a stronginfluence on the readiness to outsource.

CompetitionHistorically, industries that are facing tough

competition on price and technology are bettercandidates for outsourcing than industries thatare less technology intensive and lesscompetitive. For instance, competition in thetelecom industry is forcing companies tooperate a much leaner overhead so they canbe more flexible. The search for flexibility, timeto market and competitiveness often leadsthese industries to outsourcing. On thecontrary, the education sector and the utilitiesindustries have generally not been strongadopters of outsourcing because of the localnature and the fragmentation of their business- although that is changing through theprivatisation of these sectors.

DeregulationDeregulation is another factor that has a

strong impact on the decision to outsource.Industries that are highly regulated with littlenew competition and low opportunity to“virtualise” business practices are usually notstrong adopters of outsourcing. Privatisationand deregulation often lead to new businessmodels and the dis-aggregration of verticalinstitutions. For instance, deregulation in thefinancial services industry is introducing newcompetitors for financial institutions(insurance companies entering the bankingsector and vice versa) - who in turn have toreact quickly with competitive pricing.Deregulation was one of the primary factorsleading to outsourcing in the UK.

GeographyThe country environment and attitude

towards outsourcing has a strong impact on acompany's readiness to outsource. In general,countries with a history of strong laborregulations, powerful unions and a largepublic sector have been less open to outsourcethen countries with flexible labor laws andlimited unionisation. That is why outsourcingis more developed in the UK, the Netherlandsand Spain than it is in France and in Germany.However this picture only describes part of thereality. Nowadays, many organisationsheadquartered in strongly regulated countries

but with operations in multiple countries arelooking for options to outsource in order togain flexibility in their internationaloperations. For instance, large French andGerman manufacturers are outsourcingbusiness administration services for their UK,US or Asia/Pac divisions. Interestingly, US andJapanese corporations with internationaloperations have a tendency to develop pilot-outsourcing projects outside their homecountry first. That is why we are now seeing abig wave of European BPO projects emanatingfrom US companies.

Provider landscapeAn industry's readiness to outsource will

also depend on the maturity of the providerlandscape in the process that is consideredfor outsourcing. Historically, the BPO markethas grown as a supply-driven market, andthere is little outsourcing momentum in anindustry or a process until the providerlandscape is populated with at least three orfour providers. End users like to have achoice, and if they do not see severalproviders active in the market they are warythat the market is perhaps too immature.

Today in the European market the providerlandscape for HR and F&A services is just aboutreaching a maturity phase - and that is leadingmany organisations to look at outsourcing partsor the entirety of their business administrationservices. The growth in interest for F&A and HRoutsourcing has grown significantly over thepast 12 months - corresponding with thegrowth in maturity of outsourcing providers.

BenchmarksCompanies will only have a good

outsourcing contract if they can measure theinput and outcomes of the process. This hasbeen true for IT outsourcing for many years,and is beginning to impact the BPO market aswell. The more a process is measured acrossan industry, the more opportunities there willbe for outsourcing this process. On thecontrary, lack of process benchmarks oftenlead to inadequate outsourcing relationshipsthat rely solely on partial due diligence. Today,industry benchmarks exist for F&A and HRprocesses in Europe - although not with thesame level of detail as for IT or customer care.Over the next year or so, we can expect to seemore availability of detailed processbenchmarks for large European organisations- leading to stronger growth and bettercontracts in BPO.

Enterprise FactorsEven within the same industry,

organisations have very different cultures,business models, governance structures, andso on. In addition to environmental,macroeconomic factors, decision-makers mustexamine the characteristics that are specific totheir organisation to see if they are ready foroutsourcing. These are the Enterprise Factors.

SizeThe BPO market emerged within large

organisations. In order for BPO to befinancially worthwhile in the early days, therehad to be a significant scale to the relationship(scale can be measured in terms of number ofemployees for Human Resources or number oftransactions for F&A). Especially in the contextof offshore outsourcing, the notion of scalebecomes increasingly important. Typically, anoffshore initiative will not provide theappropriate return unless it involves thecreation of several hundred positions in theoffshore country.

However, small and mid-sizedorganisations can benefit from BPO servicesas well - they just need to focus more on thetechnology components of the contract (forinstance, through a business process utility)and less on labor arbitrage. So companies ofall sizes can benefit from BPO - but theemphasis will be different for different sizedorganisations. All organisations need to havea clear idea of the scale of operations they areconsidering to outsource before embarking ona vendor selection.

IT OutsourcingA number of outsourcing providers believe

that there is a direct link between a company'sIT outsourcing experience and its appetite forBPO. As it turns out, this is only partially true.Companies with experience in outsourcing atany level are generally much more open toBPO - this does not have to be through ITO, itcould be simply through real estate, facilitiesor cafeteria services outsourcing.

It is also true that companies with ITOexperience have gained insights into sourcingstrategy, vendor evaluation, contractnegotiations and contract management.However research conducted by Gartner andother research firms show that there is nodirect link between ITO contracts and BPOcontracts, i.e. companies outsourcing ITinfrastructure are no more likely to do a BPOcontract than companies who do not

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outsource their IT infrastructure. In addition,they will not necessarily consider their ITOprovider as a logical provider for BPO.

However, there seems to be a direct linkbetween applications management (asubsection of ITO) and BPO. I.e. companieswho outsource applications management aremore likely to outsource a businessadministration process. This is most likelybecause business applications are thefoundation for business administrationprocesses and there are an increasing numberof BPO contracts that also include applicationsmanagement as part of the deal.

GovernanceAnother factor affecting the readiness to

outsource is the company's level ofcentralisation in their business governance.On average, companies with a strong centralgoverning power are more likely to do a BPOcontract than companies that are highlydecentralised or even federated. Companiesthat are highly decentralised require buy-infrom multiple business units before movingforward and find it challenging to interact witha centralised shared service entity.

BPO sales cycles are already quite long (12to 18 months), especially in Europe wherecountry managers need to provide their inputinto the selection - so if in addition to thecountry and process complexity you addmultiple business unit decision makers, then itis likely that the BPO contract will progressvery slowly. In that instance, companies preferto sign smaller scope BPO contracts and growthe scope of processes over time.

Shared ServicesToday many large European companies

have launched shared services projects forF&A and HR services, consisting incentralising the business administrationfunction in one location serving multiplebusiness units. The location can be a nationallocation (i.e. a French shared service centerserving France) or a regional one (i.e. aSpanish shared service center serving all ofEurope). These projects were initiated in themid 1990s and continue actively to this date.

On average, companies who have createda shared service center are more likely toinvestigate BPO options, not necessarily forthe function that they put in the shared servicecenter originally - but perhaps for anadditional function. Several BPO providers arequite eager to acquire shared service centers

in the European market today. Others willprefer serving their clients from their existingshared service. The European regional sharedservices tend to be located within the EU incountries such as Ireland, Spain, the CzechRepublic, Hungary or Poland. Overall, thequestion of investing in creating a sharedservice center and the question of pursuing aBPO relationship are very closely linked.

TechnologyOutsourcing readiness is also influenced by

a company's approach to technologyinnovation and their current investment intechnology. On the one hand, companies whohave a very strong focus on innovation andwant to control their investment in innovationwill have a tendency to outsource the lesstechnology-intensive components of theirprocess (out-tasking rather than outsourcing).Others, who want access to best-in-classtechnology without investing in largeapplication roll-outs will look at BPO as a wayto gain access to process and capabilitieswithout this upfront investment.

Thus, BPO decisions and applicationinvestment decisions are very closely linked.Overall in Europe, most organisations lookinginto BPO have already made a first stage ofinvestment in ERP applications and arehoping that the BPO contract will help themgain more functionality without additionaltechnology investments. The beauty of BPO isthat companies sign up for business servicelevels, not technical service levels. But thetechnology solution is still a key componentto the delivery of a successful BPO deal andmust be assessed carefully.

ChampionUltimately, a very tactical element to

outsourcing readiness - but a very importantone - is the existence of a champion within theorganisation who believes in outsourcing.With very few exceptions, all the deals thathave been signed in the BPO market up untilnow have had a champion behind them,whether this champion is the CFO, thesourcing manager, the CEO or the VP of HR.Usually the champion is a senior decision-maker, and usually he or she belongs to thefinance organisation. Very often, thechampion joins the organisation withexperience of BPO in his or her previouscompany. The champion is a person who willensure that the organisation will stay focusedon its objectives during the sourcing strategy

and that the deal will make progress, despitethe inevitable delays and changes in scope andrequirements. Most organisations can identifyfairly quickly whether they have a championon board - and this is usually a criterion forsuccess. The danger lies in the fact thatchampions are individuals and thereforesubject to change, so if champions leave theBPO project too early, the contract might be injeopardy. That is why it is recommended tohave a multi-functional sourcing teamevaluating the sourcing strategy and establishthe governance of the contract - not to rely ona single champion.

The above analysis only scratches thesurface of what constitutes a very complexdecision process in BPO. Organisations thathave all the characteristics mentioned in Table1 are more likely than others to enter a solidBPO relationship - but it still will take a lot ofwork and effort to build a successfulrelationship. This work and effort lies on theshoulders of everyone in the organisation andalso on the provider team.

About the Author

Rebecca is Director of Market Strategy for ACS inEurope. She is responsible for developing ACS' BPOvalue proposition in Europe, providing marketintelligence, assisting on overall marketing efforts inEurope, helping form partnerships, identifyingacquisition candidates and developing influentialbusiness relationships in Europe.

Prior to joining ACS in 2004, Rebecca was the principalanalyst at Gartner, Inc. covering the BPO market.

During her five years at Gartner, Rebecca publishednumerous reports on BPO Market Trends, includingThe Rise of BPO in 2000 (2001), BPO at the Cross-Roads (2002), BPO Validated: Verticalization andAggregation Accelerate (2003).

Prior to Gartner, Rebecca was a senior consultant atBIPE in France, specializing in the pharmaceuticaland telecommunications industry segments.

Rebecca earned a master of science degree inmanagement from the Community of EuropeanManagement Schools at the Ecole des Hautes EtudesCommerciales (HEC) in Paris and a degree ininternational economics at the Institut d'EtudesPolitiques de Paris. She is fluent in English, French,Spanish, and Russian.

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AIMING HIGH IN FINANCIAL SERVICESOUTSOURCING

regulatory authorisation is required, thetransparency created by such detaileddocumentation will prove crucial whensubmitting a proposal for approval. You needto be able to demonstrate to the regulatorsthat you've thought of all the potential risksand implications, and that the implementationis to be carried out in a controlled manner.

Another key to the ultimate success of theoutsourcing project is how you structure theteam that manages the transition. It is crucialto have a strong steering committeecomprised of senior management, who haveboth a vested interest in the project's success,and have sufficient time to get fully involved.Their mandate is to set the strategic directionand to sufficiently understand the detail so that

they can assess the ramifications theirdecisions will have on project processes. Toomany projects fail because the steeringcommittee set up to manage the transition

Planning Selecting the right partner for any

outsourcing project is paramount and theamount of effort required increasesexponentially the further up the value chainyou go. Vendor partners are in the business ofselling, and in some cases there is a tendencyto oversell, thus verifying all the facts isessential - and this is even more importantwhen you are entering uncharted territory.Selection of a vendor should be based on avariety of criteria - the cheapest not alwaysbeing the best or most viable - and the moreinsight that you can gain into their ability todeliver, as opposed to their promise to deliver,at this vital stage the better. How do you dothis? Run pilots, ask for samples, talk toexisting clients, and above all, invest time. Youcan't afford to rush the due diligence andvendor selection phase.

The tasks and processes to be outsourcedmust de documented and understood in detail.You cannot outsource something that youdon't fully understand nor will you be able topass that knowledge to a third party withoutdetailed, understandable documentation. Itmay be painful to produce, but there can be noshortcuts otherwise the project will fail. Anadditional benefit of this work is that if

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

Neil SmithChief Operating OfficerRisk Management, Deutsche Bank

You can't afford to rushthe due diligence and

vendor selection phase.

StrategySECTION 1

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meets once a quarter to ratify the project planand make a few high level decisions. This levelof involvement is insufficient, but it is equallyimportant that the steering committee shouldnot attempt to micro-manage the outsourcing,as this needs to be done by another criticalcomponent, the project manager. The mostimportant thing about the Project Manager roleis not that they have had prior experience ofmoving activities offshore, but that they haveexpertise of the function being outsourced at asenior level. Junior staff are also invaluable inthe project team to provide a grass rootsperspective of change implications.

Communication plays a big role in anyoutsourcing project from getting yourobjectives across to both the vendor and staff,to ensuring that both parties are workingtogether effectively. Internally, you mustensure that management's vision for theproject is communicated as widely and asclearly as possible. Outsourcing will involveredundancies and therefore is a difficultprocess both for the staff that remains on thepayroll and for those that will lose their jobs. Itis critical to the long-term success of theproject that you motivate the retained staff,which will be part of your company's long-term future. This can only be done by ensuringbuy-in, by being upfront about the drivers andbenefits that will accrue from successfuldelivery of the outsourcing project. Likewiseon the vendor side, you need to sell thebroader objectives to senior management whoneed to communicate this down to the lowestlevels and ensure they are committed not justto a quick profit but the long-term relationshipbetween the two organisations.

One way of ensuring that vendors arecommitted is to get them to invest - the morethey've got at stake the greater the loyalty tothe project's success. This investment couldcome in many forms, such as new technologyor free service for an initial period. An affinitybetween the vendor and client can assist increating a one-team culture and can beestablished by involving the vendor incommunications and events, as well asbranding the vendor offices to create acollegial working environment that feels likeeveryone is on the same payroll and henceshare a common goal.

IntegrationIntegrating the vendor 'input' into your

day-to-day business is perhaps the mostprecarious stage of any outsourcing project

and a fully operational pilot program isessential, running in parallel with existingonshore workflow. By the commencement ofthe pilot phase, the vendor recruits shouldalready have gone through an intensivetraining program, led by your experts, as partof the knowledge transfer process. Trainingshould also encompass an appreciation onboth sides that there are cultural and workingdifferences, which may need to be overcomeas part of the relationship. These issues shouldbe ironed out in the pilot stage.

Creation of an onshore service team toprovide the client interface and a qualityassurance and review function is key. This teamis imperative to the success of the outsourcingand should be seen as a long-term constituentof the process, not as a short-term intermediarywhile the vendor staff get up to speed. Thisteam also provides security and control for yourknowledge base, so that all of your expertise ina particular area won't walk out of the door ifthe vendor relationship is unsuccessful.

Following a successful pilot, it isimperative that you move quickly to effect theoutsourcing. Critically this involves ensuringthe designated onshore heads are terminatedor redeployed. This may sound obvious, but inpractice staff reductions and cost savingsidentified in the conceptual phase as part ofthe initial approval are not always delivered tothe full extent. Therefore make sure you havedetailed headcount and cost reduction plandocuments prepared, and review these toensure all the projected cuts have been madeand all savings have been realised.

In addition to cost savings you must ensurethat the output from the vendor meets yourproductivity requirements by ensuring theService Level Agreements are properly framed.A clearly defined model is essential to ensurethe project is sustainable over the long termand so that there is clear ownership of thetasks involved. There are several models thatcan be used, and much will be dependent onyour particular venture. Beware of unit pricing;on paper, this would seem to provide anincentive for productivity, but there is a dangerthat companies are content to have a steadyrevenue stream and as long as the cashcontinues to flow in, do not see any reason toraise performance.

Don't be tempted to leave theseagreements and contracts to the lawyers. Afterthe considerable effort that has been put intogetting to this stage you need to followthrough with the deal and not relinquish

control to another department within yourcompany to close the agreement. There is anatural tendency on both sides to drive a hardbargain, but unless the deal provides a win-win solution for both parties the relationshipwill have no long-term future. Get a thoroughunderstanding of what you're signing up to,don't leave any room for misunderstandings ormisrepresentations, and try to build a safetynet into the deal in case things don't go asplanned. For example, by including a clausethat allows you to hire a percentage of thevendor's staff working on the outsourcingproject. Such a clause would provide both anincentive for the vendor's staff and a trainingground from which you can recruit strongperformers, helping you to get the best out theoutsourcing partnership. Equally, if there aregood staff that is being badly managed, itaffords you the opportunity to step in and takeaction, either by hiring them directly or bymoving them to an alternative vendor.

Long termOnce you have executed the plan and

completed the integration, the benefits ofoutsourcing should become increasinglyevident. But this should not be a signal toeither your staff or the vendor to relax.Maximising the partnership that you have builtrequires a continual investment of time.Maintaining existing relationships requireseffort and as new staff are recruited by thevendor, as a result of natural attrition, newbonds need to be formed.

It is also important that the targets youinitially set don't become set in stone. Targetsneed to be revisited and reviewed on a regularbasis to see if productivity can be improvedand cost savings increased.

In conclusion, there are some golden rulesto follow in achieving successful outsourcingof knowledge-based services. Firstly, don'tunderestimate the value of preparation,documentation and communication. Secondly,achieving the required return is heavilydependent on your level of investment interms of time and money. Obviously, costsavings will always form part of anyoutsourcing plan, but don't let this be the onlyfactor in moving business offshore. Finally,continue to look at all available opportunitiesand don't be afraid to push the boundaries ofoutsourcing to gain a competitive advantage.

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Outsourcing has long since evolved from apure cost reduction focus towards one ofstrategic relationships helping businessesachieve a wide range of goals - driving greatersystems and business process flexibility,optimizing IT and enabling businesstransformation. Clients can focus on their corebusiness and rely on an outsourcing partner toleverage economies of scale, exploit newtechnologies and source the wide range ofnecessary skills.

IBM is fully able to meet these evolvingneeds and can provide end-to-end outsourcingservices for companies across industries andaround the world, regardless of the size of abusiness or its hardware/softwareenvironment. IBM outsourcing capabilitiesinclude business transformation outsourcing,application management services, e-businessHosting services and strategic outsourcing(covering datacenter outsourcing, managedstorage services, network outsourcingservices, desktop and helpdesk services).These services can be tailored to industry andcompany-specific concerns to help reducecosts rapidly and add value over the long term.

Success in outsourcing requires a focusfrom both parties on relationship developmentunderpinned by a supplier capable of servicedelivery excellence. Furthermore, suchrelationships prosper best when underpinnedby flexibility and joint investment intechnological and business innovation. IBM'soutsourcing services described below areguided by these principles and draw upon thecompany's technological expertise andbusiness insight.

SOLUTION PROVIDER

Business transformationoutsourcing

Business Transformation Outsourcing(BTO) delivers improved business resultsthrough the continuous strategic change andoperation of business processes, applicationsand infrastructure with results measuredagainst business outcomes. Through BTO,enterprises can leverage the expertise andscale of a strategic partner by handing overmanagement of non-core processes to thispartner and concentrating on their corebusiness. IBM BTO services cover Finance andAdministration, Human Resources,Procurement and Customer RelationshipManagement (CRM) as well as a variety ofindustry-specific processes. Within theseareas, IBM BTO solutions consider andaccount for business and IT design, processand integration challenges. IBM BusinessTransformation Outsourcing provides a

IBM Global Services provides comprehensive IT services integrated with business insight to reducecosts, improve productivity and assert competitiveadvantage.

Sam Palmisano – Chief Executive Officer

John Joyce – Senior Vice President and GroupExecutive, Global Services

Joe Benaroya – General Manager, Strategic Outsourcing EMEA

International Business Machines CorporationHeadquarters:One New Orchard Road, Armonk, NY 10504, Westchester County,United States, Tel +1 914-499-1900European Headquarters: IBM EMEA HQ, Tour Descartes,2 av. Gambetta, 92066 Paris La Défense Cedex, France,Tel +33 1 49 05 70 00Business Contact:Trevor Clifton – EMEA Marketing Manager, Strategic OutsourcingE-mail: [email protected] Tel: +44 (0)1256 341174

www.ibm.com/services

IBM Global Services - full service, on demand outsourcing capability

www.cxoeurope.com20

IBM Global Services is focused on whatmatters most - working with you to provide theright business and technology services thatdeliver real business outcomes. We harness ourinsight into your industry, technology leadershipand hands-on experience to deliver services thathelp increase the growth, efficiency and ongoingflexibility of your business - making it easier toanticipate and respond to your market andimprove your ability to serve your customers.Your success is our success.

strategic roadmap for change, globalbenchmarking and best practice-based changemanagement, supported by IBM industry,process and IT expertise, as well as insightsgained from our own internal on demandbusiness transformation.

IBM Business Transformation Outsourcingoffers companies a wide array of advantagesthat will help them improve their businessperformance: Through BTO, companies will:• Reduce costs• Increase organizational agility• Improve speed to market• Strengthen their intellectual capital• Improve their competitive position• Benefit from disciplined, best practice-

based processes• Improve risk management

Application managementservices

Today, daily operations alone compelcompanies to continually upgrade and add totheir application portfolios - a dauntingproposition in terms of cost and managementrequirements. Indeed, attempting to respondfully to changing market trends and customerdemands at an application level canoverwhelm in-house IT organizations andquickly consume budgets. IBM ApplicationManagement Services (AMS) offers a flexibleset of services that can help companies deployand manage applications according to definedservice levels and for a predictable cost,through proven governance, skills, processesand technologies. In this way, IBM AMS helps

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SOLUTION PROVIDER

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Strategic outsourcingIBM Strategic Outsourcing Services cover

datacentre operations, desktop services,networks, storage etc and, if necessary,operate in concert with the other IBMoutsourcing services. IBM StrategicOutsourcing consultants work closely withcustomer executives to improve a company'soverall competitive advantage by evaluatingbusiness objectives and identifying specificprocesses and operations to outsource. IBMStrategic Outsourcing services can helpbusinesses realize significant cost reductionsand, at the same time, accelerate speed-to-market, forge stronger links with partners,suppliers and customers, and achieve apotentially higher return on investment. Plus,strategic outsourcing can provide importantflexibility and adaptability - critical buildingblocks for on demand initiatives and businesstransformation.

IBM has introduced innovative on demandcapabilities to its strategic outsourcingofferings. To deliver true on demandcapabilities, IBM Strategic Outsourcingleverages the IBM Universal ManagementInfrastructure (UMI), a proven environment foroutsourcing comprising hardware, software,architecture and best practices. Based on openstandards, UMI is designed to help build andmanage on demand computing environments- offering reliable and automated IToperations… improved capacity utilization…lower infrastructure and labour costs… andhigher service levels.

Strategic outsourcing on demand capabilitiesare tailored to cases in which IT demands - on

companies focus IT spending on implementingbusiness strategies, rather than managing andmaintaining applications.

To mitigate engagement and deploymentrisks, IBM can help companies plan,implement and manage a customizedapplication management solution and, inturn, provide proven project managementtechniques and systems integration expertise.IBM AMS can manage a single application, asubset of process-linked applications or theentire portfolio, as business needs dictate.Regardless of the scope of the engagement,IBM AMS offers the benefits of virtuallyunparalleled global reach in leveragingstrategic relationships with industry-leadingapplication vendors. Flexible service optionsand contracting methods make AMSsolutions highly cost-effective over the shortand long-terms.

e-business Hostingservices

IBM e-business Hosting offersorganizations help in designing, deploying andmanaging their e-business strategies andmission-critical business processes throughapplication hosting, facilities hosting andmanaged hosting services. Through e-businessHosting, companies access and leverage aleading-edge e-business infrastructure andbusiness applications as Web-based services -and enjoy the economies of variable pricingmodels. This flexibility is especially useful forbusinesses that have highly dynamic capacityand capability needs. With e-business Hostingservices, businesses can purchase ITcapabilities piece by piece, on an as-neededbasis and pay accordingly. In this way, upfrontinvestments are reduced. Plus, IBMinfrastructural standardization supportssimplified, rapid deployment delivering addedcost savings and supported scalability.

Our success in helping more than 5,000clients implement their e-business strategies isborne out in a state-of-the-art global networkof IBM hosting centres. These facilities providerapid deployment of hosted solutions, fortifiedby industry-leading security and continuitysupport… multi platform support… reliable

high-bandwidth Internet access andbandwidth capacity on demand… no singlepoint of network failure… and around-the-clock monitoring and reporting. IBM providessuperior world-wide customer support andhas skilled technicians onsite, 24 hours a day.IBM e-business Hosting clients have access toa customized WebSphere portal, whichconsolidates critical business functions,performance data and multi-vendormonitoring and reporting services.

With IBM's help, companies can improvespeed to market by relying on IBM's expertisein designing, building and running ITenvironments… reducing up-front costs bypaying for infrastructure and management asa service… mitigating risk in a climate of rapidtechnological change… and enjoyingeconomies of scale in infrastructure, peopleand technologies.

On DemandIn today's highly competitive environment,

forward-looking organizations are evolvingtowards a business model that is:• Responsive: Capable of sensing change and

responding dynamically to unpredictablefluctuations in supply or demand, marketturns, emerging needs or unexpectedcompetitive moves

• Variable: Able to adapt cost structures andbusiness processes in order to reduce risk,drive performance and achieve higher levelsof productivity, capital efficiency andfinancial predictability

• Focused: Committed to concentrating oncore competencies and assets thatdifferentiate the organization

• Resilient: Leveraging systems andprocesses that are robust, scalable,security-rich and available

Together, these characteristics comprise aconcept IBM calls On Demand. In technologyterms, this means that systems and solutionsmust be integrated, automated, virtualized andopen - ready and able to respond to a variety ofevents in realtime. IBM Global Services can offerclients just that and, in turn, help support a

company's successful transformation to the ondemand business model.

IBM has incorporated on demandcapabilities into its outsourcing offerings: a newand flexible pricing model designed to transformstatic IT overhead into a 'variable' expensematched to business needs. Companies canaccess and leverage infrastructure and servicecapacity as needed, so that the e-businessenvironment is continually up-and-running,despite fluctuations in demand.

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application assets or storage capacity or serverperformance - vary by season, month, day oreven hour. While traditional outsourcingengagements allow for capacity fluctuations on astable curve, adding on demand capabilitiesfacilitates adjusting capacity to both predictableand unexpected demands - dynamically.

With these capabilities, strategicoutsourcing can offer businesses an additionaland unprecedented ability to reduce costs bymatching IT pricing to demand. The figureillustrates schematically the efficienciesprovided by an on demand versusconventional model.

IBM on demand capabilities withinStrategic Outsourcing can be tailored to acompany's business and IT requirements.More specifically, companies can choose fromseveral options:• The IBM Flexible Demand Option provides

IBM-managed services based onstandardized infrastructures in IBMfacilities. Multiple clients can share theenvironment in order to capture significantcost savings. At the same time, privacy andintegrity are maintained through security-rich partitioning and other techniques.Services include automated, usage-basedand variably priced provisioning of server,storage and network resources… balancedworkloads… porting and testing… andpowerful management and reportingcapabilities.

• The IBM Flexible Support Option providesseveral alternatives for clients wishing toretain more control over their ITenvironment. For example:• IBM can help support a company's IT

infrastructure up to and through theoperating system layer. In this scenario,businesses retain IT ownership, as well asbusiness process and applicationoversight; it is the infrastructuremanagement that is outsourced.

• Alternatively, IBM can provide anenvironment dedicated to a single client.Services and capabilities closely resemblethose provided with the Flexible DemandOption, but in this case no infrastructuralresources are shared with other clients.

Either way, the IBM Flexible SupportOption helps enable companies to pool andoptimize resources across business unitswhile harnessing the efficiencies of rapid andresponsive scaling.

When properly deployed and leveraged,adding on demand capabilities to strategicoutsourcing can result in lower costs, greaterresiliency, rapid up-and-down scalability, fasterdeployment and speedier time to market. Morespecifically, companies using strategicoutsourcing on demand can benefit from:• Variable, usage-based costs• Ability to support shorter product lifecycles• Proactive risk management

• An increase in privacy, security andcontinuity

• An open, highly integrated IT environment• Self-healing, self-managing systems• User-adaptive technology

Leadership

Across industry lines, informationtechnology has become a fundamental driverof business transformation and forward-looking on demand initiatives. Likewise,outsourcing tools and offerings are on anevolutionary, increasingly strategic andspecific path. IBM remains at the vanguard ofassociated thought leadership and capabilitiesdevelopment, with a full range of outsourcingofferings applicable to enterprises everywhere,in virtually every industry. Our tools andservices can be applied alone or in concert inanswer to your company's most pressingbusiness directives. Plus, all IBM outsourcingengagements are fortified by our:

• Global sourcing• On Demand Business leadership• Business, industry and IT consulting• Strategic partnerships with leading service

providers and product providers• Flexible financing options from IBM Global

Financing• Virtually unmatched capabilities, skills and

expertise.

© Copyright IBM Corporation 2005, All RightsReserved

IBM, the IBM logo, the e-business logo, e-business ondemand, e-business Hosting and WebSphere aretrademarks or registered trademarks of InternationalBusiness Machines Corporation in the United States,other countries, or both.

Other company, product and service names may betrademarks or service marks of others.

References in the publication to IBM products orservices do not imply that IBM intends to make themavailable in all countries in which IBM operates.

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SOLUTION PROVIDER

SOLUTION PROVIDER – www.ibm.com/services

www.ibm.com/services

Schematic representation of efficiencies provided by an on demand usage-based modelversus a conventional approach.

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FINANCE & ACCOUNTING: THE COMINGWAVE OF CONSORTIA BUYING

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based on original research that we haveconducted on global outsourcing trends thatare reshaping the business and managementworld. The research findings of these articlesare summarized below.

Business Process Outsourcing Trends BPO Consortia. The first article, entitled

'Business Process Outsourcing: The ComingWave of Consortia Buying,' was based on ourresearch during the first half of 2004. The articletraces the evolution of consortia buying from the1950s when member-based buying groups andcooperatives were organised to obtain volumediscounts on the price of goods and servicespurchased - to the emergence of corporateshared services centres in the 1980s which are aform of consortia buying within a companywhere business units and users draw on centreresources - to the rapid growth of businessprocess outsourcing in the 1990s and mega-dealcontracts each worth billions of dollars.

Given this evolution, we then examined anumber of industry consortia, joint ventures,and outsourcing contracts in North Americaand Europe, including a financial servicestechnology consortia, securities/brokerageconsortia, banking joint venture, electronicfunds transfer network, insurance processingassociation, airline consortia, and electricutilities outsourcing. These programmesillustrate the various ways that corporatebuyers and service providers are comingtogether to develop innovative businessmodels and technical solutions that willreshape the economics and business practicesof entire industries.

INTRODUCTIONFinance & Accounting (F&A) outsourcing

will grow much faster over the next five yearsthan the current predictions indicate, as agreater number of Global 1000 corporationsoutsource more of their F&A processes to theleading service providers that can deliver 15%to 20% cost savings as well as make significantprocess and service level improvements. Wesee accelerated F&A outsourcing growth basedon our strategic advisory services and salesproposal work for service providers that arebidding on global mega-contracts each valuedin the hundreds of millions, or even billions, ofdollars. The number of large, high-value F&Acontract awards continues to increase year overyear as companies outsource more enterprise-wide processes, and even entire shared servicescentres, to gain competitive advantage.

Moreover, the consortia buying of F&Aoutsourcing services is about to explodeworldwide, as many of these multinationalsteam up with industry rivals to form buyingconsortia with the combined purchasing powerto negotiate cost savings of as much as 30% to40% annually. These savings are made possibleby the greater economies of scale, processingefficiencies, standardisation, and advancedtechnologies of today's on-demand computingand business process utilities that can handlehigh-volume F&A transaction processing atextremely low unit costs while also meetinghigh-quality performance and regulatoryrequirements.

This is the third article on the consortiabuying of outsourcing services in this CxOResearch business transformation series,

Joe Vales Co-founder, Reference StandardsBoard and Senior Partner, ValesConsulting Group

Rich Tinervin Founder and Managing Partner ofTinervin Advisors

Gil Parker Director, Vales Consulting Group

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StrategySECTION 1


The key success factor for consortia buying isthe basic value proposition: that is, each of thebuyers must realise significant and measurableeconomic savings and other strategic benefitsfrom the consortia. Buyers must share commonoutsourcing objectives and goals, and agreecompletely on such critical matters asorganisation, governance, ownership, profitsharing, and contracting policies andprocedures. Buyers must be willing to contributetheir proprietary business, industry, and technicalexpertise to ensure the success of the consortia.Also, buyers will have to give up some legacysystems in favor of using standardised processesand technology platforms to achieve economiesof scale and savings.

Vertical Industry Trends Asset Management to Lead. As an

extension of the first BPO article, we conductedfurther research in the second half of 2004, toidentify which industries have the greatestpotential for both business process outsourcingand consortia buying. Among the dozen majorindustries we examined, includingmanufacturing, high-technology, energy,retailing, healthcare, telecom, and utilities, weconclude that the asset management industrywith trillions of dollars invested is ready formuch greater outsourcing activity andconsortia buying than other industries.

In our second article “Asset Management:The Coming Wave of Consortia Buying,” wepresent our findings and forecasts foroutsourcing and consortia buying for each of thefollowing types of asset managers: investmentcompanies, global bank custody, insurancecompanies, employee benefit plans, wealthmanagement, and alternative investments.

Asset management firms are in fiercecompetition with one another to attractinstitutional and retail customer accounts - andmany are still recovering from the stock marketcrash of 2000-2002 that wiped out over seventrillion dollars of market value. Large and smallfirms alike are finding that the costs of managingtheir operations and service delivery are risingmuch faster than their revenue base, with profitmargins steadily declining. These firms faceserious challenges to their traditional businessmodels, and will need to make organisationaland operational changes if they are to survive asviable players and achieve their financial goals.Many firms that we work with are now exploringnew kinds of outsourcing and consortia buyingarrangements that will reduce their overheadsand contribute to bottom-line growth.

Horizontal Process Trends Finance & Accounting to Lead. As

another extension of the first BPO article, weconducted further research in the first half of2005, to identify which business processeshave the greatest potential for bothoutsourcing and consortia buying. Weexamined finance/accounting, humanresources, procurement, supply chainmanagement, customer relationshipmanagement, and corporate real estate - all ofwhich processes are being outsourcedworldwide today.

We conclude that F&A outsourcing lendsitself best to consortia buying because itinvolves high-volume transaction processingthat can be standardised on common platformsand companies will readily come together totake advantage of today's new computing andbusiness process utilities to achieve muchgreater savings than they could outsourcing ontheir own. The other business processes allinvolve more labour content, customisedservices, specialised activities, and peopleinteraction where the potential for consortiasavings would be limited.

We now review the early stages of F&Aconsortia buying and profile several largecontracts, outline the principal drivers ofF&A consortia buying, and make some boldpredictions about the future of F&Aconsortia buying.

F&A CONSORTIA BUYING -EARLY STAGES

During the 1990s, several hundred US andEuropean multinationals established F&Ashared services centres for the first time, in awave of corporate cost-cutting and re-engineering for global efficiency. DowChemical, for example, consolidated 400

separate accounting centres around the worldinto just 4 regional centres with 50% lowercosts. F&A shared services centres are a goodexample of internal consortia buying wherebusiness units and regions draw on theresources of the centres for economies ofscale, processing efficiencies, and reducedcosts, the very same reasons that driveexternal consortia buying. F&A sharedservices centres are ripe for outsourcing: afew have been outsourced in their entirety;some have been acquired by outsourcingservice providers; and the majority inoperation today actively outsource andoffshore certain F&A processes where itmakes good business sense to do so.

The F&A outsourcing programmes profiledbelow illustrate the various ways that buyersand service providers are coming togetherthroughout the world - from multi-clientshared services centres to multi-buyerconsortia contracts to industry-wide networksand solutions. These are but the first steps ofthe coming wave of consortia buying whichwill inevitably evolve into new kinds of buyer-supplier relationships and F&A outsourcingcontracts in the future.

Multi-Client Shared Services Centres• F&A for UK Energy. Accenture (then

Andersen Consulting) pioneered F&Aoutsourcing for BP (British Petroleum) byestablishing its multi-client energyoutsourcing centre in Aberdeen, Scotlandin 1991. Since then, the centre has grown to450 professionals in 2005 serving BP andother North Sea oil/gas companiesincluding Britannia Operator Ltd, ConocoUK, Lasmo, Talisman Energy, andTotalFinaElf Exploration.

• F&A for North American Energy. IBMGlobal Services manages the world'slargest F&A outsourcing contract for BP inNorth America, a $1.5 billion, 10-yearcontract which it acquired fromPricewaterhouseCoopers in 2002 when theaccounting firm sold its BPO business forauditor independence reasons. IBMmanages 1,200 former BP employees at itsservices centres in Tulsa, Houston, andChicago; 350 employees in Calgary, Alberta,Canada; and 200 employees in Rotterdam,Netherlands which supports F&Aoperations throughout Europe. In 2004, IBMexpanded its BP centres to accommodatetwo new F&A outsourcing contracts withTulsa-based Williams Companies, a natural

During the 1990s,several hundred US andEuropean multinationalsestablished F&A sharedservices centres for thefirst time, in a wave of

corporate cost-cutting andre-engineering for global

efficiency.


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gas producer, and Houston-basedMarathon Oil, an upstream producer ofcrude oil and natural gas.

Multi-Buyer Consortia Contracts • F&A for UK Banking. The UK's leading

retail banks Barclays and Lloyds TSBformed a joint venture with Unisys in 2000,with HSBC joining the consortia in 2001.Intelligent Processing Solutions Ltd (IPSL) isa majority-owned (51%) Unisys subsidiarywith minority interests (49%) held by thethree original member banks. The IPSLconsortia manages check clearing andremittance processing for the three banks,handling over 70% of UK check volume, andproviding cost savings through facilitiesconsolidation, economies of scale,processing efficiencies, and advancedtechnologies. IPSL also serves other banksand financial institutions as customers,including Halifax Bank of Scotland,American Express, GE Capital, and others.

• F&A for UK Insurance. Lloyds of Londonand the International UnderwritingAssociation (IUA) of 200 membercompanies signed a £400 million, multi-year consortia outsourcing contract in 2000with Xchanging to provide a unified andcentralised insurance processing andsettlement service. The three partiesformed an operating company calledXchanging Ins-Sure Services (XIS), which is50% owned by Xchanging, 25% by Lloyds,and 25% by the IUA. With 500 employees,the company handles over 8 millionelectronic transactions and 50,000insurance claims a year; it settles over £50billion of insurance premiums/claimsannually between over 200 companies in aglobal B2B customer network.

• F&A for Canadian Banks. The Bank ofMontreal, Royal Bank of Canada, andToronto Dominion Bank formed a co-sourcing venture called Symcor Inc. in1996. Based in Toronto, this consortia has4,000 employees in six cities who performcheck clearing and document processingfor the three shareholder banks. Also, IntriaItems is a joint venture between theCanadian Imperial Bank of Commerce(CIBC) and US-based Fiserv to providecheck and lockbox processing for CIBC anda new client, National Bank of Canada, wonin 2004.

• F&A for Australian Banks. Three ofAustralia's largest banks, Commonwealth

Bank of Australia, National Australia Bank,and Westpac Banking Corp., formed aconsortia called Vipro Pty Ltd in 2005which signed a $460 million, 12-yearoutsourcing agreement with Fiserv toprovide check processing and imagearchive services. Fiserv is reorganising andconsolidating the banks' existing F&Aprocessing facilities into a businessprocess utility with common operatingcentres and standardised technologyplatforms in each Australian state.

WHAT IS DRIVING F&ACONSORTIA BUYING?

The evolution of buying groups andcooperatives, shared services centres, andbusiness process outsourcing has givencompanies the lower cost structures they enjoytoday. But our research indicates that a new setof economic, technology, and market forceswill combine to drive F&A consortia buying toeven greater savings in the coming years.Major forces at work: • Globalisation Impact. The relentless

globalisation of industries and markets,together with the commoditisation of somany products and services, are forcingcompanies to find new ways to grow theirrevenues and profits while also reducingtheir cost structures. High-cost industrialcountries are competing more than everwith low-cost developing countries; and inevery industry, high-cost companies areunder attack by low-cost competitors.Companies need to reduce their fixed costs,capital investments, and operatingexpenses - and one sure way to lighten upon assets is to outsource non-core businessprocesses to external service providers.Another way is to form consortia of like-minded buyers to leverage their combinedpurchasing power to negotiate even greatercost savings.

• CFO Focus on Strategy. CFOs drive top-management's strategic decisions onwhether or not the company shouldoutsource certain business processes. Theyknow the economics of outsourcing, asmany spend time reviewing vendorproposals for new outsourcing initiativesand overseeing current outsourcingprogrammes. When it comes to F&Aoutsourcing, CFOs know that transactionprocessing accounts for most of thedepartment budget and readily lends itself

to outsourcing with substantial savings. Asa general rule, if the F&A departmentbudget runs more than 2.0% of companyrevenues, certain processes should beoutsourced to cut costs to less than 1.0% ofrevenues, a best practice level for mostindustries. For a $5 billion company, this 1%difference would add $50 million of profitstraight to the bottom-line. And consortiabuying would enhance earnings per shareeven more.

• Vertical Industry Solutions. In differentindustries, companies are coming togetherto develop common industry standards,systems, and protocols for their mutualbenefit instead of investing in more costlyone-company solutions. Commercial andretail banks are forming consortia to clearchecks; securities/brokerage firms areforming consortia to clear and settle tradingin stocks, bonds, and other financialinstruments; and manufacturers areforming consortia and trading exchanges toprocure raw materials. Likewise, we believeCFOs will form consortia to buy commonand/or specialised F&A services in theirindustries. While many F&A processes aresimilar, there are many importantdifferences among industries that requireindustry-specific solutions where consortiabuying would bring significant economicadvantages to the participating companies.

• Power of Standardisation. Companiesare moving toward more standardisation oftheir ERP systems, and know theimportance of using best-in-class businessprocesses and common state-of-the-arttechnology platforms. Likewise, theeconomic benefits of F&A outsourcing arebased on services providers using commonprocesses and platforms, especially sincemost F&A outsourcing involves high-volume, policy-driven, rules-basedtransaction processing which lends itself sowell to standardisation. This providesmultiple clients with the economies of scaleand processing efficiencies that no oneclient could achieve on its own. It alsodrives F&A item transaction processingcosts way down for all consortia members;and as more clients join the consortia, themore they all benefit from the ever-lowerunit costs among the larger member group.

• Supplier Consolidation. The leading F&Aoutsourcing service providers are acquiringspecialty suppliers to build out theirportfolio of services and gain immediate


OUR GLOBAL FORECASTThe coming wave of F&A consortia buying

that we think will explode in the next few yearswill be driven by the forces outlined above aswell as new governmental regulations andemerging market developments. Based on ourresearch, here are several predictions toprepare for: • Risk Management. While most F&A

outsourcing focuses on transactionprocessing, we think it will now expandinto the highly visible and critical riskmanagement area as well. Publiccompanies need to be in full compliancewith the Sarbanes-Oxley Act of 2002,which requires management to assessand document their internal controlsystems for financial reporting. The AICPAhas published SAS-70 standards forauditing those controls within thecompanies and/or within the outsourcingservice providers they use. So whencompanies form F&A buying consortia,they have an opportunity to developworld-class solutions and share bestpractices which will result in moreeffective governance and riskmanagement. Also, the consortia canensure regulatory compliance at reducedcosts by outsourcing F&A processes toservice providers whose internal controlsare already certified as compliant, whichwill reduce each company's compliancecosts even further.

• Financial Services. Consortia buying ofF&A services will take centre stage in thefinancial services industry, and willaccount for an ever increasing share of theglobal BPO market. The players willinclude global banks, trust companies,securities firms, investment firms, mutualfunds, insurance companies, custodialagents, and other asset managers. All wantto reduce the ever-rising costs of back-office customer servicing, recordkeeping,accounting, reporting, and administration -and many firms are working together todevelop industry-wide solutions to protectcustomer privacy and prevent identitytheft. We predict that leading financialinstitutions will form consortia tooutsource their back-office operations,either to automated processing centres orutilities in the US and Europe, or to lower-cost countries like India with qualifiedlabor pools to handle the work.

entry into large prestigious accounts. IBMGlobal Services, for example, acquiredEquitant for its “Order-to-Cash” businesswith such clients as Cisco Systems, LucentTechnologies, and Microsoft; it acquiredLiberty Insurance Services to expand intolife insurance and annuity processing; andit acquired Daksh eServices to gain a 6,000-strong back-office operation in India. Asother F&A suppliers continue to make theirstrategic acquisitions, consortia buyinggroups will have a greater choice of highlyqualified service providers to meet theirmany needs.

• Business Process Utility. The leading ITOand BPO services providers are buildingtheir infrastructures to serve as on-demandcomputing utilities or business processutilities (BPU) for their clients. Theseproviders have the global data centres,hardware, software, storage, and networksto manage the high-volume transactionprocessing needs of major companies. Theyalso have the people, resources, andcapacity already in place to handle large-scale F&A outsourcing programmes forconsortia buyers. Under this BPU model,clients pay for only the business andtechnology resources they actually use; themodel offers consortia buyers an entirelynew economic value proposition foroutsourcing F&A processes.

• Rise of Co-opetition. Competitors arefinding it more advantageous to cooperatewith one another behind the scenes insharing their back-office resources andinvesting in common business solutions.They know that investing in their back-office operations is not core to the businessand gives no real competitive advantage inthe marketplace. Indeed, industry leaderswe work with say they can grow theirbusiness much faster by collaborating withother firms, rather than spending onduplicative facilities and capabilities. Thiskind of co-opetition gives companies moretime and money to invest in building thecore business instead of the back-office.

As a result of these forces workingtogether, we estimate that F&A consortiabuying members can achieve savings of asmuch as 30% to 40% of their baselineoperating costs, versus savings of only 15% to20% for individual companies outsourcing ontheir own.

• Global F&A Transactions. Global money-centre banks have been providing a widerange of F&A outsourcing services to theircorporate customers and other financialinstitutions for many years. Traditionalservices include treasury functions, cashmanagement, accounts payable, accountsreceivable, trade financing, and foreigncurrencies; and these services will beexpanded to include borderless bankingand more integrated financial supply chain services including insurance,securities/brokerage, investments, andasset management - all delivered throughtheir global networks and advancedtechnology platforms. We predict thatcorporate customers in given industries orregions with common F&A service needs -as well as the smaller community banks,savings and loans, and other lenders - willget together and form various buyingconsortia to negotiate favorable servicepackages with volume discounts on theirlarger dollar-value transaction volumes.

• Check 21/Item Processing. The CheckClearing for the 21st Century Act of 2003allows US banks to substitute electronicdigital images for paper checks,streamlining the cumbersome clearing andsettlement process. Banks will save billionsof dollars in reduced transportation costs ofmoving paper checks between issuing andpaying banks as well as the associatedcheck handling and manual data-entrycosts. While the nation's larger banks maygo it alone for now, we predict that some ofthem will eventually form consortia tooutsource their check clearing and otheritem processing to transaction processingutilities. We also predict that many regionaland community banks will have toparticipate in consortia buying to achievethe economies of scale and savings neededto offset declining check volumes aselectronic payments take market share.Also, Check 21 legislation will be thedriving force that leads companies to formconsortia for other item processingsolutions such as insurance claims,mortgages, and loans - and we already seeitem processing consortia being formedaround the world.

• Offshoring Opportunities. US andEuropean multinationals have beenoutsourcing F&A processes to lower-costcountries for over a decade; and the results

StrategySECTION 1



are in that it makes good business sense todo so, as long as the contracts are wellplanned and executed. Based on ourresearch, the biggest F&A opportunities arein processing insurance claims, homemortgages, personal/auto loans, accountsreceivable, accounts payable, travel andexpense reimbursements, and taxcompliance. In financial services, theopportunities are in back-office customerservicing, accounting, recordkeeping,reporting, and administration. In retailing,the opportunities are in merchant,corporate, and retail credit/debit cardprocessing, electronic payments, andrelated accounting. As offshore serviceproviders in India, Eastern Europe, anddozens of other countries build theirinfrastructures and world-class capabilitieswith high CMM (Capability Maturity Model)levels, corporate buyers in differentindustries will form consortia to contractfor large blocks of their time, resources, andservices - and to develop common

solutions to reduce the risks of offshoretransaction processing.

In summary, F&A outsourcing certainlylends itself to consortia buying as serviceproviders want to lock up long-term contractsthat meet their financial goals and rates ofreturn on investment, and as corporate buyerswant to have lower and more predictable coststhrough the greater economies of scale andprocessing efficiencies that consortia buyingcan achieve. And the new set of economic,technology, and market forces described abovewill drive F&A outsourcing and consortiabuying as a way for companies to be morecompetitive in the global marketplace.

Biographies Joe Vales

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

Rich TinervinRich Tinervin, Founder and Managing Partner ofTinervin Advisors, has 30 years of senior executiveexperience with Bank of America, Bank of New York,Charles Schwab, Citigroup, CitiStreet, and FidelityInvestments. Rich is an outsourcing visionary forfinancial institutions.

Gil ParkerGil Parker, Director, Vales Consulting Group,conducted research for these consortia buyingarticles. Gil has 30 years of marketing experiencewith PricewaterhouseCoopers, Deloitte & Touche, andMcKinsey & Company.

SECTION 1Strategy

A CxO ResearchInitiative – Achieving Competitive Advantage through Collaborative Partnerships

27www.cxoeurope.com


The Changing Role of Outsourcing

Outsourcing is now a strategic tool formanaging change and leveraging greatervalue. The choice of an outsourcing partnerhas become a critical issue, involving far morethan quality or cost. This is becauseoutsourcing is first of all a human partnership.Identifying an organization to share yourbusiness with, whether that means yourinfrastructure or your operational processes isnot easy. That organization needs far morethan technical expertise and industryexperience. It must be capable ofunderstanding your culture and be willing toshare risks and responsibilities.

Siemens Business Services has beeninvolved in complex outsourcing relationshipsacross multiple sectors from the start. We haveunique expertise in the public and privatesectors. As outsourcing now forms a centralelement in any value-driven strategy, ourvendor independence along the entire ITservice chain is a definite advantage, while ourgreater technology bandwidth generatesadditional returns for our customers. Withinnovative delivery and commercial modelswhich embrace on-demand and off-shoreefficiencies, we combine quality outsourcingwith competitive economics. Our globaldelivery capabilities and proven governanceskills provide consistent service excellencewherever needed. Perfect your businessperformance by concentrating on your coreactivities and leave the rest to us.

At Siemens Business Services each andevery day over 36,000 employees serve 10,000customers around the world in our operational

SOLUTION PROVIDER

areas of Business Solutions, Outsourcing andIT Infrastructure Services. Our customers grantus an insider's view of their processes and trustus with projects affecting their core businesses.Each project is unique. We adapt ourselvesaccordingly - with individually developedsolutions and services and a concept ofpartnership with long-term perspective.

We give our customers the freedom to excel,providing them with best of breed when it comesto technology, supported by world-class industryknow-how and continuous innovation. SiemensBusiness Services recognizes the uniquesituation of each of its customers and offers thema business partnership built around theirdistinctive culture. No two service relationshipsare alike. Listening to your people with an openmind is absolutely crucial. Being a pure servicecompany without an IT product agenda helps uslisten to them properly. Ongoing dialog is thebasis of any successful relationship and a servicerelationship is no exception. Understandingculture - not just corporate cultures but nationaland regional ones - is another key challenge tobe addressed. This open approach, based aroundintense dialog, is reflected in our flexiblebusiness models offering customers innovativefinancing options.

As the sourcing spectrum grows fromindividual IT activities to complex and volatilebusiness processes, building on trust is the keyto success.

The Drivers to OutsourceOutsourcing is now a strategic alternative

that is established in many businesses. Whilesectors may decide to outsource for differentreasons - regulatory change in the financial

Outsourcing with Siemens BusinessServices - Built on Trust

Siemens Business Services is a leading IT service provider and with revenues of euros 4.7billion is one of the world's top 10 outsourcing providers. As a subsidiary of the SiemensGroup, we stand for trust, innovation and quality. We offer all services along the IT servicechain from a single source - from consulting and systems integration, right through tomanaging IT infrastructures and business processes.

www.siemens.com/sbs

www.cxoeurope.com28

www.siemens.com/sbsSiemens Business Services is one of the world'stop 10 outsourcing providers serving over 200 majorclients in 44 countries.

Adrian von Hammerstein – CEOChristian Oecking – Head of Global Outsourcing

Siemens Business ServicesOtto-Hahn-Ring 6, 81739 Munich, GermanyTel: +44 1344 862222Fax: +44 1344 784444www.siemens.com/sbs

Business ContactSigrid ZeiszHead of Marketing, Operation Related Services

Tel: +49 89 636 55601email: [email protected]

TOP_05_SBS_pro 22/6/05 11:34 pm Page 1

services market or skills shortage in the publicsector - all continue to feel ongoing costpressure coupled with rising customerexpectation. At the same time, the growth ofutility computing is shifting technology froman ownership to a usage paradigm. Globaloutsourcing can optimize informationmanagement and decision making. It canrealize a steady supply of technology andbusiness expertise to match the fluctuations ofa dynamic environment. This can reinforce thecompetitive advantage of the customer. Aswith other aspects of outsourcing, however, ahost of issues need to be carefully addressedwhen off-shoring. These include culturalrequirements as well as cost pressures.Language skills, education and security areother issues which need to be fully addressed.The best sourcing strategy, finally, is onewhich blends the complementary benefits oflocal and global service delivery.

Different Types ofOutsourcingSelective Outsourcing: Spanning the entire field ofoperational services from desktopmanagement to network and data centermanagement, we can help you to get themost out of your distributed computingenvironment. Help desk solutions andapplication management cover all yourcustomer and software needs.

Full IT Outsourcing: Full IT outsourcingdemands global consistency. Our GlobalDelivery Backbone ensures your infrastructuremeets the demands of the world economy. Wehelp your IT infrastructure to become trulyresponsive to your business needs. Full IToutsourcing transforms your technology froma fixed into a variable cost. You can thencontrol your business performance withgreater precision with an infrastructure whichis flexible, transparent and predictable.

Transformational Outsourcing: Transformationaloutsourcing involves a lot more thantechnology expertise, including businessunderstanding and change management skills.Switching the strategy from cost optimizationto value generation when it comes toinfrastructure requires a partner who knowshow to align IT and business strategy. Bytransforming your IT, you increase flexibilityand productivity, optimize processes, speed upthe time to market and drive profitability.

Business Process Outsourcing: The managementof complete processes, such as finance andHR, allows customers a long-term strategicpartnership to help realize their core goals.Unlike IT outsourcing, business processoutsourcing affects everyone in anorganization directly. Operational processesneed to be fully understood in terms of theirstrategic importance, flexibility, volatility andinterdependence.

29www.cxoeurope.com

SelectiveOutsourcing

Selectiveresponsibility

Total ITresponsibility


Full ITOutsoucing



TransformationManagement

TransformationalOutsourcing


TransformationManagement

Responsibility for totalcustomer process

Business ProcessOutsourcing


Figure 1. Different Types of Outsourcing

www.siemens.com/sbs

SOLUTION PROVIDER

Some facts and figures:

• Half of our workforce is dedicated to servingover 200 outsourced clients in over 40countries across all industries

• Our global help desk service handles morethan 20 million calls per year in 16 languages

• We have over 2 million desktops and the associated distributed computinginfrastructure under management

• 2000 TB of computing capacity are globallyavailable in our data centers

• We provide data center outsourcing aroundthe world to 86 countries

• We operate the world's largest SAP systemunder Windows NT

Improve your business performance byconcentrating on what you do best and leavethe rest to us. Whether it's a question ofindividual activities such as desktop services,complete infrastructure operation or themanagement of your finance or HR processes,you will find Siemens Business Services is apartner you can trust. We bring 155 years ofSiemens heritage and stability, making us theright people to share your future with.

TOP_05_SBS_pro 22/6/05 11:34 pm Page 2

FINDING INSPIRATION IN INDIA

between cost and availability of high calibreemployees and quality infrastructure.

Captive v. OutsourceThe project recommended that the offshore

operation be set up as a captive organisationdue to the following reasons:• Greater economic benefits• Better operational flexibility• Enables leveraging of Prudential brand in

attracting and retaining staff• Significant size of investment required in

initial and ongoing training anddevelopment and customer experienceenhancement initiatives

In September 2002, we announced ourintention to set up a Mumbai offshore centreemploying over 800 employees. It wasexpected to be fully operational by the end of2004 and generate cost savings of £16m p.a.from 2006. The centre would initially providecall centre and back office administrationservices to Prudential's UK insurance business.

Swift ImplementationCommunicating the decision to go offshore

was done quickly and a variety of initiativeswere taken to minimise concerns of the UKemployees, including re-deployment ofemployees in other business areas andsupporting acquisition of new skills.

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

Taking an internationalview

At the time, policyholder and newcustomer queries were principally being dealtwith at three UK centres, Reading, Belfast andCraigforth (Scotland). In order to cut call-centre and back office costs while enhancingservice, big changes had to be made. In mid2002 Prudential executives decided to lookaround the globe for inspiration as to how thatcould be best achieved and India was selectedfor an offshore services centre.

Why India?The project confirmed what was already

suspected - India emerged as the preferreddelivery location over other locations such asMalaysia, China, Philippines, Ireland and EasternEurope because of the following key advantages:• A large skilled English-speaking labour

force with two million fresh graduatesevery year

• Sustainable low labour and property cost• Favourable investment environment with

Government support and tax incentives• Successful track record of UK and US

companies in running offshore service centres

An independent risk assessment alsoconfirmed that the current political climatewould not adversely impact India'sattractiveness as a destination for long-terminvestments. Mumbai was recommended asthe most suitable city based on trade-offs

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

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

Steven Ferrari Service Development Director, Prudential

StrategySECTION 1


TOP_05_Ferarri _wp 22/6/05 11:41 pm Page 2

SECTION 1Strategy


and commitment. We were pleasantlysurprised by the response that we received fortemporary secondment assignments to India -5 times the number of vacancies.

Programme StructureThe implementation of the offshoring

initiative was structured in two broad phases: • Enablement - This phase consisted of 3

work streams:• Infrastructure - Setting up the facility and

obtaining the necessary legal andregulatory approvals

• Technology - Designing and implementingthe technology solution

• HR - Designing the organisation structureand people policies and recruiting the localmanagement team

• Migration - Identifying and migratingprocesses to the offshore operation

A Steering Group consisting of seniordirectors from across the Prudential Groupwas set-up to provide direction and guidanceto the programme team.

Enablement Phase

HRWe recruited our local management

team to ensure that we had local expertiseon ground to assist in the set up andapproval activities that proved to beinvaluable in hindsight. We adapted our UKpeople policies to suit the Indian operatingenvironment.

InfrastructureTo accelerate implementation, we engaged

a leading Indian outsourcing firm thatrecruited, trained and providedaccommodation for the first batch ofemployees until our own facility was ready.Our facility was fitted out to our stringentcorporate standards within 5 months ofobtaining the building.

TechnologyWe deployed 'Voice over IP' call centre

technology as it is more cost efficient andprovides a better quality of service ascompared to other technologies. We alsoimplemented a leading edge 'thin client'solution that ensures that we can accessany of Prudential UK's thousand or sobusiness applications without systemresponse issues.

Migration PhaseWe adopted a rigorous tollgate based

approach to migrations that ensured that wedid not move to the next stage unless certaincriteria were met. For example, weconsciously took the decision not to starttraining unless all process and trainingdocumentation were ready. Whilst deliveryquality and impact on service levels were theparamount considerations, we ensured thatthere was equal emphasis on costs andbenefits management.

31www.cxoeurope.com

FeasibilityAll processes were systematically

evaluated using a set of criteria such as theextent to which processes could be decoupled,extent of risk associated, time required toachieve competence.

Customer experience was the mostimportant consideration, as no activity wouldbe transferred offshore unless we wereconfident that the quality of service would bemaintained or indeed enhanced. The results ofthe evaluation were discussed and agreed with

Figure 1.

ParallelRun

Recruitment&

Training

Build

• DetailedImplementationPlan

• Process Design

• OrganisationDesign

• TechnologyDesign

• BusinessContinuity

• Process• Process

documentation• Training needs

analysis• Training design

• Technology• Telephony &

network set-up• Applications

deployment• Testing

• Recruitment• Induction training• Product, systems

& process training

• Validation oftraining

• Ramp Up CallVolumes

• Meet UKstandards

DesignFeasibility

• OperationBaselining

• Processesidentified

• Risk assessment• Cost-benefit

analysis

• High-levelimplementationplan

• Robust recruitment process; only 5% of interviewees are made employment offers

• Mumbai staff need to meet UK accreditation standards before they can start taking calls

• Mumbai operation needs to match UK quality, accuracy and productivity standards prior to completion ofparallel run

• Implementation by a cross-functional project team; design, process and training documentation signed offby relevant stakeholders

• Migrations are subject to periodic governance and audit reviews

A smooth and seamless transition is ensured by adopting a robust and disciplined approach

Figure 2.


StrategySection 1


our UK operating managers before any workwas migrated.

Risk mitigationWe have identified and appropriately

addressed major areas of risk while planningany migration:• Data protection - We have informed all

our policyholders of the fact that some oftheir data will be processed outside theEuropean Economic Area

• UK regulatory requirements - OurCompliance teams have been closely

involved in all migrations to ensure thatall regulatory requirements areembedded in the work that is movedoffshore. We also established a localCompliance team to provide onsiteguidance and support to the Mumbai staff

RecruitmentWe ensured that we recruited high quality

people whilst maintaining the pace ofrecruitment by adopting a disciplinedapproach to recruitment.

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

TrainingWe have invested heavily in training to

ensure that the transfer of work from the UK isas smooth as possible.

In many instances, we have retained a teamof UK employees to support the Mumbai teameven after a particular process 'went live' as asignificant portion of learning is obtained fromtheir interactions with their UK colleagues.

A Success Story - But NotWithout a Lot of Sweat

Currently we are the largest UK life andpensions offshoring operation in India witharound 1000 employees, handling 150,000 callsand processing 150,000 transactions per month.

The service levels of our Indian centre interms of productivity, grade of service,turnaround time, quality and accuracy are alreadyat UK levels (within less than a year of start-up).We conduct mystery shopping regularly to gaugethe experience of our customers and theresponse to date has been good.

Our current attrition levels are below theindustry average. We attribute this to our brandand reputation in the Indian marketplace, peoplefriendly policies including employee exchangeopportunities to work overseas, focus on rewardand recognition for outstanding performance,constant focus on learning and development andcontinuous engagement of employees.

Looking AheadDespite the heady pace, we are keen to avoid

moving too fast. Our approach is 'It has to bequality first, productivity second. If we ever feelthe cost drive is compromising quality, we willslow down. We don't want to satisfy the sceptics.'

We are currently consolidating the learningsgained through migrations. We are working onimproving the overall customer experience byfocussing on conversational aspects like empathyand listening skills. We are improving the overallcapability our Mumbai staff through focussedtraining programmes. We are also focussing ondriving tactical productivity improvements.

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

Figure 3.

Figure 4.



DRIVING INNOVATION BY LEVERAGINGOUTSOURCING RELATIONSHIPS

33www.cxoeurope.com

engineering practices and are implemented todeliver tangible benefits.

However, when deep technological andbusiness process insights are combined in theright manner from both sides of therelationship, more dramatic outcomes can beobtained:• Solutions to previously unresolved

problems;• Compelling alternative solutions (for

instance, solutions made up of buildingblocks which were never assembled in thismanner before);

• New ways of doing business and solutionsproviding competitive advantage

In addition to these innovations, newapproaches can also be devised to drive outcosts from the existing outsourced services.

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

Innovation is best created when businessand IT collaborate

Innovation requires input from bothbusiness and technology experts from bothclient and outsourcer. Whether seeking novelrevenue growth opportunities or innovating tofurther reduce costs, a joint approach isessential. For this reason, business processand business transformational outsourcing(BPO/BTO) contracts have a naturaladvantage because the outsourcer and theclient’s business divisions are alreadycollaborating for process refinement,improved agility, cost reduction andcontinuous evolution.

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

Clients and outsourcers are frequentlyfacing highs and lows in their relationships.Ensuring that these contracts remain efficientand mutually beneficial requires adherence toa number of management best practices:• Regularly revisiting key reasons to

outsource and if possible re-aligning thecontract key performance indicators (KPIs)with these new drivers and requirements

• Monitoring on-going performance as wellas efficiency, while linking them back toclient business objectives;

• Deriving additional added value throughthe relationship.

A relatively new offer from outsourcers ison its way to becoming an additional bestpractice to be added to this list: the use of theoutsourcer’s wider capability such as R&Dfacilities and business insight to driveinnovation.

This paper discusses: - The drivers, limiters and intended results

of innovation;- The criteria for deciding if the innovation

capabilities of an outsourcer will meetwhat a client is looking for;

- The management approach necessary tomaximise success.

Technological andbusiness innovation from your outsourcer: what for?

Innovation is business driven or cost drivenOutsourcers are often providing evolutions

or incremental improvements to existingservices solutions within their contracts; thesetransformations are rooted in good

Jean-Louis PrevidiGartner Executive Programs

Catherine PeyralbeGartner Consulting

TOP_05_Gartner_wp.qxd 22/6/05 11:44 pm Page 1

StrategySECTION 1


innovations. A joint innovation program willalso serve to strengthen the relationshipbetween the client’s IT department and itslines of business.

Innovation is conditioned by theorganisation’s behaviour toward risks

Those organisations more likely toconsider innovation capability within theiroutsourcing relationships are those which:• Wish to significantly improve business

efficiency or to pursue new businessopportunities;

• Recognise that innovation will be required;• Have a business culture allowing them to

take calculated risks.

These organisations are likely to createjoint teams with the outsourcer and act as apartner in the innovation process.

Those clients with a more conservative riskapproach may still draw upon an outsourcer’sinnovation capability but will then leverage itwithin more constrained environments.Companies with a reasonable level of riskacceptance are more likely to accepttransversal innovation – the use in a newmarket or a new environment of a solutionpioneered in another industry.

Criteria for assessingyour outsourcer’sinnovation capabilities

Pre-requisite: Trust in the outsourcer is keyAs previously mentioned, behaviour

toward risk is a key factor for the decision toleverage innovation capabilities. Using thecapabilities of a third party is a way to share ormitigate risks but a trusted relationship is amandatory requirement for success.

Criteria 1: Demonstration of a track recordfor the R&D capabilities, for the businessconsulting expertise and for thecombination of both

The outsourcer has to provide evidence ofprocess and business innovation and/or oftechnical innovation, using both its businessconsultants and its R&D experts.

It needs to provide a track record forbusiness consulting excellence – industry-recognised thought-leadership, cases studies,references – and for R&D: how many patentsthe outsourcer has, how many publicationsand presentations in international recognisedchannels, how many awards and distinguishedemployees (Nobel prices, etc.) …

Having these two capabilities is notsufficient in itself - there must also bedemonstrable evidence of them beingleveraged jointly to benefit outsourcing andother clients (see criterion 4 below).

Criteria 2: Coverage of the R&D organisationThe size of the R&D capability is a very

important criterion – how many labs, howmany researchers, the domains of expertiseand research covered and potential relevanceto the client’s business.

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

Criteria 3: Being both internationally andlocally oriented for R&D and businessinnovation

The international focus and the capacity toadapt innovation to the local markets have tobe taken into account. The client will look atthe geographical dispersion of the outsourcer’sinnovation teams and the different culturesthey exhibit.

Criteria 4: Ability to make business experts,vertical market experts and technologyexperts collaborate

Innovation can be at infrastructure level, atthe applications level and/or at the businessprocess level. A high level of understanding ofvertical markets is needed for business driveninnovation; the business consultants will haveto provide references in the client market.

The R&D organisation needs to haveknowledge and understanding of business inaddition to its mastering of technology issues.One indicator to assess this is the manner in

which R&D experts are internally rewarded(commissioned on the sales of their ideas,some type of measure of value to market, etc.).The R&D function's appreciation of businessissues and technology exploitation potentialwill also be improved by their routineengagement in mixed technical and businessteams. Furthermore, the R&D function itselfwill regularly assess its portfolio using industrytrend surveys, horizon-scanning and'technology foresight' exercises.

In most cases, the client brings its expertiseof its markets to the innovation team. Theclient will also want the outsourcer to provideguidance on the complete innovationapproach making explicit its innovationprocess and the mechanisms that promoteeffective collaboration amongst the differentstakeholders during the process.

Managing innovation

Innovation can only be exploited if there is aclear business case taking risks into account

Most outsourcing contracts are classicallyowned by the IT organisation with theoutsourcer’s team working mainly with the ITpeople. These contracts are usually justified bymeans of classical ROI (return on investment).BPO and BPO contracts usually have moresophisticated measures of business value sincethe business is responsible for the businesscase and for defining the effectiveness of theexpected solution(s). In both cases, risks mustintroduce adjustment factors on the calculatedreturns and be taken into account in thedecision process for innovation.

Innovation management needs to becoupled with risk limitation.

Since risk decreases the likelihood ofdelivering value, risk limitation has to be partof innovation management. It usually occursat two levels:• At the contract level: Indian outsourcing

companies are introducing what they call‘de-risking’ contracts. Basically, nopayment is made to the outsourcer if thevalue is not delivered; the service providerhas to put in place all the means to havethe solution accepted by the client;

• At the business and process level: clearly anon-reliable solution is not acceptable.Innovative mind-set clients with theinternal culture to measure and cope withthe risks are the most likely to gaincompetitive advantage.

A pre-requiteTrust

&4 criteria

- Demonstration of a track record for the R&Dcapabilities, for the business consulting expertise

and for the combination of both

- Coverage of the R&D organisation

- Being both internationally and locally oriented forR&D and business innovation

- Ability to make business experts, vertical marketexperts and technology experts collaborate


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Effective governance between the clientand the outsourcer is the key to riskmanagement and getting the best value fromjoint investment in innovation.

Business and IT management needs to driveinnovation through the right governanceand appropriate KPIs

The innovation process has to be clearlyexpressed. As part of the process, thegovernance structure, the KPIs and theprogress monitoring mechanisms have toleverage the experience of the outsourcer aswell as market best practices.

Depending on the nature of innovationsbeing sought, monitored indicators and theirtarget values are typically:• Financial KPIs: cash flow improvement,

margin improvement, cut costs, return onassets, return on existing investment, orNPV (net present value);

• Business KPIs: increase market share,reduced time to market, etc.

Some measure of the effectiveness of theinnovative solution(s) has to be put in placeand tracked during deployment. These metricsshould also be monitored during the pay backperiod in order to prove the business case,

improve the business case definition processand the risk adjustment factors applied in thebusiness case.

Cultural alignmentInnovation is usually easier for enterprises

with:• Mature risk management cultures – and

which are not risk adverse; • Mature business case processes

and measurement of returns;• Strong relationships between business

and IT.

A successful collaboration betweenoutsourcing provider and client aimed atdelivering innovation and value-add needs toensure that both sides understand each other'sapproaches in these areas. Only then can theprocess be managed smoothly and mutualexpectations be met.

Innovation management

Clear business caseRisk Management

Governance with appropriate KPIsCultural alignment

SummaryEnd-user organisations are turning away

from a purely cost-reduction outsourcingagenda. Whilst cost control remainsimportant, increasing emphasis is beingplaced on business value and revenue growth.Some outsourcers are able to meet thischallenge by leveraging their widercapabilities (e.g. R&D, business expertise) todrive innovation to the benefit of theiroutsourcing clients. Best results are obtainedwhen there is strong collaboration across bothbusiness and IT, and the innovation process isgoverned by a mature approach to riskmanagement.

For those organisations exploiting this routefor innovation, there are important criteria toassess the capability of outsourcing suppliersincluding the range and depth of theirtechnological and business insight. On goingmanagement of innovation processes must alsobe embedded within outsourcing relationshipgovernance processes and structures.


INNOVATION SOURCING: INCREASINGBUSINESS VALUE WITHINOUTSOURCING RELATIONSHIPS

one where long term relationship andbusiness value delivered are critical. Indeed,it is a sign of the maturity of this market thatboth suppliers and clients have developed amuch keener sense of what it takes to ensurethat an outsourcing contract succeeds as arelationship rather than a simple provision ofservices. Gone are the days wherecompliance with service levels alone wassufficient to maintain high customersatisfaction and market leadership. Strongrelationship governance, business value,innovation and win-win scenarios are thecurrent touchstones.

Innovation to improvebusiness value

The level of mutual commitment andimplied trust makes strategic outsourcingrelationships unlike any other in the IT industry.Beyond service excellence however, whatsources of value can a service provider leverageto enrich the relationship? One answer is toensure that the client benefits from privilegedaccess to its wider capability - not just that partwhich is providing the contracted IT services.By bringing together complementarycapabilities plus the best business and technicalminds from both sides of the relationship, jointprojects can drive innovation to improve thebase IT services and address the client'sbroader business growth challenges.

Outsourcing - a changingmarket

Over recent years, sluggish economicconditions and challenged IT budgets haveensured that outsourcing has been theprinciple driver of growth within the ITservices market. It has allowed organisationsto drive out costs, access specialist expertiseand technologies and to refocus managementskills away from non-core IT functionstowards those challenges driving competitivedifferentiation. Outsourcing has also becomewidely recognised as a financial engineeringinstrument1 to smooth out IT spending peaksand create savings; these either fall directly tothe bottom line or, increasingly, fund newbusiness solutions.

Over the same period, the globaloutsourcing market has matured significantlyand the number of service providers hasincreased. Whilst there remains a continuingstream of $1B+ mega-deals, the stronger growthin more modest contracts has providedopportunities for smaller service providers. Inaddition, various IT companies have turned tooutsourcing either to diversify away fromhardware/software portfolios or to replace thehigher margin consulting and project serviceswhich suffered a significant downturn in 2002-3.

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

The leaders in tomorrow's outsourcing market will be those who can deliver the greatest business value. Excellence in low costservice delivery will be taken for granted - the winners in the market will be those with the capability and vision to help clientsinnovate in terms of business and technology to exploit market opportunities and overcome competitive challenges. A cliententering a strategic outsourcing relationship places great trust in its supplier. Innovation Sourcing is one approach IBM useswhich recognises this investment and ensures that the client can leverage the complete IBM equation: its world-leading researchand development capability, industry thought-leadership and product/services portfolio. Successful Innovation Sourcingprogrammes with many IBM clients have harnessed the best capabilities on both sides of the outsourcing relationship to deliverbusiness value and drive revenue growth.

Trevor CliftonJoe Benaroya Strategic Outsourcing (EMEA)

IBM

“Our Clients often tell methat their “battle is won abovethe line and not below it”. Theyare searching for solutions thatwill impact the revenue line andnot only the cost line. Theywant more than just IT servicefrom their relationship withIBM. Through InnovationSourcing we leverage the entire‘TEAM IBM’ to deliver greatervalue and assure better longterm client relationships.”

Joe Benaroya, General Manager, Strategic Outsourcing, IBM EMEA

"Innovation Sourcing isthe term IBM uses tocollectively describe theassets, processes, andtechniques which it uses in itsoutsourcing contracts todrive innovation."

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In a company the size and diversity of IBMwith capabilities and intellectual assets spreadacross its research laboratories, hardware,software, IT services and business consultingpractices, there is huge potential for engagingwith clients in innovative projects. Quite rightly,IBM's size and capability raises highexpectations within its outsourcing client base -the challenge is to meet these in a manner whichis cost effective for both parties and builds upon,but does not distract from, the baseline services.

Innovation Sourcing is the term IBM usesto collectively describe the assets, processes,and techniques which it uses in its outsourcingcontracts to drive innovation. Not only doesInnovation Sourcing provide the environmentto foster the necessary collaboration but it alsoputs in place joint governance structures toensure that priorities are assigned toinnovative ideas, scarce resources aredeployed efficiently to explore them and that,where possible, they can be folded into thebase contract scope at the appropriate stagewith minimal risk.

Innovation Sourcing can be positioned as thethird of three routes for developing the in-scopeservices during an outsourcing relationship:• Transition is the initial phase of an

outsourcing contract whereby a client'sstaff and assets transfer to IBM - this iswhere 'quick-win' cost take-out actions willoccur although the main focus is onestablishing a seamless handover;

• Transformation is the longer-term processof developing the IT service throughtechnology refresh, consolidation, processredesign and new systems implementation;the transformation plan underpins the longterm cost model and services vision;

• Innovation Sourcing is the on-goingprocess of identifying and pursuingtechnical and business innovations jointlywith the client. These may directly impactthe baseline services (eg driving additionalcost reductions) or might benefit the client'sbusiness in some other manner.

Making innovation happenNo-one would suggest that innovation can

be merely purchased - it is a creative processwith unpredictable outcomes - the trick lies inputting the right multi-disciplinary teamswithin a suitable environment. Metrics need toreward creative, 'out-of-the-box' thinking andthe portfolio of ideas must be managed andprioritised based on a balance of short-termand long term benefits.

Innovation does not occur purely at thetechnical level - it can focus upon novelbusiness or organisational models. For thisreason, a critical part of IBM's InnovationSourcing process is the deep industry andprocess knowledge from the client's ownbusiness specialists and IBM's BusinessConsulting Services.

With Innovation Sourcing, there is no

37www.cxoeurope.com

'one size fits all' approach. How to tap intoIBM's broader capability will depend uponthe client's size, skills, business strategy,partnerships and resources. From a practicalviewpoint, clients may also wish to run anInnovation Sourcing programme for alimited period to match personnel andresource availability. For these reasons,IBM's Innovation Sourcing approach istailored to accommodate different models ofinteraction.

A particular concept IBM has developedsuccessfully is that of the Innovation Team, 'i-team' or Value Creation Centre. Here, IBM andthe client form a joint unit and drive brain-storming and workshop sessions to identify anddevelop innovative solutions which createbusiness value. Based upon priorities developedwith senior management, the team then definedetailed solutions, commission prototypes andcarry-out risk-reduction investigations leading

Innovation Sourcingand On DemandThe innovation process needs triggers to fuelthe intellectual and creative juices. Whilst theimmediate business challenges of the clientwill be a crucial starting-point and specifictechnologies may be able to provide quickwins, it is helpful that the IBM/client teamshares a longer term vision of how successfulbusinesses will operate in the future and howthey will exploit technology to deliverbusiness value. Many clients will alreadypossess a view of future business scenariosand the role of IT. However, to supplement orindeed challenge these, IBM's On Demandstrategy places a central role.

“An On Demand enterprise is one whosebusiness processes - integrated end-to-endacross the company and with key partners,suppliers and customers, can respond withspeed to any customer demand, marketopportunity or external threat.”

This vision underpins the value propositionof IBM's products, services and solutionsand has guided the company's owninvestments with its aim of becoming an OnDemand Business itself. We have found ourindustry-specific On Demand roadmaps anessential tool in creating a vision of theclient's future operation.

Outsourcing Contract 5-7 years

Transition

Transformation

Innovation Sourcing

Innovation Sourcing is the third of three mechanisms for developing the services within anoutsourcing relationship

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StrategySECTION 1


to full business case development. IBM cansupport the complete life-cycle, includingsubsequent implementation, drawing uponspecialist capabilities as required through itsbusiness partners.

The Innovation Team concept has had greatsuccess with many clients like those describedbelow and is a highly productive way toleverage IBM's research experts and solutionthought-leaders. This approach is also powerfulin that it provides a focus and identity for thejoint innovation activity within the client'sorganisation. The team might be a virtual oneor located at a physical 'innovation centre'.

As an alternative model, clients may wishIBM to operate in 'push mode' where the IBMteam meets with the client business specialiststhen develops a portfolio of candidate projectsfor presentation and appraisal by the client.

Scope and impact need also to beconsidered: does the client want to focus oninnovations with more direct impact on theexisting outsourced services (eg newcapabilities or additional cost take-out) or is awider remit preferred? Does the client have avery specific challenge which might benefitfrom fresh outside thinking?

What is under thebonnet?

So what are these IBM assets which arebrought to the table to facilitate and energiseInnovation Sourcing? Leading the programmefrom the IBM side will generally be aconsultant from IBM Business ConsultingServices (BCS) who will be able to draw upondeep industry knowledge as well as expertiseacross the range of BCS practice areas:• Strategy & Change• Human Capital Management• Customer Relationship Management• Supply Chain Management• Financial Management• Application Innovation.

For additional industry insight, theprogramme can also leverage the IBM Institutefor Business Value (IBV). Accessible to all IBMclients, IBV is a focus for industry thoughtleadership and research with a mission tohighlight and anticipate industry trends,understand the emerging technologylandscape and assess strategic options for thealignment of IT with business needs.

Working closely with the BCS focal-pointwill be IBM Researchers specialising inInnovation Sourcing; they will provide the

necessary window into the largest corporate ITresearch organisation in the world (see panel).They are the client's guide to IBM Research'sintellectual assets ranging from subject matterexperts and current research focus areasthrough to IBM's patent portfolio, laboratorycapabilities and collaborator networks (egacademia, venture capitalists).

To ensure that the fruits of IBM Researchmake the transition to its main business, IBMoperates a portfolio of Emerging BusinessOpportunity (EBO) projects. EBO groups workwith the main IBM business lines to developprototypes and support projects with early-adopter, flagship clients. Recent EBO subjectsinclude radio frequency identification andadvanced digital media solutions.

Other assets which can be leveragedwithin Innovation Sourcing are of courseIBM's hardware and software divisionstogether with architects experienced inbringing together both hardware, software andservices to build industry-specific solutions.

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

The Innovation Sourcing process, like anysignificant investment, requires buy-in fromthe client's executive management team. Toassist this process, IBM is able to leverage itsAdvanced Business Institute (ABI) in New Yorkas a forum for engaging senior clientexecutives on the role of innovation withintheir organisations. These events are part of awider syllabus covering both Leadership andIT Effectiveness2. With many outsourcingclients, IBM has leveraged the ABI to drive'Value Infusion' workshops as a time-boxedmethod of exploring innovation strategies.

Finnair exploiting mathsto drive revenues

Finnair is one of the world's oldest operatingairlines and carries approximately 7 Millionpassengers per year. IBM's long-termrelationship with the company was extendedin 2002 through an outsourcing contract; withtechnological leadership and innovation highpriorities for Finnair, the outsourcingagreement included provision for anInnovation Sourcing programme.

One of the early tasks tackled was toaddress Finnair's vast and growing databasecovering customer travel and purchasehistories. How could this hitherto unused assetbe exploited to gain a better understanding ofcustomer types and their historic buying

IBM ResearchIBM has the world's largest IT researchorganisation with about 3000 scientists andengineers (including 5 Nobel Laureates)working at eight laboratories in six countries.Since 1996, IBM has invested approximately$5 Billion per year in research, developmentand engineering and its current portfolio of40,000 patents is the result of 12 yearswhere IBM has consistently been awardedmore patents that any other company. Itsspecialists from multiple disciplines areengaged in a diverse range of fields:

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

Most recently, it has dedicated significantresources to On Demand Innovation Services(ODIS) where IBM researchers team with IBMclients to tackle business challenges ininnovative ways.

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patterns? Taking it further, if you could predictfuture patterns and also understand theeventual value a customer represented, thisinsight could be integrated into marketingprogrammes and processes. Customerrelationship management would then becomecustomer equity management - a whole newway to run an airline.

Working closing with Finnair's marketinggroup, IBM brought in a team from its ZurichResearch Laboratory who were able todevelop and refine mathematical modellingand optimisation algorithms to investigate thedata. Success here, and collaboration with anIBM partner, led to the development of aprototype for IBM's Customer EquityManagement solution, which already has an80% accuracy rate for predicting the eventualvalue a customer represents.

The implications are far-reaching for theFinnair business: this approach can reducemarketing costs by up to 20 percent throughbetter targeted campaigns whilst improvingcampaign response rates to boost revenues. Inaddition, by forecasting future travel decisions,the IBM solution will improve the airline'scustomer satisfaction.

Critical to the success of this programmewere the mutual commitment to pursue aninnovative agenda, sharing of the client'sbusiness challenges with the IBM team and ajoint approach to problem solving coveringboth business and IT. Other areas of jointinvestigation with Finnair have included flightlogistics analysis as well as exploitation ofbroadband, digital TV and radio frequencyidentification technologies. The InnovationSourcing programme at Finnair drew uponseveral IBM Research laboratories, the IBMInstitute for Business Value and IBM businesspartners as well as Innovation Sourcingprogrammes with other IBM clients.

Banking leadership intechnical innovation

One of IBM's key clients in the financesector in Europe is a large, multi-nationalbanking and insurance group with assets inexcess of 200B€, approximate 10 millionpersonal customers and one million corporateclients. Having grown inorganically in the pastfour years, its strategy is founded on strengthand innovation. IBM was therefore a naturalpartner when the group was looking for anoutsourcing relationship to help it consolidateand transform IT support to the business. Theoutsourcing agreement between the parties

was one of the largest ever concluded in thefinance sector.

The Innovation Sourcing model centred ona Transformation and Innovation Team jointlystaffed and managed by the client and IBMwith the remit to:• Provide access to IBM's investment in R&D

and expertise with other world-widefinance sector clients;

• Support the client's decision-making withtechnology and market insight;

• Propose projects and programmes toimprove the client's cost-income ratiowithin three years.

Since its inception, the Transformation andInnovation Team has focussed on a widerange of initiatives, for example:• Optimisation of ERP solutions to drive cost

reductions of 20%;• Assessment and development of the

group's on-line banking architecture byspecialists from IBM's Haifa Laboratories;

• Assessment of its Enterprise ContentManagement projects - again drawing uponspecialists from IBM's Haifa Laboratories;

• Integration of the multiple legacy systemsfrom the various banks brought togetherwithin the group.

Review and direction of theTransformation and Innovation Team ensuresthat it continues to deliver value by focussingon joint research interests, technologyexploitation and quick wins together withknowledge transfer to the client in criticalareas such as ebanking.

SummaryThe outsourcing market has evolved

significantly in recent years. The competitiveenvironment has been transformed and thereare more providers able to deliver the basics ofIT service. As a consequence, clientpurchasing and satisfaction criteria haveshifted. The customer dialogue is increasingly

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

IBM's experience with clients reinforcesthe importance of innovation in raisingcustomer satisfaction. Innovation Sourcing isthe route through which IBM leverages itsworld-class capability in research, products,services and business solutions to delivermore business value to its outsourcing clients.However, a single approach does not fit allcases and a range of models are availableranging from physical to virtual innovationcentres and directed innovation versus more'blue-sky' approaches.

Innovation is a creative and necessarilyunpredictable phenomenon but provided theappropriate technical, commercial andorganisational environment is established, thepay-off can be substantial. IBM's outsourcingclients have benefited in tangible businessterms from Innovation Sourcing programmes.

References:

1 Morgan Chambers, “Outsourcing in theFTSE 100: Episode 2 - Impact on FinancialPerformance”, 2001

2 IBM Advanced Business Institute syllabus,http://www03.ibm.com/ibm/palisades/abi/index.html

© Copyright IBM Corporation 2005, All Rights Reserved

IBM, the IBM logo, the e-business logo, e-business ondemand, e-business Hosting and WebSphere aretrademarks or registered trademarks of InternationalBusiness Machines Corporation in the United States,other countries, or both.

Other company, product and service names may betrademarks or service marks of others.

References in the publication to IBM products orservices do not imply that IBM intends to make themavailable in all countries in which IBM operates.

TOP_05_IBM_wp 22/6/05 11:56 pm Page 5

BPO IN GERMANY: A REALITY CHECK

between 2004 and 2008 make BPO one of themost attractive markets in pure growth terms,where most areas of IT and business servicesare continuing to grow at lower rates inGermany. Indeed, as illustrated in Figure 1, wesee BPO in total growing to over euro1 billionin value by 2008. However, we should pointout that the new net value being added to theBPO market each year is relatively small,ranging from euro50 million in 2004 to euro95million in 2008. This illustrates that there isfuture potential, which can be exploited.However, cultural as well as socio-politicalbarriers remain high and mass-marketdevelopment is still many years off.

Dominated by basicprocessing services

Another reality is that the German BPOmarket today consists mostly of basic, lowvalue services in payroll outsourcing across allvertical markets, and specialist processing

BPO is still at a nascentstage in Germany

Ovum has conducted in-depth supply-sideas well as demand-side research of theGerman market opportunity in BPO. Thisarticle summarises our findings.

The reality in Germany is that the market isstill very small. Ovum estimates that the BPOmarket in Germany is worth euro765 millionin 2005. Growth rates ranging from 7% to 11%

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

Katharina GrimmeDirectorOvum Deutschland

Mar

ket

Siz

e

Euromillion

1,200

1,00

800

600

400

200

0

14

12

10

8

6

4

2

02003 2004 2005 2006 2007 2008

1,005

%

910

830

Market sizeGrowth - total

765710

660

Source: Ovum

Figure 1. German BPO market, 2003 to 2008

Ovum estimates that theBPO market in Germanyis worth euro765 million

in 2005.

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services in the finance sector. These areas willonly grow modestly in the coming years,typically at rates of 4–6%. Meanwhile, it is thenewer areas of BPO that are really driving theoverall growth of the market and which offerthe most enticing opportunities for IT-ledoutsourcing providers and other entrants intothe German market. By ‘newer areas of BPO’,we refer to horizontal areas such as:• HR outsourcing, involving areas such as

joiner and leaver administration, benefitsadministration, employee profiling,managed training and other areas beyondpure payroll - although of course payrollwill remain an important part of the overallHR BPO service mix in many contracts

• Other areas of back-office processes, inparticular procurement andfinance/accounting

• Customer management, with supplierstaking on full responsibility for improvingand handling customer interaction, ratherthan just providing standalone contactcentre services.

Market drivers for BPOOur cautious view of the German BPO

market is mainly due to the fact that growthdrivers for BPO adoption are mostly supply-side led, although there are demand-sidedrivers for BPO, which are largely similar tothose for ITO.

Demand-side driversThe current difficult economic

environment puts pressure on Germancompanies to cut costs, concentrate on corecompetencies and reduce assets on balancesheets. CIOs have felt this through stagnant orreduced IT budgets, but other areas of thebusiness are also under review. The interest isto consolidate and optimise businessprocesses, however often companies aim toachieve this in-house, and only then considergiving it to an external provider – if further costreductions, service quality improvements orflexibility are achievable.

Supply-side driversBPO in Germany is largely driven by the

supply side. Most importantly, the large ITservice providers, such as IBM, EDS andAccenture, have gained experience with BPOprovision in the US and the UK market, andlook to deploy their skills in the large, but asyet untapped German market. The hypecreated in the press from overseas experience

and from a handful of large BPO deals inGermany (such as EDS/Infineon andAccenture/Deutsche Bank) fuels interest and alively discussion, which all players use to talkthe market up.

Smaller players such as TDS, AC Service orTriaton (now HP) have jumped on thebandwagon and aim to position themselves aslocal BPO specialists. Most of them providesimple payroll process, but are increasinglytargeting larger and higher value-addelements of HR BPO, such as recruiting andpersonnel administration.

A key motivation for players developingstrategies in this area is the concept of BPO asa type of outsourcing with high value-add, andhence potentially good margins, which willcompensate for the commoditisation of basicIT infrastructure and network services.However, for the German market this is a hopenot to be fulfilled anytime soon: the BPOservices accepted by German companies aremostly standardised transactional services,where only high volumes can ensureprofitability. The outsourcing of high value-addprocesses is not happening to any significantextent and we predict that this will not happenwithin the next two years.

Growth inhibitorsAlthough BPO growth rates appear healthy

in relation to overall IT services or outsourcinggrowth, the overall German BPO market is stillvery small – and will remain so for some time.

This is due to a number of growthinhibitors:• In a country with a stagnant

unemployment rate of 10% any threat offurther redundancies (which is oftenassumed when outsourcing is discussed)is heavily opposed by workers’ councilsand trade unions. Outsourcing in generalis inhibited by Germany’s restrictivelabour market regulations, which statethat any staff reductions or staffoutplacements have to be agreed with theworkers’ councils (Betriebsrat). Thesecouncils, as well as the trade unions, have

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a significant impact on a company’sstrategic options. The Betriebsrat, whichis in most cases represented at boardlevel, has enormous decision-makingpower, as it fulfils its primary function ofjob protection. Under §613a BGB (GermanCivil Code), personnel transferred as partof an outsourcing deal has at least oneyear of job security. Moreover, theoutsourcer typically has to assumeresponsibility for pension and otherbenefit obligations of the transferredemployees, which are often complex andcostly

• In Germany, BPO is often closelyassociated with offshore or nearshoretransfer of jobs, again raising the issue offurther job losses

• Despite the long-term experience withpayroll services, the concept of BPO is stillnew to the German market. Germany isnot known as an early adopter ofinnovative concepts and experiences. Thisis why IBM claims its main competitor is‘no decision’: uncertainty about the detailsand implications of a BPO contract oftenresult in no decision being taken at all.Moreover, sales cycles are prolonged,

taking at least nine months, and even upto 18 months. BPO references from the USand the UK only have limited value. Onlywhen there are a number of high-profilesuccess stories reported from withinGermany will the acceptance of BPOincrease

• Unlike in the UK, where public sectoroutsourcing has helped to establish BPO,and has also driven BPO growth in theprivate sector, the German public sectorhas not yet woken up to the benefits, interms of cost-effectiveness and improvedcustomer service offered through BPO tolocal and central government, as well aseducation and healthcare. So far, thepublic sector only uses basic payrollservices based on the standardisedKidicap software solution.

Outsourcing in general is inhibited by Germany’srestrictive labour market regulations, which state thatany staff reductions or staff outplacements have to be

agreed with the workers’ councils (Betriebsrat).


StrategySection 1


So where are theopportunities?

Growth in such horizontal areas of BPO inthe next four years will be most evident in the finance, manufacturing, telecommunicationsand utilities sectors. We would recommend thatsuppliers targeting the German market focustheir efforts on large, internationallyoriented organisations in these sectors,since it is here that deals are most likely tobe successfully shaped and completed.Meanwhile, the German government sectoroffers large potential for efficiency gainsthrough shared services but we do notbelieve such opportunities will begin to berealised at significant scale within ourforecast period to 2008.

In addition to the horizontal growth areashighlighted above, we believe that the financesector offers additional opportunities to supplyvertical-specific services. Areas of potentialinclude the administration of loans, life andgeneral insurance policies and otherconsumer-oriented accounts. It is true thatmany large German finance institutions arenot yet ready to consider handing over suchprocesses to a third party. However, webelieve that over the next four years we willbegin to see smaller scale opportunities (forexample, contract values typically of less than

euro50 million) opening up as banks andinsurers increasingly focus on back-officerationalisation. It will be up to suppliers toreassure finance institutions of their ability tohandle operations of this nature.

But it won’t be an easy ride!

It will be crucial for BPO outsourcers tomake a realistic assessment of the market andset expectations accordingly. The reality is thatwhen it comes to outsourcing responsibility forentire business processes, Germany is still oneof the more conservative countries withinEurope. Cultural attitudes, as well as labourregulation, act as significant barriers to thegrowth of BPO, and it cannot be assumed thatGermany, the second largest IT services marketin Europe, will be a fast adopter for BPO. So far,there are only a handful of significant deals,such as EDS/Infineon, IBM/Dresdner Bank,Accenture/Deutsche Bank. Although suchdeals help to raise awareness, only their long-term success can be expected to have a visibleimpact on the future development of theGerman BPO market.

[email protected]



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

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companies are facing currently. Thisevaluation leads to an understanding thatsuccess requires a paradigmatic change in theway companies cope with strategic re-positioning. It is the company's value-chainarchitecture in its entirety that must beanalysed, changed and managed to avoid theincrementalism and imbalance. However,even knowing 'where to go to' in the sense ofhaving a clear strategic vision does not give ananswer of 'how to get from here to there'.Successfully getting ahead has its foundationin a systematic redefinition of know-how or toput it in a different way - corporatecapabilities. Outsourcing and Business ProcessOutsourcing are measures of changingcorporate capabilities and the alignment ofvalue-chain architecture. Thereforecompetitive advantage very much depends onselecting the right strategic suppliers to form avalue-adding network. The need to have acommon strategic view and understanding -on both the supplier and the customer side - ofhow outsourcing can be used to encourageongoing business transformation thereforeemerges as one of the most critical factors.

Being stuck in thetreadmill

At the beginning a view on the competitiveenvironment was outlined, in whichcompanies currently have to struggle forsuccess or survival. To systemise and putrelevant trends in order the CESSP modeloffers a basic analytic framework. It helps tounderstand that the trends mentioned can befound in all three important parts of the overall

The times are a-changin'

- 'Bayer Completes Spin Off of Lanxess AG'- 'DaimlerChrysler shows loss for the first

time in many years'- 'China's Lenovo to buy IBM's PC business'

Those and similar headlines arepredominant in the current business press notonly in Germany but increasingly all overEurope. Weakened by an ongoing economicrecession, even blue-chip companies have tocope with the split between cost-cutting toincrease profitability on the one hand and theneed for investments to secure the future onthe other. To aggravate the situation furtherchanging customer structures in manyindustries render familiar landmarks on themarket side impossible. The market entry ofnew competitors from Central and EasternEuropean countries as well as from China andAsia, generate additional competitivepressure and strategic uncertainty.Management guru Peter F. Drucker coined theterm 'Age of Discontinuity', in the 1970s forsuch an increasingly inconstant and highlydynamic environment.

Thus, the resulting questions for corporateleadership are manifold: - How to address the substantial strategic

challenges?- What measures to take at what time?- How to secure existing advantages while

building up new competitive strengths?

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

Juergen WeigandProfessor of Economics and Director

WHU

Peter KreutterManaging Director

WHU GRID

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competitive environment. Moreover, in manycases they reinforce each other. For example,in the finance and telecommunicationsindustry deregulation has opened markets, inwhich new technologies allowed new entrantsto aggressively compete with incumbents andsatisfy new customer demands. As a result inboth industries market structures havechanged dramatically over recent years. In aGerman context the weak performance oflocal players in the finance sector gives reasonfor the existence of large-scale problemsovercoming those changes.

On principle two cardinal errors can beidentified regarding strategies of companies insuch situations:

1 Companies only re-act to changes in thecompetitive environmentIt has to be observed that many companies

only re-act after stagnant growth; decliningmargins and loss of market share have alreadytaken place. Hope and suppression are seen aslegitimate substitutes for developing andemploying a clear-cut strategy. Competitivenessproblems have to become inescapable until thewait-and-see-policy is abandoned.

There is a long pitiful record of Germancompanies that lost a former leading marketposition through a failure to actively addressfar-reaching changes in their environment.Nixdorf, Grundig or Triumph-Adler are threeexamples. Recent news about ongoing lossesat Leica, once a world-wide famousmanufacturer for high-end cameras, adds tothis. In the case of Leica, the managementignored the digitalisation trend within thecamera industry for many years.

But even if management initiatesrestructuring under massive external pressure,it often lacks the willingness for emergencyroom surgery and limits itself to a few rathercosmetic cuts. This is the second main problem.

2 Companies fail to implement far-reaching, yet balanced corporate renewalAlthough for example cost-cutting efforts are

in some way necessary to correct mistakes ofthe past, they seldom result in fundamentalimprovements of a company's strategicposition. Limiting corporate renewal on a fewisolated topics such as getting the products tomarket a few weeks earlier or launching twonew product lines, neglects other importantsuccess factors like reconfiguring the supply anddelivery value-chain or developing substantialnew business outside existing markets.

As trivial the two cardinal problemsoutlined above might appear as causallyconnected they are to the decline and fall ofindustry leaders all over the world. Let us beclear. Being on the winning side in the questfor competitiveness needs no less than anew, dynamic view on competition andcorporate strategy.

The need for a dynamicview on competition

It is the spirit of Joseph Schumpeter, whichis inseparably linked to most theories targetinga more dynamic, pro-active perspective onindustry and corporate transformation. Alreadyin the early twentieth century he laid thefoundations for a radically different way ofthinking about competition by demanding'creative destruction'. His deepest belief, thatevery company really does have the opportunityto shape its own destiny, is diametricallyopposed to predominantly reactivemanagement and strategy approaches.Schumpeter pointed out that real competitiveadvantage is not based on sole productinnovation but by additionally introducing newmeans of production and new forms oforganisation over the entire value-chain.

The Swiss watch manufacturer SWATCHhighlights an example of a successful'Schumpeterian approach'. After a long painfuljourney, in which the former leading Europeanwatch industry lost most of its market share tocompetitors like TIMEX and CASIO, Nicolas G.Hayek and his SWATCH concept brought backbillion dollar turnover and huge profits. His'innovation' included not only a radical newproduct design; it changed the way peoplethought about their watch. The combination ofcheapness and strong brand with a large'design' element made SWATCH a fashiongood rather than a watch just telling the time.However, a fact, which is often overseen, isHayek's success is more than the product idea.He introduced new distribution channelsignoring the way that the watch manufacturersbrought their goods to the customers over thelast 200 years. It was his ability to bring indifferent know-how and employ capabilitiesfrom other industries to develop and marketwatches that was the key success factor.

Let's look at the second example of'creative destruction': the efforts of DeutscheBank to get back to the top. After years ofunderperformance the management teamaround Josef Ackermann started an extensiverestructuring and repositioning program in

2002. This was more than an incrementalportfolio optimisation. Deutsche Bank madehuge divestments in combination with somefocused investments to strengthen corecompetencies in selected markets. Whatmakes the Deutsche Bank case so different isthat Deutsche Bank thoroughly aligned itsinternal and external value-chains along itsnew business portfolio.

Both examples indicate that the success ofa company's strategy is closely tied to its abilityto change capabilities over the entire value-chain. In some cases this means divestment, inothers, the build up of know-how.

Changing capabilitiesthrough outsourcing

Applying the ideas outlined above, withinthe German outsourcing market, it becomesclear that the structural changes in manyindustries and the resulting competitivepressures are the main drivers behind theincreasing growth rates in outsourcing.Companies have to divest their non-strategic,non-core know-how while securing access toit, e.g. over an outsourcing contract.

In the course of rebuilding CorporateGermany especially information technology isbeing put to the test regarding its strategicrelevance. Foremost, the so-called 'captiveoutsourcing players' are currently under severepressure. They are separate legal entities oflarge companies generating turnover almostexclusively with the parent company oraffiliated companies. Lufthansa Systems, BASFIT Services or Siemens Business Services areexamples of that type of species.

Strategic evaluation shows weaknesses intwo respects. On the one hand in almost allcases the initial idea behind the spin-off, togenerate significant additional business fromoutside the group, didn't become successful.Establishing IT as new pillar in the businessportfolio means competing in a rather maturemarket with blue chip companies such as IBMor EDS already being in leading position.Moreover, the ambitions of CSC or HewlettPackard to expand market share in Germanyincreases competition and reduce the chancesfor the captives to get up to speed.

“There is nothing more difficult to plan,more doubtful of success, nor moredangerous to manage than the creation of a new order of things.”

Niccolo Machiavelli, The Prince

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On the other hand from a parent companyperspective the question has to be raisedwhether a captive IT player can support theother core businesses in a strategic way. Thereshould be no doubt that informationtechnology is and will be increasingly animportant support factor. But the real questionis, does your IT enables you to differentiateagainst competitors? Unfortunately theanswer to that question is often 'NO'.Therefore there is no strategic reason to stickto that knowledge.

According to Ovum figures there is anincreasing number of strategic divestments inthe German market, stressing a portfolio-oriented or M&A style view on IT subsidiaries.Following Rheinmetall selling its IT subsidiaryRheinmetall Informationssysteme to IBM in2002, it was the divestment of ThyssenKrupp'sIT division Triaton in 2003 that drew massiveattention to the question 'is IT strategic?' Aftera competitive bid, in which all large globaloutsourcing companies were involved, finallyHewlett Packard took over Triaton for 340million along with a long term outsourcingcontract with ThyssenKrupp. In the opinion ofmarket analysts, HP paid a large strategicpremium for its entry into the Germanoutsourcing market. At that time DeutscheBank already had sold its Sinius to SiemensBusiness Services, IT SchmidtBank beingpassed to Accenture while three ITsubsidiaries of Draegerwerke were changinghands to Capgemini.

Other companies tried to jump onto thattrain selling off their IT subsidiaries for astrategic premium, but only with limitedsuccess. Ruhrkohle, KarstadtQuelle or theinsurer Gerling had to realise that bulgebracket players like IBM, EDS or CSC have aclear understanding of what makes a dealattractive for both sides and therefore mightavoid stepping into deals with anunpredictable future.

For sellers focusing on premiums, thisbehaviour will cause severe problems. Gettinghigh cash payment is one thing but getting apartner that is able to provide IT as supportfunction to most of your core businessprocesses, optimise them and implementtechnological innovation is even moreimportant. Having only 2nd and 3rd rowoutsourcing players in the bid can perhaps giveyou some kind of 'need to make a large deal'premium from the buyer, but in many caseswon't secure a highly experienced outsourcingpartner for providing mission critical IT.

In this sense selling the IT unit incombination with an outsourcing contractmust achieve two separate goals: Divestingnon-strategic IT know-how while having apartner securing the support function.Whether a real value-adding strategicpartnership has an opportunity to evolvelargely depends on the mindset and culture ofboth partners.

Strategic outsourcingneeds strategicpartnership models

In strategic outsourcing, which meanslarge, complex transactions digging deep intocustomer's value-chains, selecting the rightpartner is key to success. Along with basiccriteria such as market position or financialstability, it is the ability of an IT outsourcingcompany to support its customer in achievingits strategic goals that is paramount.Evaluating aspects like experience in theindustry, regional presence or specialcompetencies in certain technology areas willreduce the number of potential partners to afew. However, history shows that it is thecultural fit between customer and outsourcer,which is in the end the key success or keyfactor for failure.

Strategic outsourcing with its long-termcontracts is an undertaking with a high degreeof uncertainty on both sides. The outsourcer aswell the customer will have to change over timeto respond to a dynamic environment. Sincethose changes will not inevitably move in thesame direction, tensions between both partiesare unavoidable. Only mutual trust and a deep,long-term understanding of each otherssituation, strategic goals and inherent corporateculture will help to readjust the initial objectivestowards a common new setting. Consequentlythis means a much more qualitative criteriaapproach in decision- making.

Conclusion As we have outlined above major

structural changes in many industries enforcethe need to actively change corporatecapabilities. Outsourcing can be seen as onemeasure to redesign corporate know-how andvalue-chains. One will have to select theoutsourcing-partner depending on howimportant non-strategic know-how will be -even after having divested it. Especially insuch complex tasks like outsourcing andredesigning the IT value-chain of largeenterprises, recent developments in Germany

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

Companies will have to learn thatsometimes only one or two outsourcers canfulfil this task, limiting a chance for'auctioning' the sell-off of the IT subsidiary oroutsourcing deal. Many 2nd and 3rd rowoutsourcers will have to cope with thenegative result of a 'quick win' attitudestepping into risky deals, i.e. with enterprisesin financial unhealthy conditions.

Success therefore needs strong, long-termstrategic partnerships on both sides. Realisingthat despite a large number of companiesoffering outsourcing solutions, those strategicpartner positions are in short supply, themessage for blue chip enterprises is clear:Occupy the position as 'strategic partner No. 1'with your favourite outsourcer before yourcompetitor does.

Biographies

Juergen WeigandJuergen Weigand is Professor of Economics andDirector of the Institute for Industrial Organisation atWHU Otto Beisheim Graduate School of Managementin Vallendar, one of Germany's most prestigiousprivate business schools. He is also AcademicDirector of WHU's GRID (Group for Research onIndustrial Dynamics)[email protected]

Peter KreutterPeter Kreutter, CFA is Managing Director of WHU'sGRID (Group for Research on Industrial Dynamics)and research fellow at the Institute for IndustrialOrganisation. His research interest is technologicalinnovation and its long-run effects on industrialmarket structure as well as corporate andcompetitive [email protected]

As we have outlinedabove major structural

changes in manyindustries enforce the

need to actively changecorporate capabilities.

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TAKING A STRATEGIC APPROACH TOSOURCING: WHAT IS MY SOURCINGSTRATEGY?

performed tend toward administration morethan true stewardship of a corporate strategy.

Following the age-old adage of aligninginternal functions with broad corporatevisions, missions, and directions, the strategicsourcing professionals will endeavour topredict the likely future state of their corporateenterprise. They will seek guidance from theC-suite, looking for macro-trends along thelines of corporate structural changes (perhapsthrough acquisitions or divestitures), globalexpansion plans, product line or categorymodifications and employee demographicconsiderations.

However, different parts of theorganisation will often have very differentdrivers. The Chief Financial Officer (CFO) willoften challenge the strategic sourcing team,looking for internal measures of efficiencycompared with alternative service deliverymodels. The procurement infrastructure willlook for robustness in the supply chain and theexecutives focused on business risk will askfor approaches to business continuity,contingency capabilities, and similarconsiderations.

Often it is difficult for the strategic sourcingorganisation to truly act strategically. Theyadopt a reactive model in order to keep pacewith the latest hot topic or ill-defined and

The term ‘strategic’ sounds much moreprogressive and future-oriented than itsanalogue, ‘tactical.’ Many of us, when forcedto admit to resorting to ‘tactical approaches’,are acknowledging that we’re really notcertain what our destination truly is, but we’retrying to demonstrate leadership throughaction rather than merely passing time to seewhat the future might bring.

When it comes to corporate sourcing — theart of leveraging the expertise and efficienciesof a third party to deliver services to theenterprise, as opposed to building,maintaining, and operating the servicesorganically – most don’t want to admit thatthey don’t have a plan that aligns withcorporate directions and offers flexibility to theexecutive suite. Hence, the popular adoptionof ‘strategic sourcing’ to connote the existenceof third-party vendor management or a similarcentralisation of purchasing-related functionsassociated with contracted services.

Too often, it’s the ‘vendor management’activities that consume the cycles of corporatestrategic sourcing resources. Whetheraffiliated with the office of the ChiefInformation Officer (CIO), established as partof a corporate purchasing function, or evendesignated as the domain of a ChiefProcurement Officer (CPO), the functions

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

John BuscherJohn Buscher, Partner, TPI

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shifting business imperatives, all the whilehoping for the opportunity to develop a trulyprogressive approach to the use of sourcing.

But how exactly should organisationsapproach developing a truly strategic sourcingplan? How do they weigh the merits of variousoperating models and leverage the benefitsoffered by industry service providers, whileeffectively governing a portfolio of sourcedrelationships? What are the available sourcingoptions? How should they put together aframework to establish a truly ‘strategic’ utilityto aid enterprises in achieving their desiredambitions?

A Sourcing Strategy –What Is It?

Most major corporations define theirstrategic sourcing functions by terms that arerelated to the organisational alignment of thefunction. Some separate the responsibilitiesaround geographic axes, paying homage to theautonomy of business units and/or thedifferentiating characteristics of certainmarkets. Others make a distinction betweendirect and indirect products and services —emphasising the variances associated with theprocurement and consumption models thatoccur between serving customers versusserving internal needs.

However, there seems to be a commonthread among corporations on the topic ofscope definition. In general ‘StrategicSourcing’ is being defined as the process ofanalysis of the internal and externalenvironment via industry analysis, vendoranalysis, business need assessment,competitive analysis, and supply/demandforecasting. There may be subtle differences inthis definition attributable to such differencesas the organisational alignment of thestrategic sourcing utility and the industrywithin which the enterprise competes. Yet, theterms generally adopted for the function carrya distinctly ‘administrative’ tone to them.

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

However, these functions simply don’tconvey the level of importance and far-reaching impact a well-designed sourcingstrategy can yield for an enterprise. They alsodon’t communicate the benefits such anemphasis can deliver in the near and longer-term. With the pressures to reduce capitalexpenditures, achieve greater transparencyand variability in general and administrative(G&A) costs, and streamline the enterprise forincreasingly global competition, it has neverbeen more important to have an empoweredand progressive leadership team owning theportfolio of sourcing initiatives and ensuringthat those initiatives are aligned withcorporate ambitions.

Some enterprises are renewing thesignificance of their strategic sourcing teams.They are empowering the strategic sourcingorganisation to consider all alternatives for theeffective engagement of third-party serviceproviders in literally all corners of theenterprise. With the lessons learned fromhaving administered relatively ‘low-risk’functions such as facilities and real estate,payroll processing, and the like, seniorexecutives are challenging the sourcingstrategy to address the full spectrum of businessfunctions as candidates for sourcing, includingtransactions related to human resources (HR)services, finance and accounting operations,customer relationship management utilities andeven purchasing functions.

To deliver on these challenges, sourcingexecutives are leveraging the experience ofthe past 15 years related to the outsourcing ofinformation technology (IT) services. With amodel proven to be effective for theevaluation, negotiation, implementation andmanagement of outsourced technologyservices, to include the strategy developmentaspect of those sourcing initiatives, thestrategic sourcing function is renewed withexpectations of cost savings, service qualityimprovements, greater variability to allow forchanges in the business posture, andavoidance of capital expenditures.

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

47www.cxoeurope.com

The questions before corporate sourcingexecutives are not about whether to source, oreven how to administer sourced services.Instead, the questions relate to how to mosteffectively source, the appropriate definition ofscope for sourcing initiatives, global versusregional consistency, and assured achievementof the promised results of sourcedrelationships, among others. The call for astrategic perspective has never been stronger.

Why is it so Difficult toDevelop and Live?

Taking a ‘strategic view’ sounds easy. At itssimplest form, it says, “Design an approach toachieve the destination we envision for thefuture.’ Yet the economic and politicaluncertainty in the world and in manycorporations has never been greater. How is astrategic sourcing team to balance the near-term imperatives with the ambition of buildinga sustainable model for the future?

Whether the focus is on the provision oftechnology, business process services,manufacturing, distribution, or supply chainefficiency, the approach used should gauge thedegree of effectiveness, in terms of cost, quality,variability, and risk, among other factors andshould be tuned to provide a professionaljudgment regarding whether and how sourcingmight benefit the enterprise. Any analysisshould address the question of scope — whetherto bundle multiple business functions into asingle sourcing initiative, or to apply ‘pointsolutions’ to address risks and opportunities.

A well-constructed sourcing strategy oughtto answer three fundamental questions for theenterprise, all relative to the corporation’sambition: • Where are we? How effective and efficient

are our current capabilities? • Where could we be? What are the marginal

opportunities? • How can we get there? What is the

roadmap that will allow us to moveforward?

Like many things in business, ambition is amoving target. Developing and living astrategic sourcing strategy is made yet morecomplex by changes in executive leadership,market pressures, shareholder expectationsand the like. Yet it is possible for the enterpriseto install an empowered leadership to developand own the strategies related to theappropriate application of sourcing towardsthe firm’s business strategies.


StrategySection 1


How Can I InstallLeadership in StrategicSourcing?

Leadership begins with empowerment. Inthe recent past, the CIO was generallyempowered to define the ‘business oftechnology’ as a means to showing directrelevance between technology services andthe business units served. Many CIO’sendeavoured to operate their organisations asbusiness units, with defined services offered atdefined prices. The discipline associated withdelivering technology in a manner thatappeared to be a commercial offering isgenerally cited as a marked improvement overpredecessor models.

But even in technology services, whetherthose services are delivered in whole or in partthrough outsourcing relationships, the needexists for continually refreshed sourcingstrategies. Once a sourcing transaction hasbeen completed, whether for a narrow scopeof services or even a globally-relevantrelationship, the work of sourcing strategy isfar from complete.

In other functional areas of the enterprise,notably the G&A functions that are beingweighed for possible outsourcing, the ability toachieve the same degree of serviceprovisioning is also being sought. But internalownership of the initiative is often ambiguous,the degree of process integration that existstoday may confuse the delineation of scope,and the service providers that exist in themarketplace may be hard to gauge.

Market experience reveals several keysteps necessary to achieve true leadership indeveloping a strategic approach to sourcing. a) Link the corporate needs with sourcing

alternatives — complete a thoroughbusiness needs assessment and spendanalysis to provide alternatives in the areasof market intervention, technicalintervention, cost structure, supplierrelationships, internal process interventionand technology-enhancement initiatives.

b) Develop short-term, mid-term and long-term sourcing strategies — develop andsyndicate a statement of the strategy thatincludes each of the criteria and therationale for each element. The strategydocument includes statement of strategy,desired results, tactical choices andrationale, exit strategies, appropriateinternal approval commitments requiredand strength, weakness opportunity, threat(SWOT) analysis components.

c) Obtain internal alignment on strategy -after documenting the strategy withrationale and supporting data, review thestrategy for alignment with the internaldecision makers in the C-suite andbusiness units.

d) Establish savings targets – as sourcingstrategies always entail the reduction ofcosts, use the strategy document to definethe potential savings targets based on thestrategic intervention choices defined inthe strategy.

e) Develop the Sourcing Plan - use thestrategy document and the savings targetsto develop a detailed tactical plan thatdefines how each stated corporate needwill be sourced, by whom, when and withwhat level of required support.

f) Leverage market expertise to validate themerits of the strategy with focus on suchconsiderations as the viability of the serviceprovider marketplace, global resourceconsiderations and impact of industry trends.

Applying a consistent process for sourcingstrategy development across multiplecorporate business functions, whether or notalready sourced in whole or in part, will installa discipline for decision making, riskassessment, and opportunity evaluation thatensures alignment with business imperatives.These steps will also help to guide anyeventual sourcing transactions with respect tokey business terms that should apply to theestablishment of services agreements, such as

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

Finally, the benefits of such an approach willaccrue to the sourcing management functionthat is ultimately accountable for monitoringand administering sourcing relationships. Theachievement of the value propositionsassociated with a sourcing relationship is onlymade possible if there is a clear articulation ofthe strategy for the relationship in the first place.

Conclusions A truly strategic perspective on the topic of

sourcing is more important to corporateenterprises today than ever before. Too often therole of strategic sourcing organisations is reducedto administrative tasks. Outsourcing is never aforegone conclusion, merely one alternative inthe arsenal of the corporate executive.

By leveraging defined corporate needs andobjectives, a framework for assessing theeffectiveness of the current state of servicedelivery is outlined. In addition, developing abaseline characterisation, augmented by marketexpertise that delivers professional judgmentregarding what alternatives are possible, iscritical to the process. Finally, a lifecyclerepresentation allows the strategic sourcing teamto direct initiatives in a consistent andmanageable manner.

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

About the Author

John Buscher is a Partner at TPI, the world’slargest and most established sourcing advisory firm.Since its founding in 1989, TPI has advised on morethan 650 transactions with a total contract valueexceeding €288 billion. TPI employs more than 250advisors globally who average more than 21 years ofindustry experience.



SHAPING DEALS THAT LAST - PRINCIPLESOF DYNAMIC OUTSOURCING

49www.cxoeurope.com

fail to deliver the value expected by both parties;well over half need to be renegotiated in the first18 months due to 'material divergence betweensupplier and customer'; and an increasingnumber of companies are consideringrepatriating previously outsourced activity.

Now, we at CSC work with many clientsaround the world. None are stupid, all have agood understanding of their goals and themarket alternatives available to them, nearlyall retain well qualified advisors to assist them.So why would such informed clients continueto buy a product that is so obviously flawed?

The issue is simple, even if the solution isnot. The basic concept of outsourcing -transferring work to a specialist partner morecapable of leveraging economies of scale,scope and skill whilst lowering costs, reducingrisk, improving variability and quality, remainshighly attractive.

The OutsourcingChallenge

If you read the press, consult the analyst /advisor community, listen to clients or eventalk to outsourcing vendors, it is clear thatthere are two themes running through theoutsourcing industry at the moment.

Firstly, the outsourcing market is growingand more and more suppliers are attemptingto enter: the more mature infrastructure-related services are growing steadily; theapplications and offshore markets are growingquickly; and the newer business processsegment is growing exponentially.

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

Achieving Sustainable Transformation in a Dynamic World

David Thomas Vice President

Simon KnowlesMarketing DirectorEuropean Business Development

CSC

Principles based on research undertakenby the Leading Edge Forum - ExecutiveProgramme

“The challenge forclients and outsourcing

vendors is how to responddynamically to oftenconflicting business

challenges and priorities.”

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Indeed, most clients are pursuing asourcing strategy that will lead to the transferof infrastructure and applications-relatedservices as well as an increasingly wide rangeof business processes and support functions.However, problems arise in two regards:• Accommodating change and innovation

over the life of the contract;• Managing the array of partners participating

in the overall sourcing strategy.

These are the issues that drive thedysfunctional outcomes correctly identified byindustry analysts and advisors.

Historically, outsourcing arrangementshave contemplated a one-to-one relationshipbetween supplier and client, over an extendedperiod of time, where little changes other than:the price and performance of the services inquestion; the volumes in which they areconsumed; and perhaps the 'version' orcurrency of the technology platform fromwhich they are delivered.

The New Agenda forOutsourcing

Today's requirements are very different.Business needs and priorities are changingmore quickly than ever before. Businessconfiguration is being transformed throughmergers and acquisitions, divestments, jointventures and geographic expansion.Technology is also shifting rapidly and it isnow common for 'breakthrough' changes thatoffer new capabilities and possibilities, tooccur within the life of any contract. Thecompetitive nature of the outsourcingbusiness means that the levels of value offeredto new clients can easily outstrip that beingdelivered to existing clients.

Fewer clients are now prepared to awardall infrastructure and applications-relatedservices to a single vendor. Indeed, when thewider view of business process outsourcing isincluded in the sourcing strategy there are nosingle supplier outcomes. These multi-partnermodels raise significant questions.

How do you deploy end to end deliveryprocesses across multiple providers? How doyou transfer accountability and liability as wellas responsibility and to whom under whatcircumstances? How do you optimise the roleof each partner, determine the scope of theiractivities and, more problematic still, changeroles and scope over time?

Finally, clients are pursuing a wider agendathan cost reduction and performance

improvement. Discrete outsourcingtransactions may still be focused onoperational efficiency, but at the sourcingstrategy level, the goal is focused uponbusiness effectiveness. Understanding how todesign a sourcing strategy to be a collaborationof best-of-breed partners working together toinnovate, transform and create measurableimprovements to the overall business, ratherthan a collection of contracts offeringprice/performance gains within each specificdomain, is becoming a hot topic.

Traditional outsourcing arrangements andthe contracts that define them do not copewell with radical change, and fail to addressflexibility and collaboration betweencompetitive service providers. Even'successful' arrangements rarely highlightinnovation or creativity as the distinguishingfeature of the relationship.

Traditional outsourcing contracts aretransactional in nature and assume that muchof what may happen in the next five to 10years can be envisaged and captured incontract. They deal mainly with improvementsto the existing environment rather than withtransformation to a desired competitiveposition and maintenance of that relativeposition over time. They focus on legalremedies against non-performance andattainable penalties rather than on thebehaviours that each party will exhibit whenfaced with opportunity, threat or regulatoryrequirement.

No surprise then that in the 'failedarrangements' referred to above the supplier isalmost always discharging its obligations underthe contract in full. The real issue is that thecontract no longer reflects the needs, prioritiesand required competitive position of the clientand moreover that the contract actually

disincented the supplier from meeting the real,rather than contractual, needs of the client.

Principles of DynamicOutsourcing

Increasingly, CSC and its clients are takinga new approach to outsourcing:accommodating and exploiting change;weaving innovation and continuoustransformation into the fabric of a long-termrelationship; and designing and facilitatingmulti-partner, collaborative business models.

CSC calls this approach 'DynamicOutsourcing'.

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

1. Focus on Business Outcomes:Increasingly, the technical goals and

measures within outsourcing contracts arebecoming secondary to the business outcomesthat the overall sourcing strategy aims toaccomplish or support. These higher-orderobjectives are better understood by the businessand have the advantage of greater longevity.

The overall business objectives define theintent of the contract, specific businesscapabilities and outcomes associated witheach stage of the transformation plan, andcharges are associated with businessimprovement and capability rather than withnarrow technical measures. Sophisticated

“The key issue is thatcontracts no longer reflect

the requirements andpriorities of the client,

meaning that the supplieris only meeting the

contractual needs ratherthan addressing the real

business challenges”

“As a consequence therelationship is dynamic,changing in line with thebusiness and remainingvital over an extended

period”


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processes are used to link business strategy toIT and process strategy, so that changes inbusiness needs, priorities or evenconfiguration are captured and form the basisof a revised forward plan.

As a consequence the relationship isdynamic, changing in line with the businessand remaining vital over an extended period.By means of an example, one of CSC's clientsSAS, the Scandinavian airline, has a key goalof automating non-flight activities whereverpossible. Many of these services are purchasedon a transactional basis, it is critical for bothSAS and CSC therefore that automationprojects are successful. In order to achievethis, all projects are now subject to a technicaltransformation plan that deploys the requiredIT capabilities as well as a jointly-developedbusiness transformation plan that measureseffectiveness and ensures that the desiredbusiness results are delivered. Differentiatedcharging strategies are deployed to encouragebehavioural change in both supplier and clientorganisations.

2. Create a Collaborative Sourcing Model:In CSC's most recent market survey, 93%

of the respondents said that they werepursuing multi-supplier sourcing strategiesand that collaboration between suppliers wasa key challenge. It has become comparativelyrare for a client to transfer all of its IT servicesto a single supplier, and when BusinessProcess Outsourcing is included within thesourcing strategy there are indeed no singlesupplier models.

Most organisations are 'serial outsourcers',optimising each transaction with little regardfor the target 'sourcing model' and with almostno regard to the eventual collaborationbetween the portfolio of partners that they arecreating. This approach raises strategic aswell as operational issues. From anoperational perspective, technology needs tobe managed on an end-to-end basis.Traditionally, business users are concernedwith availability, performance, cycle times andof course cost, although they are entirelyunconcerned about the state of affairs at thecomponent level. When there is a problemthey do not care why they can't trade or inwhich partners' domain the blame lies, theyonly care that they cannot trade.

Transferring risk is more complex in amulti-partner environment. Suppliers aregenerally willing to accept both responsibilityand liability for matters within their direct

control. In a multi-partner environment, it ishighly unlikely that any one partner wouldaccept responsibility, let alone liability, for'availability' in the broadest sense.

From a strategic standpoint a traditionalsourcing approach leads to a collection ofcompetitively-advantaged contracts. However,when later business improvements arecontemplated, they require the co-operation ofmany partners to achieve the plannedoutcome and once that outcome is achievedthere are likely to be winners and losersamongst the partners. As the attention turnsfrom technical efficiency to businesseffectiveness, improvement programmesrange across and beyond technologicalboundaries. For example, one of CSC's currentclients is facing a regulatory requirement thatcalls for a step-change in capability.Applications will need to be re-engineered orreplaced so that infrastructure can besimplified and better integrated, followingwhich the business process can be re-engineered to deliver the new capability. Froma supplier perspective, the partners deliveringapplication development, network and datacentre services will see volumes and revenuesrise, those delivering application maintenance,end-user and midrange services will see falls.

Unsurprisingly, the client concerned isseeing varying levels of enthusiasm from itschosen partners, collaboration being difficultto retrofit to the existing outsourcingarrangement. Suppliers' assumptions aboutrisk, volume, future business and requiredinvestment drove the commercial offer thatthey made, underpinned the futurecommitments that they offered and shaped thecontract itself.

Dynamic Outsourcing acknowledges theneed for each sourcing transaction to bedesigned to fit into a collaborative sourcingmodel as well as to be optimal in its owndomain. These considerations are made

explicit in the solution, transition,transformation and governance as well as inthe commercial and contractual approach.

3. Align Client and Supplier Intentions:Dynamic Outsourcing aims to

accommodate and exploit change as opposedto simply mitigate it. There is an explicitrecognition that many of the assumptions thatunderpin the initial transaction will change, aswill the required performance levels andeconomic expectations. The key is to focus onthe real requirements from a businessperspective and to be realistic about thesupplier's need to recover investments andmake profit. For example, setting a targetservice level of x% for a service delivered for $yand consumed at a given volume mayrepresent the best view of the requirements inyear three of a relationship but is unlikely to berealistic across the full-term of the contract. Itmay be more appropriate to suggest that:• Service performance and costs will be

maintained in the top x% relative to theclients competitive peer group;

• Service performance and costs will remaincompetitive with other suppliers of similarservices etc.

Such definitions are more likely to endurethan traditional metrics. Dynamic Outsourcingtakes a similar approach to other areas ofchange, envisaging business scenarios(merger and acquisitions, disposals, regulatoryrequirements, new product launches etc.) andmaking explicit the behaviours and actionsrequired of both partners and the client. Itmakes specific provision for innovation -identifying how ideas will be generated, testedand funded. It also makes it clear how bothinvestment and benefits will be realised andshared.

Designing this level of alignment is highlyrewarding but challenging - unlike traditionalapproaches, it requires a level of trust,collaboration, transparency and disclosure,between all parties.

4. Build Mechanisms for SustainableTransformation:

Traditional outsourcing envisages a singleperiod of aggressive transformation toimprove services and deploy supplierprocesses, followed by a sustained period ofcontinuous improvement. This however is nolonger sufficient to maintain market-leadingperformance. CSC's Dynamic Outsourcing

“93% of the respondentssaid that they were

pursuing multi-sourcingstrategies and that

collaboration betweensuppliers was a key

challenge.”


StrategySECTION 1


approach envisages sustained, or iterative,transformation throughout the life of theoutsourcing relationship and makes extensiveuse of Business Process Management (BPM)techniques and tools.

BPM enables the capture, representation,optimisation and deployment of businessprocesses without reference to the underlyingor supporting technology. As a consequence,the business process itself can be transformed,improving business performance andcapability, and thereafter optimising thetechnology environment.

The fusion of BPM with more conventionaloutsourcing approaches enables CSC to makethe interaction between technology andbusiness transformation explicit, and to makethe vision of an outsourcing arrangementbased upon business outcomes rather thantechnical aspirations, a reality.

The potential now exists to move fromcontinuous improvement to continuousoptimisation - maintaining the optimal

business model and technology environmentin real time, as the business's needs, prioritiesand configuration change.

5. Ensure Appropriate Systems ofGovernance/Alignment:

Dynamic Outsourcing assumes that fromthe outset there will be a multi-partnerenvironment providing end-to-end servicedelivery, management and improvementprocesses. It assumes the existence of end toend service delivery, management andimprovement processes. It assumes that theobjective is to harness the combinedcapabilities of the various partners into acohesive whole working to meet client goalswhether those goals are driven byopportunities, threats, market requirements orinnovation. Dynamic outsourcing embodiesthese ideas in an innovative operating modeland a radically different approach togovernance.

In short, Dynamic Outsourcing is a newapproach to designing, shaping and managingoutsourcing relationships that focuses onbusiness objectives and outcomes rather thanon technological goals. It is designed for aflexible multi-partner environment thataccommodates and exploits change so thatthe relationship remains vibrant andcontributive over time.

To date, many of the issues that CSC hasencountered with this approach are culturaland behavioural. Some suppliers find theseapproaches come naturally, others don't.Different combinations of suppliers, allperhaps equally capable have in the pastproduced very differing results.

Ultimately, the success of this approach ismore to do with the combined capability of allsuppliers and the client itself rather than thesum of its parts. When we move from acollection of contracts to a cohesive,collaborative model combining the skills,resources and capabilities of some of theworld's best suppliers in pursuit of the client'sgoals the results can be extraordinary.

“The fusion of BPM withmore conventional

outsourcing approachesenables CSC to make the

interaction betweentechnology and businesstransformation explicit”

CSC s 5 principles of dynamic outsourcing

1. Focus on business outcomes

2. Create a collaborative sourcing model

3. Align customer and supplier intentions

4. Build mechanisms for sustainable transformation

5. Ensure appropriate governance/alignment

For dynamic, innovative, results-drivenoutsourcing solutions, talk to CSC

Contact: Simon Knowles, Marketing Director,European Business Development

E-mail: [email protected],

Tel: +44 (0)1252 536871



UTILISING OUTSOURCING PRACTICES TO GAIN IN-SOURCED SUCCESS

53www.cxoeurope.com

These are:• In-house services are delivered as if they

were externalised. This is typically as aresult of a strategic decision NOT toOutsource, but to organise in a moresupply focused manner. In-Sourcing in thisform is a major challenge. Culturally andorganisationally, companies are seldomready. Far too often this form of In-Sourcing is seen internally as a half wayhouse alternative, that avoids biting theOutsourcing bullet.

• In-Sourcing as a direct result ofOutsourcing failure or, through a change ofstrategy or approach at executive level toreturn these services in-house. This was thecase in September 2004 when JP Morgan hitthe headlines by ending their $2.8Bnoutsourced deal with IBM and taking back4000 IT/IS staff and assets. In this type ofscenario, In-Sourcing will have overcomethe cultural challenge, and the 'demand'organisation has already begun to see theseservices in question as externally provided.However, challenges remain:- The cost of exit from the existing

contract(s). This can be prohibitivelyexpensive unless there is a genuine'with cause' breach of contract

- The staff re-transfer implications

The term 'In-Sourcing' can hold a numberof different meanings. For example, in theUnited States, it is widely used to describe themovement of foreign jobs into the country(otherwise known as Foreign DirectInvestment). However, within the UK andContinental Europe, companies whoundertake in-house service provision withoutapplying the disciplines inherent in a third-party relationship have taken to calling thisarrangement In-Sourcing as well. Thiscommon usage of the term In-Sourcing isincorrect, and it corrupts the term because In-Sourcing should be applied strictly to'applying market forces, culture anddisciplines to such internal services, not as aone-off exercise but on an ongoing basis'.

This involves major cultural andorganisational change and political andeconomic sponsorship from the Executive.Few companies truly achieve this sponsorshipto ensure this philosophy is successful in themid and long-term.

In this article In-Sourcing is specificallyused in reference to intra-organisationalrelationships whether they be IT/IS driven orbusiness process driven. There are two maintypes of true In-Sourcing that MorganChambers sees and in some cases, helps tocreate in the market today.

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

Robert Morgan Director - Business and Brand Development

John ClementsSenior Consultant

Morgan Chambers

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StrategySECTION 1


(The Acquired Rights Directive in Europeor in the case of the UK, the TUPEretransfer issues. This legal constraint isnot a consideration in the US, whichoffers comparatively little employmentprotection to staff in these cases).Critical functions and knowledge needsto be retained. However, staff in Europehave a choice of staying with thesupplier or (re) transferring to the clientorganisation

- Understanding the true reasons why theOutsourcing failed on both sides (poorperformance, perception versus reality,lack of original preparation, failure tomanage, attrition of the original team,wrong cultural mix with supplier, etc). It is critical that this is thoroughlyunderstood before any decision to In-Source is made.

In spite of the issues raised, there aresignificant benefits that can be achieved fromIn-Sourcing. However, the achievement ofthese benefits requires that serious questionsbe asked before embarking on an In-Sourcingprocess. Regardless of the type of In-Sourcing,Morgan Chambers believes these questionsremain the same, and they are discussed in thefollowing section.

Deciding on Whether orNot In-Sourcing CouldSucceed

The discipline of In-Sourcing is 'applyingmarket forces, culture and disciplines to suchinternal services, not as a one-off exercise buton an ongoing basis'. It demands the continuousapplication of true best practice disciplines tointernal services. This is a major issue as bestpractice constantly evolves and can even step-change within a very short period in, what is, afiercely competitive global market.

Appreciating this should illustrate thatmaking In-Sourcing successful, even in theshort to mid-term, requires different operationalwork practices, planned investment profiles,open reporting structures, businessrepresentation, engagement and accountabilityprocesses and perhaps most crucially, afundamental shift of senior managementunderstanding as to why In-Sourcing isimportant and how it will work. Figure 1highlights ten key questions that In-Sourcingdecision makers will need to ask themselvesbefore embarking on the In-Sourcing Process.

In-Sourcing DecisionDo you have a deep understanding of

outsourcing business models, tools andtechniques?

More critically, do you understand andhave access to mechanisms to keep thisknowledge current going forward. Forexample, could you answer the following insome detail:• How do suppliers reduce costs and still

make money?• How do suppliers advance process

and procedures?• How do suppliers improve productivity and

effectiveness?• What is the appropriate level of planned

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

• What upfront investment is needed to getthe function to a world-class standard inthe first place?

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

• What buying power do suppliers havethat you do not, and can you compensatefor this?

• How do suppliers acquire and leverage IP?• Can we provide detailed and transparent

pricing to ensure users pay for what they use?

• Can we verify that the costs we incur and the prices we charge are marketconformant?

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

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

There must be a fundamental executivecommitment and recognition that In-Sourcingis a long-term initiative. It is not just forconstructing the initial agreement and

The discipline of In-Sourcing is 'applying

market forces, culture anddisciplines to such internalservices, not as a one-off

exercise but on anongoing basis'.

Q1Do you have a deep understanding of outsourcing business models,tools and techniques?

Q2Is there top - level executive understanding and sponsorship forthe In - Sourcing initiative?

Q3Does the business and service delivery function understand thedemand/supply side of the equation?

Q4Is there a real and significant investment budget to keep pacewith market knowledge and change?

Q5Is the organisation as a whole prepared to accept andembrace cultural change?

Q6Is the “demand” organisation prepared to accept improvedgovernance and education, as well as strengthening andmaturation of its organisation?

Q7Is the “supply”organisation prepared to accept greater transparencyand solid governance?

Q8Will the organisations be able to put greater emphasis onunderstanding Business needs and handling large - scale changeconsistently well?

Q9Is there acceptance that the In - Sourced operation needs at all times tobe run, managed and measured as if it is an external service provider?

Q10Is there acceptance that outsourcing certain aspects is part of a sound In - Sourcing policy/strategy?

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


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underpinning disciplines. A single boardmember needs to take direct responsibilityfor the decision and the ongoingsponsorship, management and motivation ofthe internal unit. The threat must always bethere that failure to achieve full and regularmarket benefits could result in theoutsourcing of the function.

Does the business and service deliveryfunction understand the demand/supply sideof the equation?

The 'demand-side' senior Business usersmust commit to the 'supply-side' leadershipand logic. There can be no undermining of theIn-Sourcing mandate. As with an Outsourcedoperation, a contract should tie in both partiesso that:• The service delivery function has a clear

strategy and overt sponsorship to become'commercial'

• Service delivery inhibitors (e.g. typicallyunrealistic 'power user' demands) can bedismantled and swept away or at leastaddressed, understood and charged foraccordingly

• Money for buying in specialist support (i.e.outsourcing knowledge, cultural changeexperts, benchmarking data) is expected,budgeted for and available.

Is there a real and significant investmentbudget to keep pace with market knowledgeand change?

This would include budget for technologyrefresh, staff training, new technologies andsoftware, etc. as they evolve. Organisationswho In-Source should expect to experienceset-backs (e.g. service failures, cost overruns),but they should aim to keep it in context andensure joint accountability for both theBusiness and Service Delivery.

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

In-Sourcing will be painful, systemic anddynamic. Outsourcing is about imposing newdiscipline and changing culture and the samealso applies for In-Sourcing. Without ongoingcommitment to change, In-Sourcing willrapidly fail.

Is the 'demand' organisation prepared toaccept the fact there must be improvedgovernance and education as well asstrengthening and maturation of itsorganisation?

• The Business must act like a client ofoutsourced services

• It must mature its approach and beaccountable for failing to specifyrequirements correctly …

• … produce appropriate levels of businesscase for investment decisions, and

• … know how to buy, what to buy, when tobuy, what transparency, reporting andresponsibilities they will accept, etc.

Is the 'supply' organisation prepared toaccept greater transparency and solidgovernance?

Outsourcing automatically providesgreater transparency and solid governance;the supply organisation must now be able andwilling to provide this too. Transparency and governance stops and depoliticisesdemand/supply disputes.

Will the organisation be able to put greateremphasis on understanding Business needsand handling large-scale change consistentlywell?

The service delivery function must employ properly qualified businessconsultants/analysts to act as the interfacebetween service delivery and the Business.This is important so that service delivery canrespond more meaningfully and rapidly tobusiness requests and change.

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

In effect, this means that the In-Sourcingarrangement needs to be set-up so thatService Delivery is:• Accountable• Measurable through KPIs and Business

and Service SLAs• Consistently monitored• Able to capitalise on risk/reward

opportunities• Expected to make a profit (ploughed back

into services or not)• Able to incentivise key staff in way that is

market relevant.

Is there acceptance that outsourcingcertain aspects is part of a sound In-Sourcingpolicy/strategy?

It is normal to 'sub-contract' low valueservices e.g. old coding skills, hardwaremaintenance or web-hosting. In addition,

sourcing new services (i.e. services that youhave never previously had) from the marketwith the view to managing them once they areimplemented/stable, must be seen as normaland as mitigating corporate risk.

Additional ConsiderationsIn addition to answering these questions,

there are other considerations that a sourcingdecision maker needs to factor in:

ProductivityIt must be remembered that suppliers are

forced by the market to realise a generalannual 5% to 8% productivity improvement.However, this can be even higher in certaincommodity service towers. The pressure onpricing and margins is certainly far higher inback office business processes, wherecommoditisation is happening at a dynamicand alarming rate. For example the costs ofadministering insurance policies has droppedby 65% in three years and claims managementby over 50% in a similar timeframe.

Success Could Lead to Other OpportunitiesMany In-Sourced organisations are asking

whether there is scope to bring in othersupport workloads from different departmentsor divisions and even competitors. Back officefunctions that may be mission critical butprovide no discernable competitive advantageare particularly suited. However, thefundamental question is, 'do we want tocapitalise on our investment?' ITnet owes its

very existence to the fact that Cadbury'scommercialised its IT/IS department. Thesame is true of Vertex, having been spawnedout of United Utilities. Success breeds differentforms of thinking and generates its ownpressures and outcomes.

Many In-Sourcedorganisations are askingwhether there is scope to

bring in other supportworkloads from differentdepartments or divisions

and even competitors.


StrategySECTION 1


Offshore/Near-ShoreThis aspect of the global market is

evolving exceptionally fast and extremecaution needs to be applied within the contextof In-Sourcing. Companies who move jobsoffshore may find it very difficult to bring thosejobs back in-house should they have a changein strategic direction.

Early direct client investment in building'tied' sub-continent capabilities has almostvanished. However, any In-Sourced solutionneeds to see this aspect as valid and as apotential extension of internal options.

Sourcing Management Skills (General)Any In-Sourcing will require building a

portfolio of new or improved service skills,some externally focused but most for internalinterfaces. Developing these skills needscareful attention and may require externaltraining contributions from specialists.Indeed, it is seldom the case that anorganisation has the necessary skills in-houseto manage its In-sourcing decisions and

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

ConclusionIn-Sourcing is every bit as strategic as

Outsourcing. This is because of the need for:• On-going sponsorship for cultural change

within the Business• On-going sponsorship for commercialisation

of the function• Formal adoption of a new supply/demand

management style of operating.

The preparation and sheer effort tounderstand and maintain best practice andstandards as the market evolves requiressignificant, planned and intelligent investment.

However, if the political will and foresightis truly there, then the success andtransformation of the corporate entity will beimmense. For some industries and companiesit will fundamentally strengthen their ability tonot just survive but to re-invent themselvesboth culturally and financially - customers andmarket analysts will notice!



APPROACHING THE END OF THE ROADPREPARING FOR THE NATURAL TERMINATION OF AN OUTSOURCING CONTRACT

57www.cxoeurope.com

independently validate if this is, in fact, thebest possible deal

• Don't assume that another vendor cansolve the problems that the incumbentcould not, without determining how yourorganisation contributed to the problems.If you can't understand your ownmanagement problems, you are bound torepeat the behaviour with another vendor

• Don't assume that bringing the servicesback in-house will automatically result inlower costs, higher quality service andbetter alignment between IT-Business,without first understanding the cost andcomplexity of building a new ITorganisation and recognising theresistance you might encounter in theExecutive ranks

• Recognise that Business Process Outsourcingmay be an excellent opportunity in the future,not just for traditional support services (HR,Purchasing and Finance), but also for verticaloperations that affect one business unit.Since IT underpins almost all businessprocesses, be careful about committing ITservices to one vendor only to outsource thebusiness process to another. The resultingarrangement might be expensive andcomplicated.

Preparation is key. Twelve to eighteenmonths before the contract renewal date, theclient organisation should consider its options:• Renew/renegotiate the contract with the

existing service provider• Exit the contract, go to RFP with multiple

vendors• Bring services back in-house• A combination of all of the above

Continuing the relationship with theincumbent vendor often appears to be thesimplest and least stressful route, but is it theright way to go?

Following are some guidelines andprinciples to help you define and implement aviable re-sourcing strategy.

Take a broad approach to your outsourcingstrategy: Make NO assumptions.

Don't be limited by past experience anddon't anticipate a solution before you haveexamined the issue/problem, understand thecause and evaluated the alternatives:• Don't assume that renewing the contract is

the best option, before exploringalternatives

• Beware of the incumbent that offers you a'deal you cannot refuse', before you

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

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

Geraldine Foxglobal director of sourcing services for Compass

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Involve the business units The business unit perspective on

outsourcing can often differ dramatically fromthat of the IT department. Involverepresentatives from the business units toassist in reviewing the successes and failuresof the incumbent as well as setting the goalsand objectives going forward. You can'tpossible construct an effective outsourcingstrategy without the direct involvement andparticipation of the business community.

Learn from your mistakes - and from your successes

If you are disappointed with youroutsourcer, recognise that only rarely is theservice provider solely to blame for theproblems with an outsourcing relationship.Whichever path you choose, be honest andacknowledge that your organisation may havecontributed to the problems and challengeswith the existing relationship. Ask yourselfthese questions:• Did you have clear goals for outsourcing

and did you articulate these goals to thevendor?

• Were you open and frank with the vendorat the beginning?

• Did your corporate objectives change asthe contract matured?

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

• Did you staff your retained functionappropriately?

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

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

If you can answer 'yes' to all of the abovequestions, then you are in the minority. If youanswered 'no' to any, make sure you don'trepeat the problems of the past in any futureoutsourcing relationship.

Get an objective appraisal of the current relationship

If a relationship starts off badly, it oftensettles into a scrappy, contentious, teenageexistence and never achieves maturity. Anindependent third-party governance review ofthe relationship will identify key problem areasthat must be addressed, whether or not youexit the contract. These governancechallenges will not disappear with theincumbent vendor; unless you sort out theproblems, you are in danger of repeating the

problems with a new vendor. Understand yourcapabilities and limitations to manage anoutsourcing relationship. Understand theuniqueness and idiosyncrasies of yourcorporation to ensure that the problems of thepast are not rolled over into a newrelationship.

How do your prices compare with the market?

Many clients believe they over-pay theiroutsourcer and could find another vendorwilling to deliver the same services for less.This is not necessarily true. Although somevendors will respond to RFPs with cut-ratepricing (at least in the first year) to win thebusiness, such deals generally lead todissatisfaction. If cost of IT services is an issue,quantify the potential savings beforeundertaking an expensive and stressfulprocess of re-tendering or repatriation.

An independent evaluation can define afair price for services in many areas. A 'proxybid' - which can be based on either pricesoutsourcers charge, or on the vendor's cost todeliver services - can provide a quick andinexpensive point of reference and a criticalreality check. One key benefit of a proxy is toshow if a vendor is deliberately underbiddingto oust the incumbent.

What are the costs and challenges ofbringing services back in house?

Although insourcing might reduce overallIT costs by 20 to 30 percent, the transition willinvolve increasing the headcount andpurchasing assets. This is a hard sell to theExecutive and the Board of Directors. A viablebusiness case to justify the upheaval must bebased on a realistic and thorough appraisal ofmarket costs, including the cost of repatriationas well as the personnel to run the operation.

Options and RisksEach course of action involves risks that

should be evaluated and addressed before adecision is reached. The following discusessome of the risks associated with the optionsavailable at the end of the contract.

The risk of renewing the contractDo you have a troubled relationship with

your outsourcer, characterised by mistrust andresentment, constant friction, anddisagreement over the content of the contract?If so, renewing this contract will most likelyresult in a relationship that continues to fail.

Trust, once lost, is rarely recovered. Lowercharges, or vague promises of better service inthe future, will not guarantee success in thefuture. If both parties are to blame, it generallycomes down to a bad cultural fit, rather than abad client and a bad service provider. A wiserstrategy is to accept that you are culturallymisaligned, to learn your lessons and moveon, rather than to try to rebuild a seriouslyflawed relationship.

However, if the parties have established agood outsourcing relationship, primarilycharacterised by trust between the parties,renewal is a low-risk proposition. Issues suchas perceived overcharging for services, ordisappointing service delivery, can be sortedout during renegotiation, if done the right way.

If you decide to proceed with renewing thecontract, do not do so without first:• Identifying the impediments to success in

the existing deal through an overallassessment of the governance relationshipto determine how the cause of theproblems can be addressed duringnegotiations

• Determining the scope of services andresponsibilities to outsource and those totake back in-house. Often, the client hasalready 'absorbed' some responsibilitiesover the contract term. Now is a goodopportunity to make this official

• Developing a new master servicesschedule, which fully defines the serviceoffering, maps the responsibilities, andestablishes the service delivery targets andreporting

• Using a third-party to develop a 'Proxy Bid'to fulfill the requirements for competitivebid situation and to set a fair market pricefor the services

The risk of going to RFPAn incumbent vendor participating in the

RFP process adds complexity to the process:• Other vendors may assume that you will

use their bids to achieve a lower price withthe incumbent: You must woo them toparticipate in the biding process

• The incumbent has extensive knowledge ofyour operation and therefore has asubstantial advantage over the competition

• The competition may deliberately underbidto oust the incumbent

• An incumbent vendor that expects to losethe contract may be uncooperative insharing information and allowing access toother vendors


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The key issue in the re-bid scenario iscontrol: You must have access to your dataand information and build an internal andexternal team of experts to execute andmanage the outsourcing process. • Take control of your own data and

information and avoid being placed at themercy of the incumbent vendor.

• If you don't have access to the data andinformation required to issue an RFP,execute the contract-benchmarking clauseand allow a third-party to gather thatinformation.

• Understand the prevailing market pricesbefore embarking on this process. If costreduction is the primary driver, make sureother vendors can deliver on yourexpectations

• The re-bid process is expensive and doesnot guarantee success. You will requiresubstantial investment for internal andexternal resources. Make sure the fundsare available before you consider thisventure

• The other vendors must be assured that theprocess will be fair and that all vendors willhave access to as much knowledge aboutthe operation as the incumbent. You mustbe prepared to invest in educating theother vendors about your environment

• Do not use re-tendering as a means toachieve a 'better deal' from the incumbent:this is not only unfair and unethical, butalso expensive. If that is your primaryobjective, then hire a consulting companyto develop a 'Proxy Bid', which you can usein lieu of competitive bids

• The incumbent should be given the benefitof the doubt when offering new solutionsto previously existing problems. In otherwords, consider whether you can forgiveand forget past transgressions and build anew relationship. If so, allow theincumbent to start with a clean slate andview their proposal with the sameenthusiasm and lack of cynicism accordedto the proposals of the competitors.

The risk of bringing services back in-houseOrganisations that take this path are

generally:• Dissatisfied with the performance of the

incumbent vendor• Disillusioned about outsourcing• Pursuing aggressive cost savings or control

over their IT budget• Have discovered that outsourcing does not

add value to their operation• Aware that IT is a core competency and

instrumental to their overall operation

Although rare, large-scale insourcing willlikely become more common over the nextfew years, despite the challenges. Our analysishas revealed that organisations have beenquietly insourcing selective areas for years.

Don't underestimate the challenge of

justifying the business case to the executive: Inthe past, a key driver for outsourcing was toget people 'off the books' and to sell the assetsfor a cash infusion. Notwithstanding potentialsavings of 20 to 30 percent, making acompelling business case is often difficult, asinsourcing will involve increasing theheadcount and perhaps purchasing assets.You must consider staffing the operation: Stafftransferred to the incumbent vendor at theoutset of the contract may be unwilling totransfer back. You must consider running thisnew organisation as a business.

Some issues to consider:• Realistic, independent market costs,

associated with the personnel and the costof repatriation, are needed to develop aviable business case to justify theupheaval. You need to demonstrate theeffort is worth it, which usually translates

into a substantial cost savings and notableincrease in quality

• Once the services are repatriated, beprepared to run the service as a businessand to quantify the associated costs.

• Consider that executives may find adiscount from the incumbent vendor, orfrom the market, more appealing thanachieving cost savings throughrepatriation.

Organisations unhappy with outsourcingmight be tempted to repatriate the wholeoperation once their contract term expires.While insourcing can be an enticing option, it'snot as easy as it seems, and requires carefulplanning and execution, a strong businesscase, and a sympathetic executive willing toundertake significant cost and disruption.

Repatriation should never be a knee-jerkreaction to a bad outsourcing experience, butan outcome of careful analysis. Moreover, ifyou think the outsourcer is solely to blame fora bad situation, you are probably wrong, andwill probably repeat the same mistakeswhether you repatriate, renegotiate with theincumbent, or switch to another vendor.

Geraldine Fox is global director of sourcing

services for Compass, a management consulting firm

headquartered in Guildford, UK.

If both parties are to blame, it generally comes downto a bad cultural fit, rather than a bad client and a bad

service provider.


Enabling the ResultsDriven Enterprise

Since its formation in 1959, CSC has helpedits clients manage and profit from every majorwave of change in IT.

CSC provides innovative solutions forcustomers around the world by applyingleading technologies and CSC's own advancedcapabilities. These include systems design andintegration, IT and business processoutsourcing (BPO), applications softwaredevelopment, Web and application hosting,and management and technology consulting.

The company's spectrum of end to endservices includes:• Outsourcing - Improving business

performance, service levels and reducingcosts. Our outsourcing capabilities includebusiness process outsourcing, applicationoutsourcing, infrastructure outsourcingand hosting services.

• Systems Integration - Our 45-year heritageof technology leadership includes buildingsome of the world's most complexmission-critical information systems. Fromfront-end consulting and planning tointegrating and managing technologysolutions, CSC has the expertise andexperience to respond to uniquechallenges and opportunities.

• Consulting - Our portfolio of industry-focused solutions spans the full life cycle -from strategy and business process designto technology services, systems integration,application outsourcing and hosting.

SOLUTION PROVIDER

The New Agenda forOutsourcing

Business needs and priorities are changingmore quickly than ever before. Businessconfiguration is being transformed throughmergers and acquisitions, divestments, jointventures and geographic expansion.Technology is also shifting rapidly and it isnow common for 'breakthrough' changes thatoffer new capabilities and possibilities, tooccur within the life of any contract.

Fewer clients are now prepared to awardall infrastructure and applications-relatedservices to a single vendor. Indeed, when thewider view of business process outsourcing isincluded in the sourcing strategy there are nosingle supplier outcomes. These multi-partnermodels raise significant questions.

How do you deploy end to end deliveryprocesses across multiple providers? How doyou transfer accountability and liability as wellas responsibility and to whom under whatcircumstances? How do you optimise the roleof each partner, determine the scope of theiractivities and, more problematic still, changeroles and scope over time?

Finally, clients are pursuing a wider agendathan cost reduction and performanceimprovement. Discrete outsourcingtransactions may still be focused onoperational efficiency, but at the sourcingstrategy level, the goal is focused uponbusiness effectiveness. Understanding how todesign a sourcing strategy to be a collaborationof best-of-breed partners working together to

For dynamic, innovative, results-drivenoutsourcing solutions, talk to CSC

As the third largest outsourcing company in the world, CSC's mission is to providecustomers in industry and government with solutions crafted to meet their specificchallenges and which enable them to profit from the advanced use of technology.

www.CSC.com

www.cxoeurope.com60

www.CSC.com Computer Sciences Corporation Founded in1959, Computer Sciences Corporation is a leadingglobal information technology (IT) services company.

CSC Corporate Headquarters:2100 East Grand AvenueEl Segundo, CA 90245 USAPhone: +1.310.615.0311

CSC European Headquarters:Royal PavilionWellesley RoadAldershot, Hampshire GU11 1PZUnited KingdomTel: +44(0)1252.534000Fax: +44(0)1252.534100

Business ContactSimon KnowlesMarketing Director, European Business Development

Tel: +44 (0)1252 536871E-mail: [email protected]

TOP_05_CSC_P.qxd 23/6/05 9:38 pm Page 1

innovate, transform and create measurableimprovements to the overall business, ratherthan a collection of contracts offeringprice/performance gains within each specificdomain, is becoming a hot topic.

The Principles of Dynamic OutsourcingIncreasingly, CSC and its clients are taking a

new approach to outsourcing: accommodatingand exploiting change; weaving innovationand continuous transformation into the fabricof a long-term relationship; and designing andfacilitating multi-partner, collaborativebusiness models.

CSC calls this approach 'DynamicOutsourcing'.

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

1. Focus on Business Outcomes:Increasingly, the technical goals and

measures within outsourcing contracts arebecoming secondary to the businessoutcomes that the overall sourcing strategyaims to accomplish or support. These higher-order objectives are better understood by thebusiness and have the advantage of greaterlongevity.

2. Create a Collaborative Sourcing Model:Most organisations are 'serial

outsourcers', optimising each transactionwith little regard for the target 'sourcingmodel' and with almost no regard to theeventual collaboration between the portfolioof partners that they are creating.

Dynamic Outsourcing acknowledges theneed for each sourcing transaction to bedesigned to fit into a collaborative sourcingmodel as well as to be optimal in its owndomain. These considerations are madeexplicit in the solution, transition,transformation and governance as well as inthe commercial and contractual approach.

3. Align Client and Supplier Intentions:Dynamic Outsourcing aims to

accommodate and exploit change as opposedto simply mitigate it. There is an explicitrecognition that many of the assumptionsthat underpin the initial transaction will

change, as will the required performancelevels and economic expectations. The key isto focus on the real requirements from abusiness perspective and to be realistic aboutthe supplier's need to recover investmentsand make profit.

4. Build Mechanisms for SustainableTransformation:

Traditional outsourcing envisages a singleperiod of aggressive transformation toimprove services and deploy supplierprocesses, followed by a sustained period ofcontinuous improvement. This however is nolonger sufficient to maintain market-leadingperformance. CSC's Dynamic Outsourcingapproach envisages sustained, or iterative,transformation throughout the life of theoutsourcing relationship.

5. Ensure Appropriate Systems ofGovernance/Alignment:

Dynamic Outsourcing assumes that fromthe outset there will be a multi-partnerenvironment providing end to end servicedelivery, management and improvementprocesses. It assumes the existence of end toend service delivery, management andimprovement processes. It assumes that theobjective is to harness the combinedcapabilities of the various partners into acohesive whole working to meet client goalswhether those goals are driven byopportunities, threats, market requirementsor innovation. Dynamic outsourcingembodies these ideas in an innovativeoperating model and a radically differentapproach to governance.

So if you want to implement a dynamic,innovative, results-driven outsourcingsolution, talk to CSC.

Experience. Results.

Experience. CSC.

61www.cxoeurope.com

www.CSC.com

SOLUTION PROVIDER

CSC at a GlanceYear founded: 1959 No. of employees: 79,000 FY04 revenue: $14.1 billion

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ENABLING DOCUMENT PROCESSOUTSOURCING IN THE CORPORATEDOCUMENT ENTERPRISE

Also overlooked within the organisationalchange movement was the importance ofcorporate document business processes. Often,these processes were optimised at the mostrecognisable point - output - but rarelyexamined from end-to-end, in order to betterdevelop and refine operational improvementsthat optimised efficiency and improved quality.As a result, traditional document outsourcingoptions such as facilities management andcontracted print services were aggressivelyemployed. These services, while deliveringtremendous reductions in cost andimprovements in efficiency, didn't optimise thedocument business processes within theenterprise to the degree that other strategicoutsourcing engagements in other areas did.Considering that, by some estimates, corporateenterprises spend 10% to 15% of net revenueson document processes, this was a significantbarrier to full corporate optimisation.

Today, corporate organisations are movingfaster than ever before to optimise theiroperationally-necessary business processes,including document business processes.However, as they do so, they are discoveringthat they lack the fundamental knowledge andinsight required to fully optimise their documentprocesses. The challenge, for these enterprisesand the service providers who assist them, is tounderstand the total document process,optimise it, and then - particularly in the case ofoperationally necessary but non-differentiatingdocument processes - outsource the entiredocument process to an external provider.Enterprises within the 21st century seek totransform their exuberance for optimisation ofdocument operations into a plan for action.

The Business ChallengeWithin the present economic environment,

intense competition, slowing growth rates,and a relentless drive to improve operationalefficiencies have driven many economists todescribe a transition in corporate planningfrom 'exuberance' in growth to 'prudence' inasset and personnel deployment. Otherobservers, including InfoTrends/CAPVentures, believe that the exuberance withinthe corporate enterprise has not disappeared -it has simply changed its focus in uncoveringopportunities in a 21st century marketplacethat no longer is perceived to be 'growingwithout restriction.'

This change in focus is a direct result ofefforts to re-engineer business processes. Ifvertically-integrated, technologically-advanced companies dominated themanufacturing economy of the 20th century,lean and focused integrated enterprise willdominate the knowledge economy of the 21stcentury. Many companies within themarketplace are moving to transform from theformer to the latter, and encounteringsignificant pains in doing so.

The preferred option of many corporatetransformations, organisational change, didreduce costs through headcount, but oftensimply didn't provide enterprises with thecompetitive advantages that were required inorder to become (or remain) strongmarketplace competitors. Often, resourcesthat were 'rationalised' or eliminated were incrucial areas of core competency - reducingcosts but ultimately damaging corporateeffectiveness and competitiveness to a degreewhich made 'savings' uneconomical.

Brian R. Miller Associate Director

InfoTrends/CAP Ventures

StrategySECTION 1


TOP_05_CapVen_wp 23/6/05 9:50 pm Page 2

SECTION 1Strategy


The object of this white paper is to examinethe sources of cost within typical documentbusiness processes, identify a strategy forevaluating and controlling those costs, andproposing a roadmap for implementation of anew type of document outsourcing - fullDocument Process Outsourcing (or DPO).

The Enterprise DocumentProcess Cost Model

The Case of the Missing EfficienciesEven the best-run corporate environments

often have difficulty in realising theirenterprise document sources of cost.Companies within the automotivemarketplace, for instance, are consideredpioneers in many cost reduction and efficiencyimprovement techniques within theirindustries, such as just-in-time manufacturing,lean production, and computer-aided low-costdesign. However, automotive manufacturingdocument process costs are often difficult toevaluate and even more difficult to reduce.

Consider the case of a major Europeanautomaker faced with a strong cost-reductionfocus in its core business. The company, anaggressively managed enterprise, noticed thatits cost for production and distribution oftechnical service bulletins (or TSBs) wasconsiderably higher than a larger Europeancompetitor. These TSBs, technical documentsthat are produced on a regular basis for theconsumption of the automaker's dealer servicenetwork, contain crucial information aboutmodel changes, new repair techniques, newmodels, and safety/performance/reliabilityrecalls. With an average of ten per monthproduced per model, the automakerdistributed over 150 per dealer on a monthlybasis to thousands of dealers across Europe,the Middle East and North Africa.

The TSBs were translated into locallanguages, printed and mailed from acentralised production facility within Europe.The company focused relentlessly on reducingthe total cost of its document operations, usingthe lowest cost offset technology, avoidingcostly investments in new capital equipment,and optimising its production workflow toensure that technical bulletins were sent toproduction quickly after the engineers in theenterprise developed them. Despite this focus,however, the company noted that its technicalservice bulletin operations overall cost 20%higher than the industry average and over 30%higher than its closest competitor. Confusion

and frustration were the end result,particularly for document operationsmanagement who received extensive negativescrutiny from senior managers seeking to cutcosts further for this crucial document process.

The True Cost of a Document: Focus on the Process

The experience given in the prior case studyis by no means unique within enterprisedocument environments in most industries.Service providers within traditional facilitiesmanagement engagements have oftenencountered customer surprise regarding thedegree of cost savings found within a documentoutsourcing engagement - customers oftenexpected total costs to be reduced far more thanthey actually are. The reality is that, in manycases, customers and service providers alikeare not focusing on the true cost of a documentprocess - from end to end.

As Figure 1 indicates, the cost of printinga document represents, on average, onlyabout 1/7th of the total cost to produce adocument. The overwhelming majority of thedocument's cost is found within the processaround the document - functions rangingfrom IT integration to fulfilment towarehousing and archiving. These criticaldocument sub-processes are oftenoverlooked. Traditionally, customers andservice providers alike have focused on thetop portion of this equation, since the printproduction of documents is often the mosttangible element of entire document process.

63www.cxoeurope.com

This has compounded the challenge ofsoaring document costs - in both productionand office environments - within the lessvisible process elements even further.

Examples of these business process costsinclude:• Warehousing and archiving. The cost of

facilities and personnel to store andmanage archives of documents for futuredistribution on demand, and that ensurerapid access to documents;

• Fulfilment. The cost to deliver documentson time to the appropriate end customer -internal or external;

• Procurement administration. Personnel andsystems who procure documentinfrastructure including print, supplies andequipment;

• Internal document prep and creative.Personnel and systems who performmakeready services for documents within aproduction workflow and who performcreative work for documents within a givenbusiness process;

• IT administration and integration. A portionof the time required for IT personnel to keepdocument infrastructure running and thecosts of limited integration, such as re-entrywork, datastream transformation errors,and other consequences of inadequate ITinfrastructure;

• Inventory obsolescence. The cost ofdocuments that are produced, stored,archived and then disposed of when theyare no longer necessary.

Figure 1. The Total Document Cost Model


StrategySECTION 1


When these sources of cost are examinedindividually, it's often found that not only areprocess areas unoptimised, but the true cost ofthose areas is often completely unknown. Forinstance, information technology costs aretypically an internal corporate budget areacompletely separated from other documentoperations - making it difficult to determineexactly how much an enterprise might spenddue to IT inefficiencies in a particulardocument process. Other areas of cost, suchas procurement administration, are notexamined on an activities-based costing basis,so while total expenditures in those particularareas might be known, 'useful versus wasteful'activity is typically difficult to discern. Finally,

some of the most costly areas, such asfulfilment, warehousing and archiving, areviewed as 'necessary evils' which are requiredin order for a document to reach its finaldestination, and which often lacks costflexibility - for instance, postal charges aredifficult to reduce on a per-item basis.

Document Lifecycle Analysis: Gaining CostTransparency to Grow Opportunity

Given the large number of 'murky costs'that exist within the corporate documententerprise - often over 80% of the totaldocument cost - how do companies that wishto consider strategic document outsourcingoptions get a clearer picture of their total

document costs? The answer is a documentlifecycle business assessment.

These assessments, provided by most of themajor document outsourcing service providers,examine a document process from end-to-end- from when a document owner produces adocument through to when the documentreaches the end of its life and is archived orotherwise ended. Leveraging production, officeand business workflow analyses, andincorporating advanced efficiency and qualitymetrics from manufacturing (such as sixsigma), these analyses identify unique areas ofcost within the document enterprise andsuggest strategies to reduce costs within bothprint and process.

Operationally, these engagements focus onoptimising the business and creative workflowswithin production and office documentoperations - usually to accommodate a majordocument process or even several of them,using a flexible deployment model.

These structured engagements typicallytake between three days up to several months(for large and complex processes), with theend result being an actionable report thatoffers a new implementation plan. The endresult today is usually a facilities managementengagement that optimises key portions of theworkflow in order to reduce process costs.However, even in this case, corporateenterprises remain ultimately responsible forat least a portion of the document process -even if they don't want to be.

This was clearly ascertained by theEuropean auto maker mentioned earlier.When it underwent an assessment of its TSBproduction process, it discovered a number ofinefficiencies and areas of high cost within itsprocess. All IT expenditures were accountedfor under a separate department, which'charged' its document operations as needed -without a detailed report of what IT serviceswere consumed at a given time. Due to legalrequirements as well as customer qualityassurance, the company maintained a largearchive of TSBs that required a costly facilityfor storage as well as professional taxonomyand retrieval. Fulfilment was a largeexpenditure, with some postal systems beingso unreliable that TSBs had to be remailed ifthey were lost or, worse, couriers had to bepaid to deliver the documents. Finally,administrative costs had skyrocketed as theprocess grew ever more complex withincreasing numbers of new models and newrepair techniques.

Figure 3. Optimised Business and Creative Workflow

Concept

Warehousing/Archiving

Fulfillment/Distribution*

Finishing

Printing

Order Management

Preparation

Creation

ConceptConceptConcept




Fulfillment/Distribution*Fulfillment/

Distribution*Fulfillment/

Distribution*

FinishingFinishingFinishing

PrintingPrintingPrinting

Order Management

Order Management

Order Management

PreparationPreparationPreparation

CreationCreationCreation

Figure 2. The Document Lifecycle


Section 1Strategy


65www.cxoeurope.com

In the examination of its cost centre, theautomaker realised that while it was spendingless than one Euro cent on print costs pertechnical service bulletin - where it hadtraditionally focused its document cost-cuttingemphasis - it was spending 26 Euro cents onprocess - making the process side more thanfour times as expensive as the averagedocument process.

Document ProcessOutsourcing: The NewStrategic Option

A Logical Extension of CorporateOutsourcing Strategy

While print and document spending is animportant corporate cost, it is only one ofmany areas that corporations have focusedupon to make more efficient. As companieswithin multiple industry areas examinewhat's necessary to succeed, often withlimited resources, they quickly realise thebenefits of freeing up resources onceemployed for non-core business operations -such as document production anddistribution - and reallocating them to theircore business. As a result of this philosophy,Business Process Outsourcing (or BPO) hasbecome one of the highest-growth areas ofservice provisioning within recent years.

Most popular within IT and financialservice business processes, true BPO involves

the outsourcing of an entire non-core-business process to a service provider, whostreamlines the business process and deliversit more efficiently and effectively, at a loweroverall cost. The service provider benefits byearning additional revenue, often in a sharedrisk/reward model that allocates greaterbenefits in exchange for delivering greaterefficiency. The customer benefits by freeing upvaluable capital resources to invest, withincore business operations, and in theoperational benefits that come from a lower-cost, more efficient business process.

These benefits quickly become apparentwhen examined from a document businessprocess perspective. Given the substantialcomplexities of process costs, as well as printcosts, document BPO may indeed be one of themost effective areas for a corporate entity toconsider outsourcing.

Defining DPOInfoTrends/CAP Ventures defines this

emerging document BPO standard asDocument Process Outsourcing (or DPO). DPOis defined as the assignment of an entiredocument business process to an externalprovider. An engagement typically has threemajor stakeholders:• The DPO service provider, who takes over,

optimises and operates the documentprocess;

• The DPO customer, who contracts directly

with the service provider and outsourcesthe document process in question;

• The end user, who is the ultimate recipientof the document or set of documentsproduced by the document process.Examples include consumers, governmentagencies, suppliers, business partners,distributors, employees and shareholders.

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

Service providers experience newchallenges and new opportunities within aDPO engagement, when contrasted with atraditional document outsourcing engagementsuch as facilities management. The first ofthese new challenges is a new degree ofaccountability. Service providers are no longerresponsible for discreet functions, such aspage clicks or hourly creative services, withinDPO. Instead, they must meet core servicelevel requirements that include metrics suchas quality, throughput, cycle time, andcustomer satisfaction. If these metrics aren'tmet, the service provider is penalised. In theold document outsourcing world, this meantthat a service provider might lose a contract ifa customer wasn't satisfied - but often still gotpaid for the work performed. However, withinDPO, if a service provider doesn't deliver, notonly does the provider still have to do thework, but may often find that it is deliveringdocuments and receiving no revenue -perhaps, even paying the customer for severeviolations of service level agreements!

Despite this assumed risk, DPO also offerssavvy service providers unmatched flexibility indeployment. If traditional documentoutsourcing was defined by the 'how' - theequipment, personnel and infrastructure to bedeployed to meet a customer's demands, DPOis defined by the 'what' - the document to bedelivered. Thus, the service provider is nolonger restricted to deploying only thedocument infrastructure that meets a givencontract. It is instead free to support the servicelevel agreements with any infrastructurenecessary - allowing dramatic changes toimprove efficiency, lower cost and ultimatelygrow revenue for the service provider overtime. Within DPO, a service provider can switchto electronic documents, completely optimisethe production workflow, or move personnel

Report based onpredefined metrics

Structured orunstructured content

Figure 3. The DPO Supplier and Customer Relationship


StrategySection 1


offsite, usually without requesting customerapproval. Such freedom allows the most agileservice providers to find additional margin witha document process and quickly adapt tochanging business conditions.

The Customer andService ProviderRelationship

Information ExchangesThe relationship between customers and

service providers within a DPO engagement, likemany other elements of DPO, is unique withinthe document outsourcing realm. By turningover the entire document process to a serviceprovider, the customer exits many traditionaloversight roles and becomes simply a high levelobserver of process performance metrics.

Within DPO, customer inputs generallyconsist of unstructured or structured content,which the service provider transforms into theend document. That document is thendelivered to the end user, while the serviceprovider outputs a report based upon pre-defined metrics to the customer on a periodicbasis to ensure compliance with service levelagreements. The service provider may alsooutput structured or unstructured contentbased upon the document process for thecustomer to use within internal operations.

Most Commonly Outsourced Document Processes

The document business processes mostoften being targeted today include:• Customer facing document processes -

the production and distribution of customer-facing documents. These documentprocesses include on-demand fulfilment ofcustomer requests for invoices and accountinformation (through print, e-mail, or theweb) and general customer service relatedto customer communications. In-scopeservices include design, print production,hosting, call centre and fulfilment.

• Technical document processes - theproduction and fulfilment of technicaldocuments, usually between business unitsor corporate enterprises. These documentprocesses include creation and distributionof technical service bulletins,

manufacturing supplier technicaldocuments, product design specifications,and repair manuals. In-scope servicesinclude design, translation, printproduction, hosting, call centre, e-distribution, archive management, andfulfilment.

• Marketing and communicationsdocument processes - documentprocesses related to the production ofcustomer marketing and communicationsdocuments, generally externally facing.These document processes include on-demand customer collateral fulfilment,translation services, digital and offset colourprint, advertisement and media buyingservices, and document design services.

• Regulatory compliance documentprocesses - document processes designedto ensure compliance with regulatoryrequirements (usually within financialservices, insurance, and product safety).These document processes include contentmanagement, archiving, fulfilment,document consulting, legal advisoryservices and document design services.

• Financial accounting and invoicingdocument processes - document processesthat facilitate the accurate and completecapture, reporting and archiving of financialinformation, and the seamless invoicing andpayment of customers and suppliers. Thesedocument processes include design, contentmanagement, archiving, fulfilment,document consulting, legal advisory services,print production, and hosting.

The market size, growth rate and specificopportunity notes for each of these documentprocesses within the United States, Canadaand Western Europe are profiled in eachregion's respective InfoTrends/CAP VenturesDocument Outsourcing Market Forecast.

Identifying Document Processes Best Suited for DPO

A document business process assessmentremains the best basis for determining thepotential for document process outsourcing,but several key guidelines exist for determiningwhich business processes are generally able tobenefit from DPO. They include:

• Operationally necessary processeswith no competitive differentiation.Document business processes that arerequired for operational continuity, yet donot serve as a competitive differentiatorfrom an end customer perspective are oftenamong the best sources of opportunities forefficiency improvements.

• Processes that grew in an ad-hocfashion. Often, document businessprocesses grow around a particularapplication or technology in a piecemealfashion, with little or no conscious thoughtto improving their efficiency. Since a keyportion of DPO is business process redesign,processes that have not been rigorouslystructured can benefit substantially from afull redesign and redeployment as DPO.

• Processes that serve as anorganisational bottleneck. Often,document business processes can slow theperformance of an organisation - aparticular competitive weakness in amarket environment that favours efficiencyand rapid movement. Service providers whocan open up a bottleneck through processredesign and superior execution can reaplarge dividends from the resultingperformance improvements at theircustomers' enterprises.

• Processes that serve to fulfil regulatoryrequirements. Customers often executedocument processes that fulfil regulatoryrequirements simply to avoid fines for non-compliance - viewing them as 'necessaryevils.' By providing superior performance ata lower cost, document process outsourcingservice providers can gain a strong andpredictable revenue stream over time.

• Processes that are generally viewed asweak or needing adjustment bycustomers. Customers often know that adocument process is weak, but lack the focusor expertise to optimise and redeploy aprocess. By redesigning these processes forthe customer, a document processoutsourcing service provider can gain revenuefrom helping customers transform a desire forimprovement to actual cost reduction.


Section 2

Section 2www.cxoeurope.com

Governance

TOP_05_Section 2.qxd 23/6/05 9:53 pm Page 1

OUTSOURCING GOVERNANCE: A KEYTO BUSINESS SUCCESS

GovernanceSECTION 2


governance methods, including projectorganisation and required skills, and ensure theirlinkage with overall strategy and objectives.

People issues are amongst the most importantfactors for the success or failure of outsourcing.Investing time and effort to learn best practices frompeers, potential providers and from those who haveoutsourced similar functions will maximise theeffectiveness of outsourcing. However, corporationsalso need to re-think the quality, training andmotivations of the staff they deploy to design,implement and manage outsourcing projects. Andthey need to consider carefully the role andcontribution of external ‘experts’.

More than 100 companies contributed tothe IACCM survey on the current state ofoutsourcing. More than 90% have experiencewith outsourcing IT and contact centers, withnearly 40% having ventured into businessprocess outsourcing (BPO). Only 13% havebeen involved with outsourcing of researchand development.

Among respondents, the major driver foroutsourcing is (or rapidly becomes) costreduction and related financial goals. Surveysof executives suggest their decisions tooutsource are often more strategic – things likeinnovation, time to market or maintaining

Outsourcing saves money and gainsefficiencies, but frequently fails to satisfy otherstrategic goals. CXO's are often to blame whenresults are sub-optimised; they fail to imposedisciplined governance on the project.

These findings come from a multi-companysurvey recently undertaken by the InternationalAssociation for Contract & CommercialManagement (IACCM), a worldwide non-profitassociation dedicated to improving corporatestandards in contracting, negotiation andrelationship management.

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

techniques and methods to ensure its success.Among the most common problems, executivesoften fail to adequately define business goals, toensure 'political interests' do not derail the project,to assign accountability and to monitorperformance.

The survey found that a majority turn toexternal resources for help, but those resourcesmay compound the problems. Their approach(especially if goals are not well-defined) is oftentraditional and confrontational, whichundermines collaboration - internally andexternally. Executives who want to maximise thereturn from outsourcing need to rethink

Tim CumminsPresident/CEO

IACCM

Surveys of executives suggest their decisions tooutsource are often more strategic – things like

innovation, time to market or maintainingcompetitiveness.

TOP_05_IACCM_wp.qxd 23/6/05 10:03 pm Page 2

SECTION 2Governance


competitiveness. So why does this gap arise?In part, it is due to the relative difficulty ofmeasuring and monitoring these strategicattributes relative to more traditional financialmeasures. The survey results and interviewsalso highlight internal discord andmismatched priorities within the outsourcingcorporation, which then reflect into confusednegotiation, inappropriate terms andconditions and wrongly focused targets andmeasurements.

The reported problems are highlyconsistent - and they could be avoided if

available resources and knowledge were usedbetter. Outsourcing is complex; it raises notonly the traditional issues of any majorbusiness negotiation, but frequentlyintroduces complex emotional and loyaltyissues that cloud judgments and confuseobjectives. So it requires a new approach.

Most companies initiate outsourcingthrough their established business processesand resources. They build teams that thenapply the same approach as they would to anymajor purchasing relationship. The timing ofinvolvement, the training of the personnel, themanagement and measurement systems bywhich their success is gauged – none of thesefactors are typically given enoughconsideration. And the results reflect this. Theteams run out of time; key data is missed; gapsin skill or knowledge remain unfilled.

Survey responses indicate that companiesenter the world of outsourcing withoutadequate preparation and internalcoordination at the inception of theiroutsourcing projects. Business strategies lackdefinition, or have not been adequatelyembedded into the vendor requirements, sonegotiators miss critical service level and/orcontingency provisions in contracts. Thesecontract components would be captured in thecontracts with better cross-companycommunications. This is reflected in reportedissues such as the lack of a strategic plan, poorproject definition and projects that are overbudget and behind schedule. The ability to

manage contract complexities andcollaborative relationships, which areessential for successful outsourcing, isidentified as a weakness in virtually all theparticipating companies.

In the end, most outsourcing projectsdeliver significant benefits; but the researchconfirms that many targets are missed – andthat overall, performance could bedramatically better if there was a different andmore imaginative approach.

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

outsourced relationships are fraught withclaims and disputes that steadily chip away attrust and also detract from the innovation thatcould have been achieved.

The Big Three The three biggest issues that people were

grappling with in setting up outsourcingprojects were:1. Lack of a Sourcing Plan and on-going

management process2. Poorly defined projects3. Lack of skilled resources to execute and

manage outsourcing projects

While people know that they need to havea Sourcing Plan that is aligned with thestrategic direction of the company, fewcompanies have such plans. While contractmanagers may have marching orders tooutsource a project, in the rush to execute theassignment, they don’t feel they are in aposition to question the business motivationfor outsourcing (linked to business strategy) orthe business needs and requirements thatdrive project requirements. Often, key metricsare missing – for example, there is no readilyavailable benchmark data to indicate goals orensure clarity of objectives. Without acompelling business case and a cleardefinition of business needs and requirement,a company can easily pick the wrong vendor (asmall partner vs. a large vendor capable ofscaling) or the wrong outsourcing solution

69www.cxoeurope.com

(offshore vs. onshore; captive vs. third-party;short-term contract vs. long-term contract;etc.). Failure to plan is preparation to fail.

The lack of skilled resources seems to be acommon problem. There are many traditionalapproaches to address this issue. An alternateapproach may be to use temporary personnelwith outsourcing experience. But in eithercase, it is key to understand precisely whatskill and knowledge sets are needed and thento align these with what is available.Companies often select the wrong peopleinternally – and then compound the error byrecruiting the wrong external experts.

While jobs in program management areprobably best kept in-house, many of the taskssuch as day-to-day project management,setting up a change management plan and on-the-ground vendor audits can beaccomplished with short-term personnel. Thiswill allow the company personnel to focus onthe important tasks. Moreover, if a company isonly in the early stages of using outsourcing asa tool to drive business performance, they maynot want to invest in full-time personnel untilthe company has made a commitment tooutsourcing and has a better understanding oflong-term resource needs.

A very high percentage of therespondents (75%) said that they did notthink their company had the skills requiredfor success in-house, they were seeking helpto ‘just get it done’. It is important to get theright kind of help. Many surveys show thatmore than half of all outsourcing projects failto meet expectations within two years,suggesting that many of the ‘traditional’methods are not ensuring success. Forexample, in projects that involve a largenumber of experienced vendors (indicating arelatively mature market), the RFI/RFP/RFQ‘dance’ may be long, costly and lead tocontentious relationships. For such projects,a clear understanding of the businessrequirements allows the list of capablevendors to be shortened to only a few.Instead of the traditional bidding andnegotiating process, a collaborativepartnership with the service provider canyield the desired result – a skilled andexperienced partner with deep expertise inthe process that is outsourced that has boththe infrastructure and knowledge of bestpractices that can be leveraged to the client’sadvantage. Most importantly, a collaborativepartner will be committed to evolving withyour business needs.

Outsourcing is complex; it raises not only thetraditional issues of any major business negotiation, but

frequently introduces complex emotional and loyaltyissues that cloud judgments and confuse objectives.


GovernanceSection 2


Dispersion of OutsourcingExpertise

40% of those surveyed have consolidatedkey resources into a centralised outsourcinggroup, with a further 15% now moving towardsuch a model. Participants clearly see suchcentralisation as an improvement - thoughmany are concerned that even centralisedgroups manage individual deals andrelationships as 'islands', with limited sharingof knowledge and experience. Implementing asystematic process that draws in relevanttalent, both internally and externally, duringthe structuring of outsourcing projects willleverage internal skills and fill skill-gaps,leading to greater success.

The early obstacles - such as poorlydefined projects, lack of clear strategy, poorlydrafted contracts - are showing signs ofimprovement through organisational learning.However, the rate and extent of thatimprovement is not satisfactory for many ofthe respondents. While outside legal, contract,and outsourcing advice is used successfully,most companies still use internal expertisewith good results.

The ContractTight contract definition can help define

and manage service provider relationships.The most critical elements highlighted in thesurvey were service level definition andmonitoring, and performance management(remedies and penalties). Successfuloutsourcing arrangements have leveragedperformance bonuses with great success.

The contracting process is critical to successin outsourcing deals. The evidence suggeststhat there is frequently poor integration andmisalignment between contracting andbusiness personnel, both on the buy-side andsell-side of outsourcing contracts.

In the contract, while there will be a fairamount of ‘template material’, the contractmanager plays a very central role in setting itup for success (or failure) – talking to all thekey parties to ensure that the project is alignedwith the strategy and the requirements of thefirm; and, that the business requirements, therelationships and the governance are capturedin this ‘live’ document.

There is a set of issues on the vendor sidethat did not surface in this client-sidedominated respondent population. Thoseinclude the capability of vendors, thestructuring of contracts from their perspectiveand their management processes.

Use of ExternalResources

57% of respondents use external skilledresources to assist with the contract. Yet, thecontract-related concerns for this group(versus those that do not use externalresources) do not seem to diminish – and insome areas, their post-award concernsactually increase.

In part, the contract can only be as good asthe requirements. There is also some evidencethat external resources bring excessive focuson containing the consequences of risk, asopposed to reducing the probability of thingsgoing wrong - or more importantly, setting theframework for things to go right. For example,external advisors who advocate contentiousnegotiation may succeed in driving downprices and 'winning' on certain terms, but dothey really assist in shaping a successful dealthat delivers on their client's goals? Manyexternal experts appear driven by the need forshort-term, highly visible 'wins', rather thanlonger-term, superior results throughcollaborative approaches and win-win dealarrangements.

Managing & MonitoringVendors:

The survey accentuates the criticalimportance of skilled post-award contractmanagement. Managing and monitoringperformance is a headache for most of theparticipants. It seems to fall into threecategories: • Successful companies focus on setting and

maintaining the right service levels andrelationship goals, with skilled resourcesensuring pro-active management. Thesecompanies report relatively low levels ofdispute.

Clever use of ’progressive SLAs‘ thatdemand increases in performance over timehave shown excellent results. In addition, aregular review of mutual business goals andexamination/realignment of relationshipsallow changing business conditions to bemanaged proactively. This, however, requiresa level of engagement that most companies donot recognise. More dialogue, exchange andresources allocated to relationshipmanagement really are necessary for ongoingsuccess. It is a fundamental shift inoutsourcing management, from a traditional‘stick’ approach to a more collaborative ‘carrotand stick’ approach.

• Mid-performing companies havedesignated (not necessarily dedicated)resources responsible for monitoringservice levels, though this is primarilyconcentrated on performance reportingand reactive handling of claims. Disputelevels are high - the relationships arecontentious and extensive time is occupiedin handling claims.

• Poorly performing companies do not havededicated contract management resources.They typically view such roles as part ofvarious jobs. Often, these roles are noteven defined. Performance monitoring islimited and disputes are rare. However,such disputes, when they do arise, assumemajor proportions and typically involveexecutive management.

Once again, these findings point to theplanning process. While SLAs are a part ofmost contracts, successful companies putconsiderable thought into their structure. Forexample, if the vendor is new to the process,the SLA should reflect the reduced effortrequired by the vendor over time - it mighttake the vendor 1 hour for a particular task atthe beginning of the contract, but only take 35minutes after doing it for 12 months. Similarly,the SLA should place a requirement to usetechnology (to reduce the required effort,thereby reducing costs).

Additionally, there should be agreementbetween the company and the vendor on futureperformance improvement goals for definedfuture periods (i.e. 3% improvement in everyquarter). These goals and agreements take timeto construct, but good planning will ensure thatyou get the business value from outsourcingand it is easy to monitor and manage.

Coordination acrossMultiple Suppliers:

83% of the respondents were fromcompanies with revenues over $1.3B. In thisgroup, 89% saw the need for coordinationamong suppliers as a significant issue. Whileoutsourcing usually begins with single project,the indispensable need for coordination comeswhen there are multiple outsourcing suppliers.This points to the advancement of therespondent companies along the outsourcingmaturity curve.

While many of the respondent companieshave done well with outsourcing projects, theskills required for acquiring and managingmultiple suppliers are different. There is the


Section 2Governance


71www.cxoeurope.com

At a recent CXO conference, there wasextensive discussion on the merits ofcollaborative negotiation and whether thiswas a potential remedy for today's under-performing relationships. The debate rapidlyillustrated the lack of consensus over what ismeant by 'collaboration' (one delegate evenexplained the perils of using such a word inparts of Europe), yet it also pointed to thegrowing importance of robust capabilities innegotiation, contract and relationshipmanagement. The quality of a corporation's

'commitment management' is moving tocentre stage because it lies at the heart of itsstrategic business execution. Outsourcinggovernance is one very immediate example ofthis critical need.

This report on Outsourcing Governance isbased on research originally undertaken inlate 2004 and supplemented by interviews

issue of integrating across vendors - vendorsworking within a particular function (say, HR)and then those across outsourced functions(say, HR and F&A) in the entire company.

ConclusionsOutsourcing creates a unique governance

phenomenon. As an approach to doingbusiness, it reflects the breakdown oftraditional corporate structures. The old,centralised, multi-functional model is beingreplaced by a dynamic, networked

environment, where the ability to managechange and enable innovation is critical tobusiness success. It is hardly surprising thatcompanies struggle to define the right process,measurements, roles and skills at the sametime as they are designing their newenvironment. Yet that is the demand thatconfronts them.

conducted in January – April 2005. Inputcame from a cross-industry group ofinternational corporations, 75% withoperations in North America, 74% withoperations in Europe and 65% withoperations in Asia-Pacific.

To hear and learn more about topics likethis from THE Global Contracts & Negotiationsprofessional association, visitwww.iaccm.com/emea. “Contracting in aGlobal Marketplace: Are your Contracts,Systems & Procedures Ready?” will take placein Munich on September 12 & 13 and will beattended by over 150 leaders in sourcing andsales contracting.

ABOUT IACCM:

IACCM is a non-profit association that focuses ondeveloping excellence and integrity in contractingprocesses and practices in worldwide business. Ithas members representing more than 1,000corporations in over 90 countries. More details areavailable at www.iaccm.com

The old, centralised, multi-functional model is beingreplaced by a dynamic, networked environment, wherethe ability to manage change and enable innovation is

critical to business success.


Atos Origin is a leading international ITservices company for enterprises worldwide.Our business is turning client vision into resultsthrough the application of consulting, systemsintegration and managed operations.

We offer truly global solutions in over 40countries worldwide and are one of the fewcompanies that can provide all the 'design,build, and operate' elements of a businesssolution. More than 60% of the revenue base isrecurring, deriving from multi-year outsourcingand application maintenance contracts.

Our business approach is based onestablishing a long-term partnership approachthat encourages success through mutualbenefit. We aim to develop close relationshipswith all our clients through either jointventures or other forms of long-termassociations. We believe that this is the mostproductive way of developing business today,with both parties sharing the risks and rewardsof the association and helping to develop andshape the future.

SOLUTION PROVIDER

World Class Solutions thatCreate Value across anEnterprise

Atos Origin understands that it is vital for ITservices and solutions to add value and to be apositive enabler for the future. As manycompanies today are developing into pan-European or global businesses, they also want tofocus on their core activities and drive down ITcosts. We respond to these issues by unlockingthe potential of new business systems -delivering competitive advantage throughimprovements in productivity, speed and control.

We have the global reach and presence tohelp enterprises achieve this by providingcomprehensive support, and IT services andsolutions that add real value and act as a basefor future growth. And to maximise their effectwe can provide all the 'design, build, andoperate' elements of a solution across ourchosen specialist market sectors and for globalor multi-national clients.

Atos Origin is a leading international IT servicescompany. Its business is turning client vision intoresults through the application of consulting, systemsintegration and managed operations.

John Dain – Senior Vice President Global Managed Operations

Atos Origin HeadquartersBuilding VN 404, PO Box 218, 5600 MD Eindhoven,The NetherlandsTel: +31 (0)40 27 89073Fax: +31 (0)40 27 84158

Business ContactJohn Dain – Senior Vice President Global

Managed OperationsE-mail: [email protected]: +31 (0)40 27 89073

www.atosorigin.com

Atos Origin – Turning Client Vision into Results

Atos Origin is a leading international IT services company for enterprisesworldwide. We integrate business and technology by designing, building andoperating IT-enabled business processes that improve the effectiveness of ourclients’ businesses.

www.cxoeurope.com72

Our business approach is based onestablishing a long-term partnershipapproach that encourages successthrough mutual benefit.

TOP_05_Atos Origin_pro 23/6/05 10:12 pm Page 1

SOLUTION PROVIDER

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We create complete business solutions,which deliver real business benefits throughthree balanced Service Lines - Consulting,Systems Integration, and Managed Operations.These Service Lines are the heart of ourapproach to the marketplace. They enable us tofocus on the particular needs of our clients,providing personal service, attention to detailand true day-to-day partnership, combinedwith direct access to unrivalled internationalexpertise and resources.

The combination of market expertise,innovative solutions and Service Lines is thehighly successful formula that has allowedAtos Origin to become the long-term partnerof choice for an ever growing list of Europeanand multi-national enterprises.

Consulting - A KeyEnabler for BusinessTransformation

Atos Consulting offers advice and apragmatic, realistic approach to addressingclient needs. It provides 'end-to-end' servicesand solutions, ranging from supportingstrategy development through to enterprisesolutions and technology decisions. Thisenables our clients to become increasinglyeffective and to generate more value throughan innovative approach to business processes,well-integrated supporting technologies andstrategic investments in people.

The Group's activities are supported byfour Centers of Excellence, which deliversolution alignment, dissemination anddevelopment as well as supporting businessdevelopment activities in four key domains:• Strategy & Technologies• Operational Transformation• Financial Management Solutions• People & Change Management

Atos Consulting has a legacy of long-standing and close relationships with itsclients, providing complete businesstransformation solutions that deliver highlyeffective results. We support our clientsthrough every stage of the change process-from strategic planning through toimplementation and beyond.

System Integration -Delivering Clarity fromComplexity

Our Systems Integration specialists designand implement new IT solutions and systemsacross a number of core markets, ensuring aseamless fit with existing infrastructures, andproviding ongoing support and enhancementof IT applications. Our extensive experience inintegrating people, processes andtechnologies enables us to design, build andoperate practical and robust solutions.

We work with our clients to develop,implement, and maintain systems that willsupport and enhance their overall businessstrategy. And as the market moves towardsstandardised packages, we design andimplement solutions from leading vendors

such as SAP, Oracle, Siebel, and integratethem in complex environments, using best-of-breed technologies. We also perform projectsusing customized software, open source, andlegacy applications, including variouslanguages and design methods. We work witha carefully selected group of strategic partnersto develop and implement end-to-endofferings, integrating best of breedtechnologies and packaged systems.

As the global demand for applicationmanagement increases, the Group has crafteda unique and transparent value proposition,incorporating state-of-the-art process andmethodologies, strong governance, industrystandards (ITIL for continuous servicedelivery). This solution, applicable across all ofour core markets, leverages our global

sourcing capabilities to deliver substantialTotal Cost of Ownership (TCO) reductions viaflexible pricing models aligned with theirbusiness activities. Key services and solutionsinclude:• Enterprise Resource Management • Customer Relationship Management • Business Intelligence and Corporate

Performance• Supply Chain / Product Lifecycle

Management • Enterprise Application Integration • Enterprise Content Management• In-Product Software • Security

The Group is particularly strong inmanaging large-scale integration programsand has significant technical architectureskills. Our complete service offering is foundedon extensive training and the adoption ofhigh-level industry certification standards suchas the Capability Maturity Model (CMM),Project Management Institute - PMI andISO9001: 2000, with a set of fully definedsystems integration processes.

Atos Origin is also a leader in deployingEuropean SEI CMM capabilities. We currently

have global sourcing centers in Europe, Asia,and South America assessed up to CMM level5. Our approach to global sourcing is aboutleveraging a worldwide portfolio ofcapabilities, irrespective of their geographicallocation, to deliver high performance,dependable and globally consistent servicesacross all the elements of the IT lifecycle.

Managed Operations -Strategic AlternativesAddressing Cost and Risk

Our highly successful outsourcingoperations manage core IT infrastructures forclients, including datacenters, desktopsupport, server farms and networkcommunication systems. We provide 7x24

We work with our clients to develop,implement, and maintain systems thatwill support and enhance their overallbusiness strategy.

SYSTEMS INTEGRATION – Delivering Clarityfrom Complexity


'follow the sun' infrastructure and applicationsupport through our global network and thecompany has unrivalled experience in majorenterprise programs covering complex andmulti-site solutions. Our Continuous ServiceDelivery Methodology (CSDM) guides ourclients through the process of assessment,planning, implementation, transition, andensures consistent, high quality servicedelivery worldwide.

Our services and solutions include:• Enterprise Infrastructure Management -

Managing and transforming the ITinfrastructure operations of our clients.

• Desktop - Installation and management ofcomplex distributed architecturesencompassing workstations, LANs, serversand software and including 7x24 GlobalService Desk IT Support through aworldwide network.

• Utility Based Computing (UBC) - includingon-demand storage and capacity servicesthat are secure, reliable and cost-effective.

• Application Management - True end-to-end support covering infrastructureoperations and management. Specialistprocesses for the management of SAP R/3platforms, including multilingual, specialisthelpdesks, application maintenance andplatform management.

• Messaging - Internet and extranet services,collaborative messaging, web and portalbased application-hosting services.

• Security - Managed security servicessupported by experienced global servicedelivery and infrastructure resources.

We are a market leader in areas such aseBanking and eTrading, encompassing bank,brokerage and insurance companies. We alsoprovide Business Process Outsourcing (BPO)and specialist processing services on a globalbasis and are a key European player inpayment and card processing services, CRMand multi-channel contact services throughour subsidiary, Atos Worldline.

We offer flexible pricing and capacity optionsto meet the changing needs of your businessand help your enterprise realize its full businesspotential. And with consistent outsourcingsolutions, flexible contracting options, andmeasurement against service quality, anincreasing number of world-renowned clientssuch as the International Olympic Committee(IOC) have chosen Atos Origin as theirworldwide information technology partner.

Understanding the Issues - Maintaining the Competitive Edge

Atos Origin knows that choosing the rightpartner is critical for success. You have to beable to trust your partner and a close culturalfit needs to exist between the two companiesfor any partnership to work effectively.

Our strong values - client dedication,commitment to execute, entrepreneurship andconviviality - are reflected across all elementsof our company and have often been adeciding factor in the selection of Atos Originas a partner. In many instances, we believethat joint ventures and other forms of long-term association with clients are the mostproductive way of developing business, withboth parties sharing the risks and rewards ofthe association and helping to ensure a stable,profitable and growing relationship.

Our strategy is based on our provenindustrial heritage and well-balanced mix ofservice offerings in carefully chosen marketsectors. This approach enables us todemonstrate an in-depth understanding ofmarket issues and offer comprehensive anddedicated services and solutions across all

industry sectors including CPG/Retail, DiscreteManufacturing, Financial Services, ProcessIndustries, the Public Sector, Telecom, Utilities,and Media.

Atos Origin has a strong and balancedpresence in all the major IT spending marketsof Europe and we provide comprehensive ITsupport operations in The Americas and AsiaPacific for our multinational client base.

www.cxoeurope.com74

SOLUTION PROVIDER

Atos Origin – Atos Origin is a leading international IT services company for enterprises worldwide.

About Atos OriginAtos Origin is an international informationtechnology services company. Its business isturning client vision into results through theapplication of consulting, systems integrationand managed operations. The company's annualrevenues are more than EUR 5 billion and itemploys over 46,000 people in 40 countries.

Atos Origin is the Worldwide InformationTechnology Partner for the Olympic Games andhas a client base of international blue-chipcompanies across all sectors. Atos Origin isquoted on the Paris Eurolist Market and tradesas Atos Origin, Atos Consulting, AtosEuronext andAtos Worldline.

For more information send an email [email protected]

or visit the company's web site athttp://www.atosorigin.com

www.atosorigin.com

Our strong values - client dedication,commitment to execute, entrepreneurshipand conviviality - are reflected across allelements of our company and have oftenbeen a deciding factor in the selection ofAtos Origin as a partner.

Comprehensive IT support – IT supportoperations in the Americas and Asia-Pacific for our multinational client base.


SECTION 2 – Governance

BUILDING FOR THE FUTURE THROUGH OUTSOURCING

75www.cxoeurope.com

was made and the company then embarked ona carefully planned process to realise this.

The first step was the production of aninformation brochure. This enabled thecompany to crystalise its ideas and strategy andidentify what it was looking for in an IT servicespartner. This brochure was created to contactthe leading players in the European outsourcingmarket and led to a number of positiveresponses. From these we selected 4 to go intoa second phase. This was done on the basis ofthe level of cost savings they had identifiedbased on the provided information and on theirposition and experience in the market.

The second phase was followed by DueDiligence, after which the Board made theirdecision. In coming to their decision theoriginal factors of cost savings and marketposition were still critical and they consideredadditional important factors such as theservice providers experience and track recordin areas and disciplines such as legal, finance,communications and especially HumanResource Management (HRM).

Atos Origin had a long-term strategy basedon achieving significant growth in Germanyand using the area as a major center ofbusiness. Their approach also meant that ourown computer centers would be kept in placeand crucially they had excellent humanresource procedures in place to manage the

IntroductionIn late 2004, Atos Origin and

KarstadtQuelle AG announced a long-termoutsourcing agreement under which AtosOrigin took over the Infrastructure Division ofItellium Systems and Services GmbH,KarstadtQuelle's IT subsidiary. The agreementcomprised the Infrastructure Division ofItellium Systems and Services GmbH, whichwas responsible for KarstadtQuelle's dataprocessing centers, network operations,terminal device support and the applicationmanagement group. Around 900 stafftransferred to Atos Origin under a businesstransfer arrangement.

Planning for a Secure Future

As part of a regular review of strategy, theissue of costs and cost structures became aleading business driver for the company.Looking ahead on a 10 year basis, it was clearthat the company would not be able to realisesufficient synergies or leverage significanteconomies of scale alone and that thereforeother options such as outsourcing had to beconsidered. This would also give anopportunity to change the cost structure andmove a number of costs from fixed to variable.A decision to look for an outsourcing partner

KarstadtQuelle AG, based in Essen, Germany, is Europe's largest department store and mail order group. The Group achievedsales of EUR 13.4billion in the financial year 2003. The Group's business segments include Over-the-Counter Retail, Mail Order,Services and Real estate. The KarstadtQuelle Group employs around 100,000 staff.

Ulrich EngelhardtCIO, Over-the-Counter RetailKarstadtQuelle

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GovernanceSECTION 2


transition and careers of the employees thatwould transfer, and a proven track record ofassimilating outsourced staff. As a result of theBoard's deliberations, Atos Origin was selectedand a long-term outsourcing agreement wasannounced in September 2004.

Quick and Smooth off the Grid!

Although this outsourcing deal has onlybeen running for a few months, the resultswere noticeable very quickly. Atos Originmanagement moved to Essen to be near thebusiness and this has ensured thatcommunication has been fast and transparentat all levels right from the start. Nointerruptions in normal daily business wereexperienced and everyone's favorite state'stability' was continued!

On the crucial aspect of cost savings weimmediately noticed that the cost of runningapplications was cheaper. Not only that but wehave already seen a price reduction in the firsthalf of 2005 on the levels agreed in 2004.Significant assets have also been smoothlytransferred bringing further savings. Andimportantly, with the company going througha restructuring process, we have been able toreduce our own headcount. This aspect ofchange always has the potential to causeproblems to employees and their families.However HRM formed a major part of theBoard's thinking during the decision makingprocess and this has proved successful so far.Here establishing trust and selecting a partnerwith a good cultural fit have helped to ensurea good and smooth start to the relationship.

Keeping the MotorRunning - A Future-Proofed Strategy!

Although we have had a good start, ourstrategy has always been to secure the long-term success and profitability of our company.Continued cost reductions are obviously anexpectation but there will be many otheraspects to be considered when entering intothis sort of outsourcing relationship.

We will particularly look to Atos Origin forthought leadership and innovation in their ITservice provision. This could be in the area oftechnical changes such as new networks or inother areas like pricing. Here for example, newideas such as a flexible project oriented orapplication-by-application billing model wouldallow for better budget planning and give usgreater control over our costs.

Finally, I believe that a customer, ratherthan sales-oriented approach from ourpartners is the way forward. An openrelationship, regular discussions and feedback,and a positive desire to share the risks andrewards form the basis for the way ahead.

Together with Atos Origin, we have made agood start in delivering our long-term strategy.Looking ahead I feel that the nature, fit andstrategies of both companies means that thereare a number of clear and strong marketdrivers to ensure that both parties willcontinue to build on this start and growsuccessfully and profitably together.

About the Author

Ulrich Engelhardt is Managing Director of the ItelliumSystems & Services GmbH, responsible forconsultancy and systems integration for the Over-the-Counter Retail business of KarstadtQuelle and alsoCIO for Karstadt Warenhaus AG, covering some 160department stores and sports shops.

After studying education and mathematics, in 1987Ulrich Engelhardt founded the company 'SHEInformation Technology AG' in Ludwigshafen. Until 2003he developed SHE into one of the leading companies inthe area of IT-Security, first as a managing director andlater as a chairman of the board.

From 1987 to 1991, he was also was active as alecturer in mathematics and business administrationat the university of Mannheim in Germany and carriedout research at the chair of business administrationand operations research.

I believe that acustomer, rather than

sales-oriented approachfrom our partners is the

way forward.

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DEMAND SUPPLY MANAGEMENT IN IT OUTSOURCING PARTNERSHIPS -GOVERNANCE IN ACTION!

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implementing outsourcing relationships - theDemand Supply Management Model.

The Demand SupplyManagement Landscape

On the Demand Management side,business management has informationrequirements, which are structured byfunctions usually labeled as informationmanagement. These requirements are pre-defined by the guidance and constraints of thebusiness strategy and more particularly by theIT strategy, including the sourcing strategy.Demand Management is also responsible forstructuring the information needs and suppliermanagement. The Chief Information Officer,

Information Managers, Contract Managers,Purchasing Managers, Information Analystsand Functional Application Managers are partof the Demand Management.

Supply Management is responsible for the

IntroductionA large number of IT outsourcing

relationships still lack a proper governancestructure and mechanisms and this hinders theachieving of business goals and smoothservice provisioning. A lack of IT governancealso hinders transparency for which themutual obligations of both the servicerecipient and service provider have to becrystal clear.

The need for proper governance structuresis stronger than ever due to the need forcompliance to regulations such as theSarbanes Oxley Act, IFRS or IAS. In this respectthe key questions that have to be answeredare: What are the responsibilities for both the

service recipient and the service provider in IToutsourcing partnerships? - And how to makeDemand Supply management work?

Atos Origin's approach is to provide astructured approach to successfully

For decades outsourcing has been growing with double-digit percentages. Different types of outsourcing have emerged, includingBusiness Process Outsourcing and Global Sourcing. Furthermore, the focus of IT outsourcing partnerships is slowly shifting fromefficiency to innovation.

Key to maintaining this growth, and making outsourcing a success for both parties, is governance. Weill and Ross, in their 2004book 'IT Governance', define it as 'specifying the decision rights and accountability framework to encourage desirable behaviorin the use of IT'.

While adequate IT governance needs to be applied by any service recipient, it is unthinkable having a governance structure inplace in which external service providers do not play a role. A co-operation model has to be implemented, which we have calledDemand Supply management.

Erik BeulenInternational Business Development ManagerAtos Origin

A large number of IT outsourcing relationships stilllack a proper governance structure and mechanismsand this hinders the achieving of business goals and

smooth service provisioning.

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GovernanceSECTION 2


execution of the services as this is the corebusiness of the service provider. Account andcontract management is responsible formanaging the relationship with the servicerecipient and for managing the serviceprovisioning. Service delivery management isresponsible for the service provisioning,including investigating new technologies inorder to continually provide state of the artservices to customers at an affordable priceand at adequate service levels. The businessopportunities afforded by these newtechnologies have to be taken pro-actively tothe service recipient.

Client Executives, Customer OperationsDirectors, Lead Technical Officers, ClientManagers, Service Delivery and CustomerOperations Managers, TCO Managers andCustomer Solution Operations Managers, SalesManagers, Services and Project Managers arepart of the account and contract management.

The Nature of the ITOutsourcing Relationship

The nature of the relationship can be derivedfrom the objectives of the IT outsourcingpartnership - efficiency or innovation.

In IT outsourcing partnerships targetingefficiency, there are two different types ofpartnerships - single service management(direct cost focus) and multiple servicelifecycle management (Total Cost ofOwnership focus). These IT outsourcingpartnerships are technology driven. In IToutsourcing partnerships targeting innovationthere are also two different types ofpartnerships - business portfolio innovation(return on investment focus) and businessprocess innovation (value focus). These IT

outsourcing partnerships are business driven.An IT outsourcing partnership may start with acost cutting focus and over time transform intoa business driven IT outsourcing partnership.These different types of IT outsourcingrelationships are detailed in Figure 2. For eachtype the characteristics are detailed in socalled growth paths addressing customervalue, service concept and the relationship.

These different types of IT outsourcingpartnerships have an impact on Demand SupplyManagement. The interface in IT outsourcingpartnerships targeting innovation objectives hasto be more open and intimate resulting insharing strategies and ultimately jointly going tomarket. This requires making availableresources to create and assess innovationproposals. These resources come from both theservice recipient and the service provider.

The level of management attention alsoincreases in IT outsourcing relationshipstargeting innovation. This type of IToutsourcing partnership also requires morebusiness and process knowledge from theservice providers. Therefore a sector focus isnecessary within the organisation structure ofthe service recipient. This sector focus shouldnot be limited to the account managementorganisation, but should also encompass thebusiness and strategy consultants.Furthermore business management has to beinvolved in the discussion on Demand SupplyManagement. Discussions between thebusiness management of the service recipientand the service providers are essential!

Communication StructureIn order to ensure service provisioning, the

implementation of a formal communicationstructure and service delivery processes are

necessary. On each level, strategic, tacticaland operational, formal communicationstructures have to be implemented. Theimplementation is a mutual responsibility forthe service recipient and the service provider.This implies that both the service recipient andthe service provider have to free up qualifiedresources for the implementation of the formalcommunication structures.

The proper implementation of servicedelivery processes is important to ensuregovernance. These processes, related tocontinuous services, have interfaces to boththe service recipient and the service provider.Here, Atos Origin uses CSDM, whichessentially consists of a set of coherentbusiness processes for the delivery ofcontinuous managed services, including asupporting organisation and tools. In order to

strategic level

bus

ines

sm

anag

emen

t

info

rmat

ion

man

agem

ent

Ser

vice

Del

iver

ym

anag

emen

t

Acc

ount

&C

ontr

act

man

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tactical level

operatioal level

demandmanagement

supplymanagement

Figure 1. Demand Supply managementstructure

Customer valueGrowth path

Direct CostImmediate ICTcost savings

Single servicemanagement

Pro-active SLA’sSupplyOutput driven

Service ConceptGrowth path

RelationGrowth path

efficiency

innovation

TCOStructural ICTcost reduction

ROIReduce business& Process cost

ValueInnovation inBusiness - ICT

Business ProcessInnovation

Joint venture andco-makershipComp.edge driven

BPRService portfolioInnovation

Managed InnovationprocessBusiness result driven

Multiple servicelife-cyclemanagement

Demand/SupplyEfficiency driven

Figure 2. Nature of the IT Outsourcing Relationship: Targeting Efficiency or Innovation

On each level, strategic,tactical and operational,formal communicationstructures have to be

implemented.


IT board

ITmanagement

Demand management Supply management

Businessmanagement

Informationmanagement

Account & contractmanagement

Servicedelivery

management

Strategiclevel

Tacticallevel

Operationallevel

Clientmanagement

Contractmanagement

Servicemanagement

IT operationsOperations

management

SECTION 2Governance


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have CSDM applied consistently by employeesall over the world, the supporting organisationassists in setting up the processes, checks thetooling and provides training and auditingfacilities. The scope of the processes is limitedto the tactical and operational level.

Strategic LevelAt the strategic level there are two forums

- the IT Board and the Partner Board. Thesemeetings are held annually or bi-annually. Atthis level there may also be an important rolefor independent consultants.

IT Board - The IT Board is an internalforum within the service recipient'sorganisation to maximise the contribution ofIT to the business processes. The CIO, theinformation managers and the senior businessmanagement, including C-level, represent theservice recipient at this meeting. The purposeis to align future business requirements andprovide an overview of technical innovationsto the business management. This is essentialat the strategic level and will be captured inthe IT strategy. Sometimes the IT Board is usedto get feedback from representatives of thebusiness management in order to the draft ITstrategy, prior to endorsement. No decision-making on the IT strategy is made in the ITboard, this is done by the service recipient'sBoard of Management.

As the discussions are of strategicimportance to the service recipient, there canbe some resistance within service recipients toinviting representatives of the service providerfor the IT Board. The commercial interests of

the service provider can also hinderparticipation in the IT Board. If the servicerecipient does invite representatives of theservice provider, these representatives shouldbe experts with an in-depth understanding ofthe relevant topic and able to make aknowledge based contribution.

Partner Board - In the Partner Board jointstrategic planning is important. Theinvolvement of senior management from boththe service recipient and the service providerenables the implementation of visionarystrategies. This is essential in IT outsourcingpartnerships with a focus on return oninvestment (ROI) and business processinnovation. Transparency of information isalso key at this level and in mature IToutsourcing partnerships the information isprovided by a management cockpit.

Another important topic for the PartnerBoard is to resolve escalated tactical issuesrelated to the service provisioning and issuesrelated to mutual contractual obligations. Thecontract provides guidance to resolving theissues, however, contracts cannot covereverything. In that case, the service recipientand the service provider have to solve anyissues in good faith.

In addition to the Partner Board, the servicerecipient and the service provider can addindependent advisors to the governancestructure at the strategic level to secure theinterests of both the service recipient and theservice provider. Furthermore, independentthird parties can provide benchmark andauditing services in order to ensure a proper

governance structure in the IT outsourcingpartnership. Due to the independence of theadvisor, the results of the benchmark andauditing services are binding for both theservice recipient and the service provider. TheCustomer Operation Director and sometimesthe Lead Technology Officer are present at thePartner Board in order to address technicalissues in the discussions on behalf of theservice provider. The information managersare their counterparts.

Finally, relationship building is key at thestrategic level. The client executive has tomaintain the relationship with the CIO andthe information managers. This relationshipwith information management does notmean that the client executive has no orlimited relationships with representatives ofthe business management. It is more that therelationships with business management donot contribute to the governance of the IToutsourcing partnership but rather influencethe stakeholders in the IT outsourcingpartnership in order to expand the IToutsourcing partnership. Therefore as thissolution paper is only focusing ongovernance issues this is not addressed indetail here.

Tactical LevelAt the tactical level there are four forums -

the Service Review Board, the ContractReview Meeting, the Service Portfolio Boardand the Change Advisory Board. Thesemeetings are held monthly or bi-monthly,except for the service portfolio board.

Figure 3. Formal Communication Structure at the StrategicLevel: the IT Board

ITmanagement

Demand management Supply management

Businessmanagement

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Account & contractmanagement

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management

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Tacticallevel

Operationallevel

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Servicemanagement

IT operationsOperations

management

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Figure 4. Formal Communication Structure at the StrategicLevel: the Partner Board


GovernanceSECTION 2


Unsolved issues at the tactical level areescalated to the strategic level. These forumsare linked to Atos Origin's Continuous ServiceDelivery Model (CSDM) processes.

Service Review Board - In the ServiceReview Board the performance of the serviceprovider is discussed based on reports of thelast month's performance. These discussionsare related to the service level managementprocesses. The reports also include historicaldata on the performance of the serviceprovider. The trends can be analyzed and inthe case of non-performance, improvementplans have to be implemented. Theseimplementation plans are related to theincident management and problemmanagement processes. The implementationof the improvement plans is the responsibilityof the service provider and the status of theimplementation of these plans is alsodiscussed in the meeting. The implementationof the improvement plans often requires theimplementation of changes. Therefore thechange management process is also related tothe Service Review Board. In the meetings, theInformation Manager and the ContractManager are the representatives of the servicerecipient and the Customer OperationsDirector and Service Delivery Managersattending on behalf of the service provider.

Contract Review Meeting - For theContract Review Meeting, the invoices areapproved in advance, based on a conceptinvoice prepared by the service provider.Preparing this concept invoice avoidsdiscussions afterwards and any delay inpayment of the service recipients to the serviceprovider. The complaint management processis also related to the Contract Review Meetingas it enables cost control and transparency forthe service recipient. Only undisputed elementsof the concept invoice will be invoiced andtherefore the service level managementprocess is related to the contract reviewmeeting. If necessary any disputed elements ofthe invoice will be discussed at the strategiclevel. The Contract Manager and PurchasingManagers from the service recipient attend thecontract review meeting and the ClientManager and Customer Operations Directorrepresent the service provider.

In IT outsourcing partnerships the servicereview and the contract review can also becombined into one meeting to save time andvaluable resources. This is often a morefeasible option after the start of the IToutsourcing partnership, as the invoicing

process is more stable after this initial period.Service Portfolio Board - In the Service

Portfolio Board the appropriateness of newtechnologies is explored. Therefore theproduction process is related to the ServicePortfolio Board. Based on the strategicguidance of the service recipient, the serviceprovider provides feasibility studies and pilotprojects for the implementation of newtechnologies. Also in this board, decisions onthe implementation of new technologies aretaken. Therefore configuration management isalso related to the Service Portfolio Board.Structural problems experienced with the

current services are also discussed here andfrom the starting point for new/adaptedservices. This means that problemmanagement is also related to the ServicePortfolio Board.

Ideally the strategic guidance is notlimited simply to guidance based on the ITstrategy. If the service recipient is also willingto share the business strategy with theservice provider, exploring theappropriateness of new technologies will bemore effective. To obtain this will mean theparticipation of information managers andcontract managers on behalf of the servicerecipient, and also of representatives of thebusiness management.

The lead technical officer and customersolution architects represent the serviceprovider in the Service Portfolio Board. Theinitiatives of the Board have to be approved bythe Partner Board at the strategic level, asthere is a serious cost impact in implementingnew technologies.

Change Advisory Board - In theChange Advisory Board, change requests arediscussed at a high level. The impact of achange request in terms of financial impactand alignment with the IT strategy of theservice recipient is discussed. Based on theinitial approval of the Change AdvisoryBoard, the Change Control Meeting willprepare a detailed implementation plan forany change requests. Then based on theimplementation plan, the Change AdvisoryBoard will approve a change request. At theoperational level the Change Control Meetingcarries out the execution of the changes.

Operational LevelAt the operational level there are three

forums - the Service Meeting, Change ControlMeeting and Project Meeting. These meetingsare held daily or weekly. Unsolved issues atthe operational level are escalated to thetactical level.

Service Meeting - In the Service Meeting,day-to-day issues related to the serviceprovisioning are discussed, including thehandling of calls and operational service levelssuch as availability. Therefore the service levelmanagement process is closely connectedwith the Service Meetings. It is essential tokeep track of the issues discussed over aperiod of time and therefore the incidentmanagement and problem managementprocesses are also related to the ServiceMeetings. Unsolved issues have to beescalated to the tactical level - the ServiceReview Board.

The Customer Operation Manager andService Delivery Manager represent the

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Tactical forums Atos Origin's CSDM processes

Table 1. Mapping of Atos Origin's CSDM Processes on Forums at the Tactical Level


SECTION 2Governace


service provider at these meetings and theService Delivery Manager is the interface tothe service managers. The counterpart of theCustomer Operation Manager is the ContractManager. Often representatives of businessmanagement also participate in the ServiceMeetings and as the information analysts andfunctional application managers of theservice recipient have a relevant in-depthknowledge, they can also be invited to theService Meetings.

Change Control Meeting - In the ChangeControl Meeting, analyses are made of theimplications of the implementation of thechange requests. As it is important to fullyunderstand the present mode of operations,the configuration management and thesoftware control & distribution process arerelated to the change control team. Based onthe analyses, the Change Control Meetingapproves the implementation plan for thechange request and so the changemanagement process is also related to theChange Control Meeting. The final andfinancial approval takes place in the ChangeAdvisory Board, as there is a cost impact inimplementing change requests. And, aschange requests are often business driven,representatives of the business managementalso have a role in the Change Advisory Board.The other service recipient representatives arethe information managers, informationanalysts and functional application managers.The Service Delivery Managers and ServiceManagers and Costumer Operations Managerattend on behalf of the service provider andsometimes the Client Manager is also presentas change request might have a largecommercial impact, for example thereplacement of applications or the upgrade ofa software package.

Project Meeting - In the Project Meetingday-to-day issues related to the projects arediscussed. It is essential to keep track of theissues discussed over a period of time andany unsolved issues have to be escalated tothe tactical level - the Service Review Board.Here the Project Manager represents theservice provider. The counterpart of theCustomer Operations Manager is theContract Manager and sometimesrepresentatives of business managementalso participate in the service meetings asthey often provide the budget forimplementation of the project. And as theinformation analysts and functionalapplication managers of the service recipienthave a relevant in-depth knowledge they canalso be invited to the project meetings. Asthe focus of CSDM processes is oncontinuous services none of the CSDMprocesses are linked to the project meeting.

ConclusionIn today's IT outsourcing partnerships

there is a strong need for governance. Thebusiness strategy and the IT strategy set theboundaries of the IT outsourcing partnershipand the nature of the IT outsourcingrelationship determines the focus of theDemand Supply Management which then hasto be implemented on three levels - Strategic,Tactical and Operational.

The implementation of Demand SupplyManagement requires substantialmanagement attention from both the servicerecipient and the service provider.Implementing sound Demand SupplyManagement ensures an alignment betweentoday's business dynamics and technologicalinnovation opportunities resulting in stablegovernance in action!

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Operational forums Atos Origin's CSDM processes

Table 2. Mapping of CSDM Processes on Forums at the Operational Level


AN OUTSOURCING PARTNERSHIP SHOULD BE ABOUT MORE THAN JUST SAVING MONEY!

including policing the national borders,managing immigration and preventing illegalentry and processing and approvingapplications for UK nationality.

This is a highly 'information intensive'Directorate requiring the efficient and effectivehandling and collation of large amounts ofdata. In order to continuously provide our staffwith the information they need we are lookingto create a new flexible IT infrastructure with acommon look across many sites.

This involves a major technology upgradeof the current IT infrastructure, includingdesktops, networks and applications. We alsowant our service provider to act as our PrimeIntegrator, a role involving:• Managing the day-to-day Service Delivery

of IND's major IT service providers andsuppliers

• Promoting uniformity of technical andarchitectural standards

• Providing a single view of the ITinfrastructure

• Giving IND's own IT Directorate thespace to focus on delivering benefits tothe business

Finding the right partner As with most things in life, finding the right

partner is never easy! For us this was run as a major European-wide procurement

IntroductionThe continuing popularity of outsourcing

as a business strategy is often driven by adesire to reduce costs, make costs moretransparent, and shift the costs from fixed tovariable. However, outsourcing can bringother benefits such as increased efficiency,flexibility and continuous improvements,which often bring more obvious and tangiblebenefits to end-users and customers alike.

Within the UK Government in recent yearshas been a desire to expand what becameknow as 'Private Public Partnerships' as a wayof harnessing the latest ideas and technologyand thereby securing improvements in publicservices and creating better value for moneyfor taxpayers. As far as I am concerned for theImmigration & Nationalisation Directorate(IND), I am looking for, and expect, a closeworking relationship with a flexible and highlyresponsive IT partner.

Providing front line staff with theinformation they need, when and where they need it

As part of the United Kingdom HomeOffice, the IND employs some 16,000 staffspread over 100 sites all over the UK. It isresponsible for setting and enforcing the UKimmigration and nationalisation policies

The Immigration & Nationalisation Directorate (IND) is part of the UK Home Office and employs 16,000 staff spread over 100sites. It is responsible for setting and enforcing the UK immigration and nationalisation policies. These include:

• Policing the national borders, managing immigration and preventing illegal entry

• Processing and approving applications for UK nationality

Stephen CalvardDirector of ITIND

GovernanceSECTION 2


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Section 2Governance


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programme. This lasted about 18 months andfollowing some very tough competition from anumber of excellent candidates we reducedthe candidates to a shortlist of three.

Then we had to see how our businessdrivers and goals matched up to thecapabilities of the different service providers.As indicated earlier, value for money was akey aspect in our decision-making, but there

are other factors that are also equallyimportant in other areas. A flexible and'future-proofed' approach is important to dealwith often changing policies and approaches.Suppliers need to be open and engender trustand be both able and willing to respondquickly. And the cultural fit is also important.When working together in high-pressuresituations, and to tight deadlines, it is alwaysimportant to be able to understand each otherand to be able to discuss things in an open andtransparent manner.

So at the end of this process, in August2004, we selected Atos Origin as the companythat offered the right balance and the culturalfit and agreed a 6-year transformational

outsourcing contract. Atos Origin was notcompletely unknown to us, as they had beenassisting the IND with a number of keybusiness programmes since 2000. Theseincluded involvement in complex initiativessuch as Programme Management, Programmeand Office Support, Project Management,Change Management, Risk and IssueManagement and Technical Assurance.

Atos Origin took over control in November2004 and the partnership has got off to a goodstart. Personnel from both our teams arealready closely physically located, makingcommunication easy, and are operating as atightly integrated unit. The importance of the'cultural fit' is already paying off and, forexample, we have already been able topresent jointly our business plans and todemonstrate a good fit between ourrespective targets and objectives.

Proactively building for the futureAs the relationship grows, it is important to

ensure that we can build for the future. Thereis a need to build strong ties between AtosOrigin, the IND business and the in-house ITDirectorate. From this we will be able to satisfyour major goal of a single, effectiveinfrastructure that offers ease of working anduniformity across our large spread of offices sothat front line staff have access to theinformation they need, when they need it.

An efficient and effective IT infrastructure iscritical to almost every aspect of the IND'swork. As Home Office minister Des Brownesaid at contract inception, “Atos Origindemonstrated to us that they have the expertise

and understanding to successfully deliver theIND's IT. Investing in its infrastructure is part ofthe directorate drive to continually improve theworking environment for its staff as well asensuring value for money.”

About the Author

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

He joined the Ministry of Defence in 1970 andworked for 10 years on electronics research anddevelopment at the Royal Aircraft Establishment. In1980 he worked for 5 years on technical support toNaval Defence Systems before moving to London in1985, where he was the project manager on a rangeof major guided weapons systems.

In 1990 he became a Scientific Advisor with theCentral Scientific Staffs in MOD, Whitehall. In 1992he was transferred to the Defence ResearchAgency where he held the post of Director ofEngineering Services.

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

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

Stephen has one son and one daughter and lives inGuildford, Surrey.

Atos Origin was notcompletely unknown to

us, as they had beenassisting the IND with anumber of key businessprogrammes since 2000.

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We believe it is who we are and how weapproach our work that sets us apart from thecompetition. We set the highest standards inthe way we operate and pride ourselves on ourclient focus.

Our philosophy to international growthhas been to build practices around locallawyers who understand the country'sculture, business and language. In doing so,we have created a closely knit and cohesivenetwork of lawyers. It is a significantchallenge to unite the wide range of culturesand legal approaches that run through ourfirm and we believe that we have succeededin achieving the right balance betweenrespecting these traditions and delivering aglobal service.

We have organised ourselves in line withour clients' requirements into key practiceareas and sector groups.

Our sector focus allows us to bringtogether specialists from across our practiceareas into dedicated groups. This enables us tobetter appreciate the environment in whichour clients operate and to work with them toachieve their objectives. We currently havesector groups focussing on Aerospace &Defence, Consumer Goods, Energy & Utilities,Financial Markets, Pharmaceutical andBiotechnology, Real Estate & Construction,

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Technology, Media & Telecommunicationsand Transport.

The core practice areas, from which wedraw our sector teams, are: Commercial,IT&Telecoms, Corporate, Dispute Resolution,EU & Competition, Employment, Finance, IP,Projects, Real Estate & Environment and Tax.

Simmons & Simmons inoutsourcing

Simmons & Simmons has one of theleading outsourcing practices in Europe, whichis supported by an extensive internationalnetwork. Our lawyers advise on all types ofoutsourcing transactions, ranging fromtraditional IT outsourcings, business processesand offshore outsourcings to cutting-edgestrategic partnerships. We advise clientsthroughout the duration of the transaction,from the commencement of the sourcing untilafter the end of the transition process. Weadvise on single jurisdiction relationships tomulti-million dollar global arrangements. Ourclients include vendors, intermediaries,consultants and customers.

Simmons & Simmons is ranked jointsecond in The Lawyer's survey of UK-basedlaw firms advising suppliers on outsourcings.The list was compiled following consultationwith in-house lawyers. Simmons & Simmons

Simmons & Simmons is a leading international law firm with over 1,000 legal staff in 19 business and financial centres across Europe, the Middle East,Asia and the US.

David Barrett - PartnerTel: +44 (0)20 7825 4032E-mail: [email protected]

Peter Brudenall - PartnerTel: +44 (0)20 7825 4346E-mail: [email protected]

Michael Sinclair - Partner

Tel: +44 (0)20 7825 4155E-mail: [email protected]

www.simmons-simmons.com

Delivering innovative outsourcingsolutions

Simmons & Simmons is a leading international law firm with 19 offices across Europe,the Middle East, Asia and the US.

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was also recently judged by the samepublication to be the leading firm in the UK inadvising suppliers in the Indian offshoreoutsourcing sector.

The Simmons & Simmons team isdedicated full-time to outsourcing and webring a wealth of experience not just on thehard commercial and legal issues that arisebut on softer issues such as governance andcontract management and broader issues suchas pricing process and key performanceindicator ('KPI') measurement and remedies.

Outsourcing transactions are very differentfrom other transactions companies enter into -they involve staking key processes for theirsuccess in the hands of others. The lawyeringand soundness of those transactions is crucialto business success. We have a breadth ofexperience in providing and managing theprovision of legal advice to address thefollowing legal and commercial issues withinthe context of a global outsourcing:

Service DescriptionThe heart of a successful outsourcing is a

clear definition of 'who does what for whomfor how much'. In other words, there needs tobe a clear service description, a clear statementof customer responsibilities and a cleardelineation between the two. All too often thisis ignored (particularly by lawyers, who tend toregard these as technical matters). In contrast,we regard achieving clarity on these issues asbeing at the heart of what we do.

Service Levels and Service Credits

It is important that the service level andservice credit regime is properly designed sothat it incentivises good performance ratherthan institutionalises poor performance.Service credits are not a perfect solution tonon-performance and they have to beengineered with care in conjunction with othermechanisms (such as reporting requirementsand escalation) designed to identify andmitigate poor performance.

RegulationOutsourcings in the financial services

sector are usually subject to supervision by aregulator (in the UK, the Financial ServicesAuthority). A proper balance needs to bestruck between customer and supplierregarding who bears the cost of changesrequired as a result of changes in regulation.US listed companies and their subsidiaries(and those with US listed securities) have tocomply with various audit requirements underthe Sarbanes-Oxley Act. These requirementsneed to be reflected in the contract by drawinga workable balance between access tosupplier systems and processes and protectionof supplier commercially sensitiveinformation. We have developed a standardset of contractual provisions to achieve this.

Outsourcings in the public sector requireexpertise in the regulations governing thepublic procurement process. Precise legalanalysis is required in relation to proposals toprocure under framework agreements andwhen relying on exemptions to theprocurement requirements; the requirementsof the 'OJEC' process (contract tender notices)need to be complied with; the legalrequirements of tender evaluation can beexacting; government approved contractwording needs to be used. A consideredunderstanding of 'how things are done' in thepublic sector informs our advice in this area.

Data Protection and Confidentiality

The transfer of personal data for processingin another country can raise significant issuesunder data protection legislation in Europe andelsewhere. Contractual models for permittingsuch transfers and for protecting theinformation are at the heart of many businessprocess outsourcings. The reputationalconsequences for not addressing this in anoutsourcing can be significant. Data protectionlawyers within our outsourcing team areexperts at formulating appropriate contractualprotections to achieve such compliance.

OffshoreUnderstanding the offshore outsourcing

market is key to a successful outsourcingnegotiation. We have been working in Indiafor over 10 years (and even longer in China)and our Indian and Chinese qualifiedoutsourcing lawyers provide valuable supportfor outsourcings in these key offshoredestinations. Offshore suppliers often have adifferent attitude about the sharing andallocation of risk, and appreciating this iscrucial in both commercial and legalnegotiations. Issues concerning theenforceability of the contract, the ability tochange the on-shore/off-shore mix, theprotection of intellectual property rights, andcompliance requirements (including dataprotection) all need to be addressed. Duediligence (in addition to the strict legalrequirements) is fundamental.

Pricing Competitiveness and the Cost of Change

One of the key commercial issues isensuring ongoing price competitiveness.Benchmarking and other forms of markettesting, indexation and incentivisedgainsharing are common, although there is no'one size fits all' solution. Long-termarrangements are likely to yield moreattractive pricing, but with a greater need overtime for changes to be made to the servicedescription, service levels and technologyplatform. It is vital that the outsourcingagreement caters for change in a way that'systematises' the process of agreeing andimplementing change, and that it controls andgoverns the cost of changes made.

Structuring and TaxSome outsourcings, to be financially viable,

depend on preserving VAT/sales tax groupingsand the exempt status of services. Tax lawyerswithin our outsourcing group regularly advisebanks and financial institutions on VATtreatment in outsourcings, and liaise with theRevenue where necessary to obtain clearances.


Management and Corporate Governance

One factor that is consistently absent infailed outsourcings is a proper managementand governance structure. The issue ofcorporate governance needs specifically to beaddressed in the contract: a jointly appointedmanagement committee, an independentchair, a dispute resolution mechanism, anescalation procedure, joint participation incontinuous improvement and other classic'signatures' of good corporate governanceshould be designed for the deal.

Employment IssuesWhile the Acquired Rights Directive (ARD)

(the directive governing employee transfers,implemented in the UK as TUPE) cannot becontracted out of, the customer and supplierare free to re-allocate cost amongst themselvesfor the consequences of the ARD (including re-allocating the cost of meeting transferringclaims). One of the major commercial issues isthe cost of redundancies of surplus employeesat the end of the agreement, as the supplier willwish the customer to bear this cost (whether ornot the employees are deemed to havetransferred to the customer by virtue of theARD). But the ARD is but one of several issuesthat need to be addressed in relation to inscopeemployees. Pensions, employment terms andconditions, consultation, and benefits alsoneed to be addressed.

LiabilityOne of the most contentious issues in an

outsourcing is the allocation of liability betweenthe customer and supplier. The supplier willwant the degree of liability it takes on to reflectthe reward it is receiving, while the customerwill wish to transfer risk to the supplier. Issuessuch as liability for data loss or corruption canbe major issues for a supplier. Creative solutionsare sometimes called for: can the supplieraccept liability because it has insurance for thatkind of loss? Can liability for delay be quantifiedin advance by way of liquidated damages?

Exit ManagementA right to terminate is a hollow right if it

cannot be backed up with the ability to exitsmoothly to a successor supplier or to take theservice back in-house. The exit rights will needto be carefully designed to balance thecompeting needs of the customer and supplier.Post-termination assistance, use of intellectualproperty rights and assets, recruitment of staff,and return of data and records will all need tobe addressed.

Delivering successfuloutcomes

A successful outsourcing requires that theprocess of outsourcing is project managed andthat the resulting contract balances theobjectives of limiting risk and achieving acommercial and enduring outcome.

ExpertiseSimmons & Simmons provides cutting

edge legal advice with lawyers who arespecialists in outsourcing, many of whom haveworked in industry, and who thereforeunderstand the commercial drivers to asuccessful outsourcing. Our lawyers arerecognised leaders in the field - we publishand speak on outsourcing globally.

Industry SpecialisationWe advise on outsourcing across a wide

range of industry sectors, nationally and globally,including the health, technology/telecoms,defence, banking/finance, insurance/pensions,transport, and public sectors. We work closelywith outsourcing suppliers, businesses wishingto outsource, consultants and specialist industryassociations.

Strength in DepthWe have a global outsourcing group

throughout our network of global offices,enabling us to mobilise large teams ofoutsourcing lawyers on short notice tomanage even the largest of national andglobal outsourcings. Reflecting the dominance

of India (and increasingly China) for offshoreoutsourcing, we have Indian and Chinesequalified outsourcing lawyers who are able todeal with local considerations as they arise(avoiding the expense and delay of having tosource such advice locally).

Project ManagementThe process of outsourcing needs to be

carefully controlled using expert projectmanagement techniques. Our outsourcingteam has developed a project managementmethodology, adapted from industry. Itdelivers 'no surprises' of full coststransparency and provides support andresource to your commercial team on aseamless basis.

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IT OUTSOURCING GOVERNANCE:IMPLEMENTING CORE IS CAPABILITIES

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The original framework is shown in Figure1, and was developed from detailed interviewresearch into 53 high performers in the ITfunction, and multiple interviews in 112 ITsourcing arrangements in the mid-1990s. Theresearch suggested that the future IT functionhas four tasks - eliciting and delivering onbusiness requirements; ensuring technicalcapability; managing external supply; andgovernance, coordination and leadership.

Throughout we define a 'capability' as adistinctive set of human resource-based skills,orientations, attitudes, motivations andbehaviours that have the potential, in suitablecontexts, to contribute to achieving specificactivities and influencing business performance.A 'core IS capability' is a capability needed tofacilitate the exploitation of IT, measurable interms of IT activities supported, and resultingbusiness performance.

In 1998, Feeny and Willcocks published a core IS capabilities framework suggesting four tasks and nine capabilities for any futureIT function. This paper revisits the framework, examining the challenges and learning points from its implementation in Dupontand in four other cases from 1997 to 2004. Longitudinal case research revealed a range of omissions and resulting problems.Two research questions guide this paper: Does the model still hold or does it require revision? What challenges and learning arisefrom trying to implement the framework?

Leslie WillcocksWarwick University

David FeenyTempleton College, Oxford

Figure 1. Nine Core IS Capabilities (Source: Feeny and Willcocks, 1998)

Capability 1 IS/IT Governance 'integrating IT effort with business purpose and activity'

Capability 2 Business Systems 'ensuring that IT/e-business technologies capabilities are envisioned in Thinking every business process'

Capability 3 Relationship Building 'getting the business constructively engaged in IT issues'

Capability 4 Designing Technical 'creating the coherent blueprint for a technical platformArchitecture which responds to present and future business needs'

Capability 5 Making 'rapidly trouble-shoot problems which are being disowned by others Technology Work across the technical supply chain'

Capability 6 Informed Buying 'analysis of the external market for IT/e-business services; selection of asourcing strategy to meet business needs and technology issues; leadershipof the tendering, contracting, and service management processes'

Capability 7 Contract Facilitation 'ensuring the success of existing contracts for IT services'

Capability 8 Contract Monitoring 'holding suppliers to account against both the existing service contracts and the developing performance standards of the services market'

Capability 9 Vendor Development 'identifying the potential added value of IT/e-business service suppliers'

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GovernanceSECTION 2


Case Study: DupontBackground

Dupont is a chemicals, health care,materials and energy multinational operatingin a range of segments. Its divisions includeAgriculture and Nutrition, Coatings and ColourTechnologies, Electronic and CommunicationTechnologies, Performance Materials, Safetyand Protection, (Textiles/Interiors/Other wasdivested in 2004). By the end of 2004 Duponthad $US 27.3 billion revenues and 55,000employees worldwide. Its 20 plus strategicbusiness units operated in more than 70countries. From 1996 Dupont strove to focuson core business competencies and hasregularly divested non-core businesses. It hasalso focused on the reduction of overheadcosts and increased capital efficiency. Part ofthis involved IT outsourcing.

In 1997 Dupont signed a series of 10-yearcontracts, worth $US 4 billion, with CSC andAccenture (then Andersen Consulting). By 2002,80% of its IT spending (total: $600 million a year)and 75% (3000) of its IT staff had beentransferred to its alliance partners. CSC wasresponsible for shared infrastructure worldwide,and corporate, regional and business specificapplications, while Accenture managed theChemical division's business enterpriseapplications. Dupont initially retained 100, (laterreduced to 60), central staff to manage thecontracts, and over 1000 distributed technicaland business people to provide business ITleadership, process control computing inmanufacturing, and R&D computing.

For new project work Dupont retained theright to source from anywhere as well as fromone or both sitting suppliers. As one example,by the late 1990s Dupont had identified a new$400 million worldwide SAP/Y2K project. Onesupplier brought 400 SAP people on to theproject, while, to supplement the othersupplier's SAP skills Dupont transferred 300people from the divisions over to the supplier,who then bore the costs of their SAP training.Dupont also adopted a balanced scorecardapproach for benchmarking the health of its IT

service 'towers'. By 2001 Dupont had reducedits 90% fixed IT costs to 50% fixed, was gettingquicker injections of skills from suppliers than ithad before outsourcing, was achievingincreases in some service speeds and flexibility,was probably achieving modest cost reductionson a pro rata basis (overall IT budget actuallyincreased with greater demand), and had givena range of its ex-employees real careerdevelopment opportunities. However, by 1999 itwas questioning whether it had given away toomuch IT technical and management expertise.

IT Organisation and Core IS Capabilities

By this date the CIO headed twoorganisational units - Global Services andAlliance Operations. Global Services had 70people providing leadership of strategicplanning, architecture, security, emergingtechnologies, and enterprise-wide projects.Oversight of regional and specialised serviceswas delegated to 350 people across fiveregions responsible for country specific ITarchitecture and administration andmanagement of regional vendors. GlobalService also had a Business Unit Supportgroup made up of 500 employees across 20divisions. These looked after manufacturingprocess and production controls, business-specific applications and IT for central R&D.

Alliance Operations consisted of 47 peoplewho managed business unit demand forvendor services, monitored vendor servicedelivery, developed SLA metrics and achieved

continuous performance improvement. Of the47, 10 dealt with Infrastructure - oversight ofthe CSC deal, and service responsibility fordesktop, telecom, midrange and mainframe.Another five dealt with Applications -oversight of Acenture/CSC, and liaison withfour business divisions. Three employeeslooked after Contract management -performance scorecards, resolve contractdisputes. A further 20 staff managed ITFinance - invoices, charges to business units,audit billing accuracy and timelines.

While this seemed sufficient, by early 1999Dupont began to question whether its internalcapabilities were strong enough. IT was oftenexcluded from critical business discussionsand decisions. Succession planning for ITleaders and core staff needed work. Andemployees were looking for guidance onchanging skills and career paths. About thistime Dupont adopted the Feeny-Willcocksframework to begin formalising competencies,job families, personal developmentopportunities, and career paths. Dupontdefined relationship building, leadership,contract facilitation, informed buying andmaking technology work as 'generalcompetencies', and pointed to three careerpaths - Business and IT Vision (needingbusiness systems thinking), Design of ITArchitecture (requiring architecture planning)and Delivery of IT Services (including vendordevelopment and contract monitoring). InDecember 2000 Dupont launched an intranet-accessible career management site, enablingemployees to identify required competencies -business, interpersonal and technical - foreach of its Dupont's 55 existing andprospective IT roles.

Our own analysis of Dupont's retained ITcapabilities took place in July 2001. The overallfinding of weaknesses in retained corecapability some four years into a large-scaleoutsourcing arrangement was not, in fact,untypical of what we have found elsewhere(see for example Kern and Willcocks, 2001;Lacity and Willcocks, 2001). On Business andIT Vision we found the following. With limitedlocal resources, business unit IS leaderstended to be driven to operate also inrelationship building and contract facilitationmodes. The focus on service delivery,automation, and fire-fighting led to diminishedstrategy and value creation. Business unitexecutives themselves commonly positionedIT as an agent of cost reduction, rather than ofbusiness value creation, and business systemsthinking was generally squeezed out of the ITframe. Vendors were not filling the gap instimulating innovation for business value.

On IT Service Delivery, we saw theinformed buying and vendor developmentroles needing considerable enhancement.Many Business Unit IT leaders needed to movefrom fire-fighting to a more strategic focus,while making technology work was oftenunderpowered, given the IT demands, and thevariable strengths of the suppliers operating indifferent parts of Dupont. Neglect of the

In 1997 Dupont signed a series of 10-year contracts,worth $US 4 billion, with CSC and Accenture (then

Andersen Consulting). By 2002, 80% of its IT spending(total: $600 million a year) and 75% (3000) of its IT staff

had been transferred to its alliance partners.


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vendor development capability contributed toa number of adverse supplier behaviours andpractices. The relationship had not evolvedand this inhibited Dupont's ability to tap intothe suppliers' intellectual capital. Weakness ininformed buying led to a limited sourcingvision, intra-Dupont learning, and limitedfuture sourcing flexibility. As a result, the issueof how to anticipate and cope with sourcingchanges over the next four to ten years wasnot being addressed sufficiently.

On Designing IT Architecture, Dupont'sposition on this capability fitted fairly well withour findings elsewhere. Dupont had alreadynoted its weaknesses here and was rebuildingthis capability. It needed to develop careerpaths and more staff for this key area. Oneweakness of our own model, identified inwork in 2001 on building e-businessinfrastructure, is that architecture needs to bemore closely aligned with business strategythan would seem from the way it is portrayedin our three rings model. Our conclusion in our2001 study was that infrastructure andarchitecture planning were now board-roomissues because the technology platform nowinfluenced greatly what was and was notpossible as a business. The implication forDupont was to ensure that architectureplanning becomes closely co-located/dealtwith closely with business planning. Here werecommended development of career pathsfor this core retained capability, with thepossible quick hiring of experienced staff to fillthe vital gap left by the vendor here.

On a regional basis we found Asia Pacificquite well adapted and leveraging the core IScapabilities concept. Europe and SouthAmerica had not yet tailored the capabilities totheir environments and resource levels. Somecore IS capability definitely neededenhancement in terms of making localresources available, in particular contractfacilitation, making technology work, businessvision and contract monitoring. In terms ofDupont's overall objectives, we felt it couldonly move from cost reduction to businessvalue if business executives were educatedinto the transformational possibilities of IT.Increased delivery speed needed more in-house project management capability and arapid application development approach, risk-reward contracts with vendors, a change inthe bureaucratic process by which work wascontracted for and assigned, architectureplanning linked to business vision, andstrengthened technical fixer and contract

facilitation capabilities in order to leverage theoperational service. Innovation could bedelivered through enhanced business systemsthinking, informed buying and vendordevelopment capabilities to unlock vendorpotential and greater internal and externalnetworking. To facilitate these moves, the coreIS capabilities framework was correctlypositioned for career development, but neededto be further imbedded in human resourceprocesses, including selection, appraisal andreward systems.

By early 2003 the competency modellingand career development self-service effortshad generated several positive results. 80% of

staff accessed the site in 2002 and 30% createdcareer plans Employees and managersfocused on competencies rather thanadministrative tasks. By 2003 the companywas able to fill 90% of key leadership positionsinternally, despite the fact that it had reducedthe pool of potential successors from 4000 to1,200 as a result of outsourcing. The projectedshort-fall of in-demand employees wasreduced from 30 in 1999 to two in 2004. Thestrength of emerging IT leaders wasrecognised by business management, with90% of business unit CIOs reporting to abusiness unit VP/General Manager asopposed to 50% previously. Even moreimportantly, Dupont felt that it had wrestedback control of its IT destiny and put itself in amuch better position to leverage itsrelationships with suppliers, and renegotiatesourcing arrangements into the future, as itbegan to do from 2003 onward.

Analysis Of The Case The company's experiences were not

untypical of other large-scale outsourcingarrangements we have researched (Cullen andWillcocks, 2003). After outsourcing 80% of itsIT budget Dupont discovered it had retainedinadequate management and technicalexpertise to control its IT destiny. Mid-contractsag occurred after transition. Here thequestion: 'how much more value and leveragecould be got from the relationships' wasraised, and benchmarking was introduced for

more accurate tracking of performance and asan inducement to improve. As a globaloutsource with two major partners, Duponthad specific issues on distribution of resourceslocally - in the business units - and centrally. Itunder-resourced the more operationalcapabilities (MTW, CF, RB) resulting in ITmanagers and local CIOs having to deflecttheir attention into these areas and away frommore strategic, business oriented activity.Moreover, despite the size of the outsourcingarrangements, Dupont had not retainedenough technical or architecture planningcapability either at the centre or locally. Thiscould be dangerous for big projects such as the

major SAP project allied with the Y2K workfrom 1999. The other areas of concern wereDupont's on-going ability to monitor andmanage present and future sourcing strategy,and develop further business value from thevendor relationships.

Dupont IT management began addressingthese issues from 1999, one result being themove towards using the core IS capabilitiesframework as a basis for staff developmentand career succession planning. Architectureplanning was an interesting case in point.Given away to CSC in 1997, Dupont found itwas losing control of designing its technicalplatform and being able to have informeddiscussions with vendors. It began recreatingthis capability in-house from 2000. Contractmonitoring, initially, had seemed detailedenough, but within two years a majorbenchmarking process had been introduced.Dupont thought it had resourced the businessunits enough, but then discovered that ITleaders there got pulled too much intooperational issues, and too much doingcapability was left to the supplier, runthrough an over-bureaucratic procurementprocess. Subsequently we found differentbusiness units left to deal with these issues intheir own different ways. Dupontsubsequently also bolstered its seniortechnical capability, and also its informedbuying capability in order to deal withrenegotiation of their outsourcingarrangements into the 2003-2005 period.

After outsourcing 80% of its IT budget Dupontdiscovered it had retained inadequate management and

technical expertise to control its IT destiny.


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Conclusion: LearningFrom Implementation

Here, based on Dupont and four othercases we reflect on what might be learnedfrom attempting to implement the Feeny-Willcocks framework.1. Organisations need to develop long-term

strategic core capability rather than beingdrawn into fire-fighting and focusing onlyon the shorter term capabilities in ourmodel. Problems develop when any of thecore IS capabilities are not suitably staffed,but there is a tendency in the first few yearsto neglect the capabilities with longer timehorizons - business systems thinking,governance, architecture planning forexample, thus building up important issuesfurther down the line.

2. The case supports our earlier 1998 findingsthat high performers with distinctive skills,capabilities, and orientations need to beappointed.

3. Issues of core capability development andsuccession emerged which need carefulmanagement.

4. Getting innovation and business value-added from outsourcing really does needorganised, pro-active in-house corecapabilities being applied to the task. But afurther challenge at Dupont was to get thebusiness units and power brokers thereengaged with IT issues. This underlined theimportance of the Leadership role and thebusiness facing capabilities in the ITfunction. It also points to the fact that

however empowered the IT functioncannot do it alone. Maturity of the businessunits' capability to manage IT strategicallyalso has to develop. We found, however,that the IT function has an important roleto play in that process.

5. Our framework emerged as better appliedas an evolutionary process rather than aninstant fix. Particularly endorsed was theFeeny model of IT organisations passingthrough Delivery, Reorientation andReorganization phases (see Feeny andRoss, 2000). Here core capabilities focusingon technology and service were developedin the Delivery phase, more business -focussed capabilities in the Re-orientationphase, with the fully fledged model beingapplied only in the Re-organisation phase,which is the lowest risk phase for large-scale outsourcing.

6. Core IS capabilities success levels alsorelated to other mitigating factors, namelygovernance mechanisms in place,inflexibility of outsourcing contracts anddeals, the level of resourcing (numbers ofstaff), supplier capabilities andresponsiveness to new demands.

7. We were discovering in 2001-5 thattechnical architecture capability has to bemuch closer to and responsive to thebusiness units than we were finding in the1990s.

8. In the original model we positioned projectmanagement as an organizational ratherthan a specific IS core capability. Since

then we have been getting more feedbackfrom these two cases on aspects of projectmanagement that might be distinctive tothe IT function.

9. In the cases we have examined, so far, wehave found the Core IS capabilitiesframework producing significantly betterresults in terms of control of IT destiny,effective working with business units,supplier management, better control offinancial aspects of IT.

10. In allied research, we are finding themodel, with a few modifications, alsotranslates well for use in business processoutsourcing

References

Cullen, S. and Willcocks, L. (2003). Intelligent ITOutsourcing, Butterworth, Oxford.

Feeny, D. and Ross, J. (2000). The Evolving Role OfThe CIO. In Zmud, R.(ed.) Framing the Domains Of ITManagement Research. Glimpsing The FutureThrough The Past Pinnaflex Educational Resources,Cincinnati.

Feeny, D. and Willcocks, L. (1998). Core ISCapabilities For Exploiting Information Technology.Sloan Management Review, 39, 3, 9-21.

Kern, T. and Willcocks, L. (2001) The RelationshipAdvantage. OUP, Oxford.

Lacity, M. and Willcocks, L. (2001). Global ITOutsourcing: In Search Of Business Advantage.Wiley, Chichester.



THE IMPLEMENTATION OF UTILITYCOMPUTING WITHIN AN OUTSOURCINGRELATIONSHIP

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necessary to do business, and one that needs tobe right, but nothing to get too excited about.

Major steps forward within IT have beenprompted by the development of so-called'killer apps' - new capabilities that dependedon the provision of certain facilities, such asthe PC or the Internet. Such developments arecumulative, and most new applicationsnowadays presume a certain amount ofinfrastructure already exists. So developmentswithin that infrastructure are now more aboutefficiency than effectiveness: reducing costand increasing quality of service, rather thanthe introduction of new 'must have'technologies.

The reasons for adopting utility computingare by now quite well understood. It improvesflexibility, allows 'pay for use' services andincreases responsiveness to business change.

But a less well understood benefit is that itallows a reduction in complexity, which isincreasingly a predominant factor within anysizeable IT environment. It does this by bothsimplifying the services provided and also byreducing the variations in the infrastructureemployed to deliver them.

So why outsource to provide a utilityenvironment? Well it allows the supply model tochange so that the customer no longer ownsthe 'boxes', it allows the application of a level ofsupply process maturity that most end usercompanies struggle to achieve, and finally itensures a critical mass of infrastructure withoutwhich the utility model cannot really work.

IT Today - Less Visible,More Critical?

There are various people, notably NicholasCarr1, who claim that IT 'does not matter', as itis becoming a commodity. Others, such as Wielland Broadbent2, say that a well-structuredinfrastructure can make a significantcontribution to the flexibility andresponsiveness of a business. They may both beright, of course, if we come to view such an ITinfrastructure as a 'hygiene factor'3, something

Outsourcing is by now a well-established method of commissioning and providing services, whereas utility computing is a muchnewer and much-misunderstood concept. Is there a relationship between them, or should there be?

This article will examine both concepts. It is the author's view that they are complementary concepts, which when combined wellcan provide significant added value. All of the ideas and concepts suggested here are themselves well-understood and repeatableactivities available from good suppliers. But it is their intelligent combination which provides the real progress towards thedesired goal and this is where I believe Atos Origin can offer a competitive advantage.

Michael SymondsAtos Origin

Figure 1.

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Indeed, the infrastructure itself is becomingquite boring and routine. Whereas in the pastthere was concern as to whether you couldbuy a machine big enough for someapplications, nowadays there is more concernas to whether you can buy a machine smallenough, or risk gross under-utilisation. Andthe reliability of the components has improvedto such a degree that it is not mean time tofailure (MTBF) that is the problem but, due tothe complexity and unfamiliarity with faultresolution, mean time to recover (MTTR) ifsomething ever does go seriously wrong. Sothe emphasis must change from the complexrepair of failing components to their rapidreplacement should such a failure occur. Andthis, in turn, allows the adoption of lessexpensive and more 'commodity'components.

Unpacking the Boxes,Freeing the Service

So, how can utility, and outsourcing as ameans of supplying it, help address theseissues? Why change the supply model? Theessential motivation is to disentangle theservices used from the boxes used to supplythem. This allows customers to use variableenvironments and amounts of them, asdictated by their business needs and withoutthe need for capital investments to do so. Thatalso frees the usage of systems from being tiedto the depreciation cycles of the boxes.

On the supply side, the change is from onethat has essentially been 'design and purchaseto order' to one of 'assemble from stock'. Todo so, new service capabilities have to bedeveloped, such as (re )provisioning, meteringand usage-based billing.

Providing such services can add a newdimension of availability to the servicesprovided. When a failure does occur or anupgrade is needed, the service provider neednever actually do any work on the customer'srunning systems: rather the system is 'swappedout' and the application continues while anywork is done offline. This illustrates one of theadvantages of moving from a traditional staticto a dynamic IT infrastructure, where resourcescan be rapidly deployed and re-deployed as thebusiness requires.

Within a utility-based service, there is achange in the supply chain, away from theprovision of boxes to the supply of services.The supply of the hardware itself is pusheddown the supply chain towards the vendor.Although a relatively new concept within IT,

this is a much-better understood conceptwithin other businesses, where vendor-managed inventory is a well-understoodconcept. But, again, a certain volume of supplyis needed to make this work for all involved.

One technological development thatunderpins all of these enhancements is that ofvirtualisation: a much-used and abused term,which means many things in many contexts.See panel. This is gradually evolving andemerging, and the ability to do so is nowstarting to become of the 'industrial strength'needed for the delivery of commercial servicesto be based upon it.

These developments cause extra concernswithin a managed IT services environment.Such an environment is essentiallyconservative, indeed it is supposed to be so.There is an in-bred aversion to changing too

much all at once. You should never introduce asingle point of failure and should always havea back-out plan. And a complex change controlprocess should manage everything that moves.

Making Progress alongthe Road to Partnership

So, the supply of IT infrastructure is movingover from a tangible, box-based service to onethat is virtualised and evolving. And it has todo so in a well-controlled and incrementalprocess. How can we plan to get there andhow will we know when we are actually there?

One answer is to create a path towards autility-based computing environment. A paththat is likely to encompass change on the partof the customer, the supplier, and in therelationship between them. Some steps in thispath may not actually be clearly defined until

Figure 2.

Virtualisation is the creation of a logical abstraction of the physical environment It involves the decoupling of an interface, so that different and variable resources can be used ʻbeneath the surfaceʼ. It can make many appear as one, or one appear as many.Virtualisation can be applied to a myriad of resources, examples of which include:

• Services: de-coupling what is used from the infrastructure used to provide it;• Applications: use web services so that multiple customers can make use of a process;• Servers: run multiple applications on the same box, whether in the same or using multiple operating systems;• Storage: allow data to be stored across a range of physical storage devices;• Networks: both WAN and LAN: run different services over the same cables.

Virtualisation can be made to work across an increasingly heterogeneous range of devices, so that devices of different types can be combined and replaced. Virtualisation drives increased utilisation of these resources.


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they are well down the path, but importantlyby following a set path they leave a 'trail'behind them and can feel that they aremaking progress together because they cansee the tangible steps that they have troddenon the way.

That is the subject of the flow chart above,which depicts such a path as described forone particular customer. It needs to beinterpreted in each case, but provides a set ofingredients and sample recipe that can beused to determine such a progression inwhatever circumstances pertain to theparticular customer.

It will be seen that Outsourcing is depictedas one of the possible steps on the road toUtility. Its applicability depends on the startingstatus of the customer. Its main intention is toensure that all resources are in the rightorganization and suitably motivated to avoidthe so-called “Turkeys and Christmas”syndrome when moving to an environmentwhich disconnects services from the boxesused to deliver them.

A customer could go through this processin a single sweep for their whole ITenvironment, but such a managed serviceenvironment is often innately cautious andeven conservative. It may be better to startwith an identifiable sub-set of the environmentfor which these services are already wellunderstood, namely, storage. Storage ondemand is by now a mature service offering

and offers the opportunity for customers todeploy the utility concept in a staged andcontrolled manner, becoming familiar with theprocesses and gaining experience beforemoving on to a full-scale deployment acrossthe whole operational environment.

For example, one of Atos Origin's firstcustomers for a full utility service was arelatively small specialist chemical company,which was the subject of a divestment andacquisition from one multi-national toanother. It needed its own SAP environmentto be provided quite quickly and for a limitedbut unknown period, probably a year toeighteen months, before it could beincorporated into the new parent company'sconsolidated systems. The exact scale of thesystems needed was difficult to judge untilthey had been separated out. Here, thenecessary services and storage have beenprovided from Atos Origin's utility computingenvironment, and can be scaled up or downas required.

A Possible Path Towardsa Utility-ComputingEnvironment

1. Standardise: platforms (vendor, models,OS), applications environment, systemmanagement tools, etc. Determinestandards for each set/class ofapplications systems (eg SAP).

2. Transfer supply-side personnel withinbusinesses into a supplier, such as AtosOrigin, to overcome the 'Turkeys andChristmas' syndrome.

3. Organise a single, structured service deliveryarchitecture, including common processes,service descriptions and levels, tooling, etc.

4. Consider an offshore component, whichcould be significant for mature servicesand is dependent on the systems'lifecycles. This needs to be carefullycombined with standards and possiblesubsequent automation.

5. Share facilities wherever they are notbusiness-specific. Consolidate data centresinto a common Tier 1 twin-centre structure,which may itself provide services to Tier 2 &3 centres. Use common, virtualised DC-LANand storage facilities, on an 'on demand'basis, with centralised backup and recoveryfacilities. Networked storage allows moreefficient utilisation and the implementationof different classes of service.

6. Determine a structure between thecustomer's businesses which coordinatestheir Demand functions, allowingmaintenance of requirements for ongoingservices, and attuned to a complementarySupply structure. Use governance toreduce the diversity of perceived businessneeds, adopting company-wide releasemanagement processes for commoncomponents.

Figure 3.


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7. Reduce the diversity of applicationsenvironments and run them in fewer,shared system platforms. Concentrate onstandard Wintel and Lintel (Windows orLinux on Intel or AMD systems)environments. Use virtualisation facilities toallow the utilisation for suitable applicationsto be increased from the current below 30%to 60% or higher. Reduces the number ofsystems and thus some operations,hardware and software costs.

8. Run the resulting centres as fully-automated, 'lights out' centres, with theservices to deliver them being similarlyautomated. Use provisioning software tomanage the environment on a utility-likebasis which can allow re-purposing of ITresources driven by business needs.Improve the support ratio from the currenttypical 1/15-30, depending on complexity,towards 1/50-60 or more, so halvingrelevant costs. Combining doubledutilisation with doubled support ratiosgives a compound benefit on current costsfor those elements.

9. Put in a simple, 'managed operations ondemand' based service and contractstructure, which allows transparency sothat businesses can determine which of therationalised service levels is appropriatefor each of their systems.

10. Manage the management of data to reflectthe business value of the information itcontains.

11. Deliver both storage and processing from acoherent utility environment, supplied andowned by fewer preferred platform vendors.

12. Constantly adjust pricing levels to reflectefficiency improvements.

Note: There are, according to the purists,18 different forms of consolidation, but for thesake of understanding we have used the threemajor groupings: logical, physical and rational.

This is an iterative path, which canencompass an increasing scope as servicesare rolled out and become more ambitious asthe maturity of the delivery organisationincreases. All of these Instruments arethemselves well-understood and repeatableactivities from suppliers. It is their intelligentcombination which provides the real progresstowards the stated goals.

1 IT Doesn't Matter, Nicholas G. Carr, HarvardBusiness Review, June 2003

2 Leveraging the New Infrastructure, PeterWeill and Marianne Broadbent, HarvardBusiness School Press, ISBN 0-87584-830-3,1998

3 The Motivation to Work, Frederick Herzberg,Wiley and Sons, ISBN 0-47137-390-7, 1959

About the Author

Michael A. Symonds is an IT consultant and currentlyPrincipal Solutions Architect for Atos Origin. Hestudied Psychology at Reading University, UK andComputer Studies at Cambridge Technical College.

An experienced IT practitioner and Consultant withmany years of in-depth technical IT experience, aswell as experience in marketing and generalmanagement, Michael has worked both in the UK andinternationally at a senior level. He has contributed tomany white papers and is a regular speaker atvendor and public conferences on IT related subjects.

Recently responsibilities have included several majorservice and product development projects, includingthe definition of architectural standards andprocesses and the establishment of a structured,forward-looking vision creation and developmentconcept.



OUTSOURCING GOVERNANCE ANDREGULATORY COMPLIANCE - CAN THEYCO-EXIST?

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as a whole. And these numbers do not takeinto account the opportunity cost ofcompliance and the distraction it creates fromother critical activities.

Regulatory Compliance -You Can't Hide

While organisations can debate thecollective merit of these regulations, most arehere to stay. While some, such as SOX, couldpotentially be scaled back, the overallregulatory environment is not going to loosensignificantly in the near term. Affectedorganisations must address these regulationsas efficiently and effectively as possible.

One common misperception in the marketis that existing outsourcing audit mechanisms,

Regulatory compliance mandates arebecoming increasingly pervasive and onerousin western countries (see Figure 1). They havebecome a driving force in influencing affectedorganisation's investments, areas of attentionand activity, and in extreme cases, strategicdirection (i.e., going private in an attempt toavoid regulatory mandates). Business processregulation has become a new and uglier “BPR”.

A large company, for example, could easilyhave total direct and indirect costs forSarbanes-Oxley (SOX) compliance in excess of$10M annually. AMR Research estimates thataffected organisations worldwide will spend$6B+ on SOX related activities in 2005, notcounting actual audit fees, and will spend$80B+ over the next five years on compliance

Nick AndrewsManaging DirectorEquaTerra Europe

Figure 1. Major Regulatory Mandates

• DoD 5015.2, U.K. PRO: Federal standards on records management in the U.S. and U.K.

• EU95/46, EU02/58: European Union privacy legislation.

• Gramm-Leach Bliley Act (GLBA): Privacy of financial information.

• Health Insurance Portability and Accountability Act (HIPAA): Privacy of patient information andhealthcare records.

• National Association of Security Dealers/NASD 3110: Written policies and procedures for review ofcorrespondence with the public.

• New Basel Capital Accord (Basel II): Capital assessment and reporting standards for global banking.

• Sarbanes-Oxley Act: fiscal accountability and control environment integrity; various Europe versionsare in place on a country-by-country basis.

• SEC Rules 17a-3, 17a-4: Securities-related records retention.

• USA PATRIOT Act: Various anti-terrorism, surveillance and anti-money laundering dictates.

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primarily the SAS 70 audit (see Figure 2), arealways adequate for SOX compliance. Thereality is that even an SAS 70 Type 2 audit maynot prove enough for SOX in all cases. TheSAS 70 standard was developed long beforeSOX regulations existed and was not designedto focus on the type of controls that SOXaddresses. In addition, there have been norequirements for users to request a SAS 70audit, and many have not.

The result is that there are more caseswhere aggressive/thorough clients aredemanding additional controls anddocumentation beyond an SAS 70 Type 2 auditto enable what they estimate is 'good enough'SOX compliance. In some cases, however,SAS 70 Type 2 audits are enough - it depends.

As more corporations are evaluatingoutsourcing, the roles and responsibilitiesoften change within their organisation.Ultimate responsibility for compliance resideswith the client, but as it reallocates resourcespost-outsourcing, many of these responsibilityshift to the outsourcing governanceorganisation. This is the team retained by theclient to manage the interdependenciesbetween the service provider and the clientand may serve as a Center of Excellence (COE)for all the processes a company hasoutsourced. This group often becomes a'corporate watchdog' over the compliancerequirements for the outsourced process(es).

Outsourcing BusinessProcesses & RoleRealignment

Most outsourcers are still struggling to gettheir compliance capabilities adequately inplace. Long-term compliance efficiency andeffectiveness will become a factor to help

define Business Process Outsourcing (BPO)market leaders and will drive marketconsolidation. Organisations considering BPOor in existing arrangements must thoroughlyvet their outsourcer's compliance capabilities.The following is a sample (and far fromexhaustive) compliance checklist fororganisations to use as a starting point inassessing compliance readiness andrequirements in an outsourcing situation.• Compliance organisation and internal audit

represented on the buyer sourcing team.• Corporate governance and risk

management frameworks employedaddress and account for outsourcingrequirements.

• Ownership assigned to addressoutsourcing governance and relationshipmanagement.

• Short-listed service provider's SOXcapabilities and position understood.

• Service provider's operations haveundergone SAS 70 audits.

• Geographic locations of potential servicedelivery centers known and complianceimplications understood.

• Are the cost associated with compliancetesting and SAS 70 audits agreed upon?

• Does the proposed contract provide a meansto review, assess and account for futurechanges in the regulatory environment.

There are positives to the marriage ofcompliance and outsourcing. BPO can helpaddress an organisation's compliance needs inseveral ways.• Outsourcers may possess more efficient

processes that require fewer controls andhence have lower compliance costs.

• Processes that have more automated and

less manual controls are easier andcheaper to manage from a compliancestandpoint.

• Outsourcing service providers can performmuch of the compliance legwork (e.g.,control's testing and documentation) andspread the cost of the resources to performthat work over multiple clients.

• Outsourcers with 'best practice' processmodels can possess stronger embeddedprocess controls.

• Outsourcers can dedicate more complianceexpertise & experience against controlsmanagement and optimisation and spreadthose costs across multiple clients.

• Outsourcers can gain more experience andcapabilities with standardised (i.e., SAS 70)reporting.

A contract is the fundamental instrumentguiding the outsourcing relationship. Asregulatory compliance must be factored intothe contract, clear definition of roles andresponsibilities are often contained in thestatement of work. Organisations mustalways remember, though, that they areultimately liable for compliance requirements.This does not mean that when the inevitablecompliance meltdown involving outsourcedprocesses occurs the service provider won'tfind itself in court. Organisations, however,must focus on the segmentation ofcompliance duties with an outsourcer toensure they maintain ultimate control. Thiscollaborative effort could divide theresponsibilities along the following lines.

Document controls >> Service Provider

Test controls and >> Client/review control designs ServiceProvider

Design & sign off on controls testing program >> Client

Suggest process improvement to improve compliance >> Service Provider

Approve process improvements >> Service Provider

Define compliance, F&A policies & procedures >> Client

Define/own/manage risk assessment processes >> Client

Review/interpret responses to audit qualifications >> Client

Assist in performing remediation for audit qualifications >> Service Provider

Figure 2. SAS 70 and SOX Compliance

SAS (Statement on Auditing Standards) 70 is an international auditing standard developed by the American

Institute of Certified Public Accountants for service organisations. A SAS 70 audit is the means through

which an auditor examines a service organisation's or outsourcer's control activities, particularly around IT

and related processes. SAS 70 is based on SAS 55, 'Consideration of Internal Control in a Financial

Statement Audit', and on the COSO framework. There are Type 1 and Type 2 audits. Type 1 is a point-in-

time/snapshot audit that focuses on general and application controls but does not include testing by

auditors. A Type 2 audit occurs over a period of time (e.g., 6 to 12 months), focusing on general and

operational controls during a life cycle, with auditors typically performing actual testing. A Type 2 is

obviously more expensive as well as burdensome for the outsourcer. Only a CPA firm can perform an SAS

70 audit, and the Big Four audit firms, as well as the specialist firm SAS 70 Solutions (formerly part of

Andersen), perform the bulk of the audits for G2000 organisations.


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Roles change as a company enters anoutsourcing agreement and forms thegovernance organisation that will nowmanage many of compliance issues. Oftencompanies will establish a role for ServiceQuality and Compliance within theoutsourcing governance team (see below)whose primary responsibility is compliance.Prior to outsourcing, this role relied on workand information created internally, whereasdata feeds and information is likely beingreceived from the service provider. This personmust be skilled at now using the provider as aresource and coordinating with their overallcompliance requirements and team.

A sample job description for the ServiceQuality and Compliance Manager will likelylook vastly different than prior to outsourcing.A sample of that job description couldresemble the following:

Outsourcing Governanceand RegulatoryCompliance - Co-exist orConflict?

One area where regulatory mandates arealready having a major impact is around ITOutsourcing (ITO) and BPO. In the short term,some regulations such as SOX have slowedand curtailed deals, particularly finance andaccounting BPO. Longer term, however,compliance requirements and burdens willdrive more outsourcing as organisations seekthird-party support as they may find thesophistication and capabilities of the providerenables them to better manage compliancecosts and requirements.

The result is that organisations are takingwidely different approaches to applyingcompliance requirements against outsourcedprocesses and engagements. For example, twoseparate META Group studies conducted in2004 found that nearly 25 percent oforganisations were ignoring outsourcedfunctions and processes in first year SOXefforts, a recipe for potential audit failures.Other organisations are much moreaggressive.

A recent challenge faced by one U.S.company currently upgrading its HRIS systemas a part of an outsourcing relationship isfacing divergent interpretations of SOXcompliance. The company is looking at aNovember 1, 2005 roll-out of an upgrade to itsHRIS system, and faces questions about theamount of time needed to perform testing tomeet SOX requirements. The most stringentinterpretation states that there is not enough

Figure 3. SAMPLE Organisational Chart for Outsourcing Governance

Figure 4. Service Quality and Compliance Manager - SAMPLE Job Description

Role: Monitors and reports service deliveryperformance; conducts gap and root-cause analyses; andenables effective quality and compliance management

Reports to:Governance Director

Responsibilities:• Facilitates definition and continuous refinement of

process and sub-process effectiveness and efficiencymeasurements; coordinates with SP and [Client]Retained Ops teams to enable required data capture

• Consolidates performance reporting from SP andretained functions and distributes

• Coordinates with Finance Manager to capture/confirmbusiness-value-delivered information

• Defines and revises reports as needed to enableimproved business decision-making

• Provides service-delivery performance informationand validation to Financial Manager to aid in SPinvoice verification; identifies potential areas forservice credit assessments

• Manages periodic (internal and external) audits of SPand [Client] activities to ensure compliance topolicies; works with Regulatory ComplianceCoordinator on root cause analysis of problem areas;

• Manages SP/[Client] service-knowledge sharingprocesses

• Maintains benchmarking efforts; provides analysis

• Assists with the consolidation of demand forecastsfrom the business, and preliminary capacity planning

Experience & Education:Six Sigma 'mindset'Benchmarking and/or service levelassessmentOperations familiarityOutsourced service management familiarityAudit experience

Attributes & Characteristics:Strong (written, oral) communicationsRoot-cause focusedAnalytical and quantitativeBusiness judgment


GovernanceSECTION 2


time to perform testing prior to year-end, andthere is too much post-FYE activity needed toperform the upgrade in 1Q 2006. Therefore,under this interpretation, the company wouldnot be able to roll out the new system until 2Q2006. The lack of clarity has created a difficultsituation as the new governance team isengaged to evaluate the risks around thevarious interpretations of the rules and guidethe organisation and the provider on theappropriate plan of action.

The governance organisation now plays acritical role in leading the service providerand its company through the challengingpath of regulatory compliance interpretation,role definition and execution of the definedregulatory issues. As the complexities ofbusiness increase with new and changingregulatory mandates, it is vital that acompany allocates adequate resources tobuild and manage the outsourcinggovernance organisation.

Conclusion - ManageableChallenges

Ultimately, successful BPO efforts cansignificantly assist organisations in managingcompliance more efficiently and effectively.Outsourcing has the potential to improve theoverall controls environment and makecompliance more sustainable. Mostimportantly, organisations can work withqualified outsourcers to leverage complianceinvestments for greater competitive gain. Theprocess to marry compliance and outsourcingbest practices is not an easy one, but one thatis worth the effort.


What We DoWe remain large enough to keep pace with

the speed of changing technology, yet we offerthe responsiveness and flexibility that help ourclients do what they do best.

ACS delivers technology-based resultsthrough two major service lines, whichsupport the model shown in Figure 1.

Business Process Outsourcing – Our BPOgroup handles most back-office functions,including finance and accounting services, HR,check processing, loan administration, claimsprocessing, customer contact centers, orderfulfillment/procurement, print/maildistribution and shareholder services. Thesetasks are resource-intensive and contain oneor more technology-enabled processes. Bycontracting with ACS, clients can concentrateon their key business strategies, while wemanage and operate the 'non-core' businessprocesses that may not be essential to their offerings.

Technology Outsourcing – ACS' technologyoutsourcing services include IT outsourcingand systems integration support. Our ITservices include data center operations,network management and security,desktop/seat management, help desk servicesand application services. We providetechnology infrastructure outsourcing servicesacross mainframe, midrange, distributed anddesktop platforms. IT outsourcing represents25 percent of ACS' revenue.

ACS' systems integration solutions includeapplication development and implementationand integration of platforms, software andtechnology such as decision support systemsor benefit management systems, networkdesign and installation services. Other servicesinclude project management, Web hosting andinformation security.

Technology-based results

www.acs-inc.com/emeaACS is the leading provider of diversified, end-to-endbusiness process outsourcing (BPO) and informationtechnology (IT) outsourcing solutions to commercial and government clients worldwide. With $4 billion inannual revenue, a blue-chip client base, and more than43,000 employees supporting operations in nearly 100countries, ACS is a rapidly growing FORTUNE 500Company. ACS makes technology work for our clients.

NYSE: ACS. www.acs-inc.com

Jeff Rich – Chief Executive OfficerMark King – President and

Chief Operating OfficerLynn Blodgett – Executive Vice President,

Commercial SolutionsBrian Stones – Senior Vice President, ACS Europe

ACS Europe Marketing54 Avenue Hoche, 75008, Paris, France

Business ContactRebecca Scholl – Affiliated Computer Services, Inc.Tel: +33 (0)1 56 60 52 64Mob: +33 (0)6 10 44 25 37email: [email protected]

End-to-End Business Process Outsourcing Efficient Information Technology Outsourcing

Data C

enterO

perations

Netw

orkM

anagement

Help

Desk S

ervices

Ap

plication S

ervices

State of the Art Technology, Call Centers and Global Facilities

Security S

ervices

Desktop

Managem

ent

Hum

an Resources

Finance andA

ccounting

Ad

ministration

Sales M

arketing andC

ustomer C

are

Figure 1 – ACS Service Offerings

www.acs-inc.com/emea

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SOLUTION PROVIDERwww.acs-inc.com/emea

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CORPORATE GOVERNANCE - OUTSOURCINGAND OPERATIONAL RISK IN THE FINANCIALSERVICES AND INSURANCE SECTOR

maintain effective corporate governancestructures to ensure that operational risksassociated with outsourcing arrangements areadequately managed and controlled.

Each new set of principles, guidance andregulatory requirements designed to managethe operational risk of outsourcing willcontinue to create more complicated levels ofregulatory compliance for firms that choose togo this route. The trend is likely to continue asthe business processes and functionsoutsourced are, increasingly, moresophisticated, more reliant on intellectualcapital and more central to a firm's keybusiness functions. In this context, corporategovernance remains a significant and ongoingconsideration for any firm.

FSA guidance onoutsourcing

The FSA Handbook sets out certainrequirements for regulated firms that engagein outsourcing. SYSC Chapter 3.2 provides thatwhen a firm delegates functions and tasks, itshould put in place 'appropriate safeguards'and should at all times ensure that it has takenreasonable care to establish and maintaineffective systems and controls for compliancewith regulatory obligations. SYSC 3.2 makes it

The Financial Services Authority's recentFinancial Risk Outlook 2005 highlightsoutsourcing, business continuity planning andresponding to regulatory change as priorityrisks and operational challenges for the comingyears across the financial services sector.

The FSA defines operational risk as the riskof loss resulting from inadequate processes,people and systems, or from external events.Cost-cutting, greater use of technology,implementation of regulatory changes and theincreasing complexity of financial products areprimary sources of increased operational riskthat firms face when considering outsourcingarrangements.

Risks may also arise out of inadequate duediligence or preparation of contracts andservice level agreements (SLAs), which do notclearly specify all material aspects of anoutsourcing arrangement. These risks mayoccur especially when outsourcing activity isaccelerated by a desire for cost reductions andgreater margins in the face of deterioratingbusiness conditions.

In this context, the control andmanagement of operational risk exposure dueto outsourcing now features in regulatoryframeworks across Europe. As a consequence,it is imperative that firms establish and

Recent developments in the regulation of outsourcing arrangements in the financial services and insurance sector hashighlighted the need for firms to institute effective corporate governance structures to ensure that operational risk associatedwith such arrangements is effectively maintained and controlled.

Peter BrudenallPartner

Jeremy StorerSenior Associate

Simmons & Simmons

GovernanceSECTION 2


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clear that a firm cannot contract out of itsregulatory duties. The firm must ensure that ittakes reasonable care to supervise thedischarge of outsourced functions by itscontractor. The firm is required to obtainsufficient information from its service providerto assess the impact of outsourcing on itssystems and controls.

More detailed guidance applyingspecifically to outsourcing activity conductedby banks is set out in the Handbook's InterimPrudential Sourcebook and includes: • Requirements for an SLA featuring

specified performance targets, periodicreviews and appropriate remedies for poorperformance;

• Responsibilities on the service provider tonotify the bank of developments whichmay have a material impact on its ability tomeet its obligations;

• Rights of termination on the serviceprovider's insolvency or change ofownership; controls around sub-contracting;

• Obligations on the service provider tosupply information about the outsourcedfunction to the FSA.

Whilst in draft form since March 2003, theFSA has now formally introduced guidance onoutsourcing for certain insurance firms in anew section of the Handbook - SYSC Chapter3A. The SYSC 3A guidance provides, inaddition to existing notification requirementsfor material outsourcings that an insurancefirm should: • Notify the FSA of any operational risk

matter of which it would reasonably expectnotice, including any significantoperational exposures, the invocation of abusiness continuity plan and any othersignificant change to infrastructure orbusiness operating environments;

• Establish and maintain proper systems andcontrols for managing operational risks

that can arise from inadequacies or failuresin its processes and systems, and asappropriate, the systems and processes ofthird party suppliers, agents and others;

• Put in place appropriate contingencyarrangements to ensure businesscontinuity in the event of a significant lossof services, for instance, due to significantloss of resources at, or financial failure of,the service provider or unexpectedtermination of the outsourcingarrangement.SYSC 3A provides that, before entering

into, or significantly changing, a materialoutsourcing arrangement, a firm should:• Analyse how the arrangement will fit with

business strategy, overall risk profile andability to meet its regulatory obligations;

• Consider whether the arrangement willallow the firm to monitor and control itsoperational risk exposure;

• Conduct appropriate due diligence on theservice provider's financial stability andtechnical expertise;

• Consider and manage transitionarrangements;

• Consider concentration risk implicationssuch as business continuity implicationsarising in respect of single serviceproviders being used by several firms.

In preparing and negotiating contractualdocumentation for material outsourcings, theSYSC 3A guidance provides that an insurancefirm must have regard to:• Reporting and notification requirements,

and ensuring appropriate access byinternal and external auditors;

• Clarifying information ownership rightsand confidentiality agreements to protectthe firm's interests;

• The adequacy of any guarantees andindemnities;

• Compliance with the firm's internalpolicies;

• Business continuity arrangements,exclusivity arrangements, and thecontinued availability of third partysoftware;

• Processes for controlling changes to theoutsourcing arrangements, includingchanges in the ownership, control orbusiness operations of the service provider.

Firms should take the FSA's guidance intoaccount when considering their corporategovernance structures and whenever they

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contemplate new material outsourcingprojects or changes to existing materialoutsourcing arrangements.

Markets in FinancialInstruments Directive

The Markets in Financial InstrumentsDirective (MiFID), adopted by the EU Council ofMinisters in April 2004, includes neworganisational requirements for theoutsourcing of some operational functions ofinvestment firms. The Directive provides that,when an investment firm seeks to outsourcethe performance of operational functions thatare 'critical for the provision of continuous andsatisfactory service to clients and theperformance of investment activities on acontinuous and satisfactory basis', the firmmust take 'reasonable steps' to avoid undueadditional operational risk.

Article 13(5) of the Directive states:'Outsourcing of operational functions may notbe undertaken in such a way as to impairmaterially the quality of its internal control andthe ability of the supervisor to monitor thefirm's compliance with all obligations.' Itrequires investment firms to ensure that theymaintain sound administrative and accountingprocedures, internal control mechanisms,effective procedures for risk assessment, andeffective control and safeguard arrangementsfor information processing systems whenoutsourcing operational functions.

EU member states are required toimplement MiFID by May 2006. TechnicalAdvice on Possible Implementing Measures ofthe Directive was submitted to the EuropeanCommission by the Committee of EuropeanSecurities Regulators (CESR) on 29 April 2005.The implementation recommendations include:

• That an investment firm should be requiredto notify its regulator of an intention toenter into outsourcing arrangementspertaining to operational functions, if aweakness or failure in performance of theoutsourced functions would cast seriousdoubt on the investment firm's continuingcompliance with the conditions andobligations of its authorisation and/or itsfinancial performance, financial position,continuity of operation or reputation;

• That outsourcing arrangements should notrelease an investment firm from itsregulatory obligations nor result in thedelegation of senior management'sresponsibility;

Firms should considerwhether outsourcing

arrangements will allowthem to monitor and

control operational riskeffectively

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• That outsourcing arrangements should notalter the relationship and obligations of theinvestment firm to its clients, as requiredby the terms of the Directive;

• That the investment firm should berequired to exercise due skill, care anddiligence in planning, entering into,managing and exiting from outsourcingarrangements, and must identify, assess,monitor, and manage the risks inherent inoutsourcing, taking reasonable steps toavoid or mitigate the impact of such risks.It is clear that firms need to establish best

practice corporate governance and robustinternal management arrangements in orderto meet the requirements of Article 13(5) of theDirective and the CESR's recommendations inrespect of outsourcing and the control ofoperational risk. It is only with clearly definedand maintained management structures inplace that firms will be able properly toidentify, assess, monitor, manage and mitigatesuch attendant risks.

Basel IIThe new Accord on International

Convergence of Capital Measurement andCapital Standards (Basel II) was finalised inJune 2004 and is due to be implementedglobally on 1 January 2007. It contains newrules for calculating the regulatory capital thatinternationally active banks will be required tomaintain with effect from January 2007. InEurope, Basel II will be implemented via theCapital Requirements Directive, which willresult in amendments to the existing BankingConsolidation Directive (Directive2000/12/EC) and Capital Adequacy Directive(Directive 93/6/EEC).

The key objective of Basel II is to promotebetter risk management in the internationalfinancial arena. Whilst the basic regulatorycapital regime remains the same, the Basel IIchanges reflect modern risk-basedmanagement systems and procedures, withthe regulatory focus shifting towardsevaluating the internal methodologies, modelsand databases used by banks. A majoradvance on the Basel I Accord is the newrequirement for internationally active banks tohold a minimum amount of capital againstoperational risk.

How far a bank has outsourced its keybusiness functions, and the extent to which itcan demonstrate that it has establishedadequate corporate governance structures to

retain control over such functions, will havean important bearing on the level ofoperational risk it faces.

A joint forum of the Basel Committee onBanking Supervision, the InternationalOrganisation of Securities Commission(IOSCO) and the International Association ofInsurance Supervisors (IAIS) recently releasedits report, 'Outsourcing in Financial Services'.The report suggests a range of mitigationstrategies for firms to consider when assessingkey risks in outsourcing, including to:• Draw up a comprehensive and clear

assessment policy for outsourcingactivities bearing in mind riskconcentrations and limits on acceptableoverall levels of outsourcing;

• Establish effective risk managementprogrammes to monitor the relationshipwith the service provider, including thegeneral management by the serviceprovider of operational risk;

• Ensure that outsourcing arrangementsneither reduce the ability of the firm to fulfilits obligations to customers or regulators,nor impede effective supervision of thatfirm by regulators;

• Monitor effectively the outsourcing firm interms of contingencies, including disasterrecovery and testing of back-up facilities;

• Ensure full due diligence in terms of choiceof the service provider, putting in placecontracts with effective management ofthe outsourcing firm and ensuring effectiveclient confidentiality.

Sarbanes-Oxley ActFurther regulatory and corporate

governance challenges in respect of financialservices outsourcing may arise due torequirements set out under the Sarbanes-Oxley Act 2002 (SOX). Section 404 of SOX setsout rules requiring each annual report of a USpublic company to include a statement ofmanagement's responsibility for establishingand maintaining adequate internal controlstructures and procedures for financialreporting, and an assessment by managementof the effectiveness of such control structuresand procedures. Furthermore, section 404requires the public company's auditors toattest to the internal control assessment madeby management.

The SOX provisions also apply to Europeansubsidiaries of US public parent companies.

Whilst responsibility for maintainingeffective control over financial reporting is notdelegable by management, standardsdeveloped by the Public Company AcountingOversight Board establish that serviceproviders and suppliers will fall within thesphere of internal control of a regulatedcompany when providing services thatmaterially affect how the company processesand reports transactions in its accountingrecords and the preparation of its financialstatements.

Management's failure to discharge section404 responsibilities carries heavy penaltiesunder SOX. Firms subject to SOX will need toensure that its corporate governancestructures accommodate the control andreporting processes necessary for it and itsoutsourced service providers to comply withSOX requirements.

Other regulatoryframeworks andprinciples

Other regulatory groups are developingfurther and more specific guidance onoutsourcing arrangements, corporategovernance and risk management for parts ofthe financial services industry, including: • Draft high level principles on outsourcing

for EU banking institutions issued forpublic consultation by the Committee ofEuropean Banking Supervisors (CEBS) inApril 2004;

• Principles for outsourcing in the securitiesindustry published by the TechnicalCommittee of IOSCO in February 2005;

• An intended review of IT outsourcingpractices among members by the BaselCommittee's e-banking Group.

The recent developments we havehighlighted indicate that the control andmanagement of operational risk will remainan important aspect of the regulatorylandscape for the coming years. As such, firmsneed to have effective corporate governancestructures and related management practicesin place to ensure compliance with thisincreasingly complex regulatory framework.

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SUN'S EXPERIENCES OF OUTSOURCING ITS EDUCATIONAL SERVICES TO A GLOBAL DELIVERY PARTNER.


this scenario, it was logical to question whySES was not using partners to deliver thetraining to customers and leveraging ourpartner's infrastructure, skills andadministrative capabilities.

OptionsIn countries or regions where SES was not

present - or did not have the necessarycapacity to meet the market's expectations -SES was already using local partners tosupport Sun's operations. One option,therefore, was to simply extend the existingmodel and add many local partners to theexisting business everywhere else, therebyensuring seamless transition or continuation.

On the other hand, an idea was put forwardof a globally operating partner company, whichwould have an existing infrastructure,

Sun Educational Services (SES) is part ofSun's Global Customer Services (GCS). Themission statement describes the environmentSES is operating in: “We exist to enable anenterprise to measurably increase itsproductivity and business success withnetwork computing, through development andconservation of intellectual capital.”

SES delivers educational solutions toenterprises and the majority of this business isclassroom-based training. The official term is'instructor led training' (ILT). Every year, allaround the world, several 100,000 student dayshave been delivered by Sun. The scope of thisparticular outsourcing plan covered 12 countriesin Europe, the Middle East and Africa (EMEA)and 20 training locations in the US. Theinfrastructure was mainly owned by Sun, whichconsisted of classrooms, technical equipment,remote lab data centers and so on. Obviously thisalso affects hundreds of instructors (includingcontractors) and administrative staff, who areessential in providing this part of the business.

Sun is well known as a partner-orientedcustomer. Partners are delivering Sun'sproducts and services all over the world. So far,this was only partially true for SES. It wasmainly SES who delivered this business to ourpartners and customers, including all thenecessary overheads in infrastructure. Given

In 2003, Sun Micro Systems outsourced the major part of its Educational Services Organisation to Accenture. This paperdescribes the rationale behind the decision, and focuses on the experience acquired and lessons learned in over two years, sincethe project's inception.

Stephan GroppDirectorGlobal Education Business Partners

The idea of having onepoint of contact, similar

processes, common goals,shared environments anda smooth transition was

compelling.

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GovernanceSECTION 2


consistent processes and a similarunderstanding of customer's expectations withhigh quality, high skilled instructors.

It soon became apparent that the secondoption was preferable, if such a partner couldbe identified. The idea of having one point ofcontact, similar processes, common goals,shared environments and a smooth transitionwas compelling. Of course, if such a globallyoperating partner could not be found, wewould still have the first option of using lots oflocal partners in the various countries.

Partner SelectionHaving made that decision, the next step was

easy. Sun submitted a request for proposal (RFP)to selected partners. Some were not interested atall. Others asked for several conditions to be met.Several partners were interested but weren'tready for such a huge transaction at that time. Tocut a long story short, Accenture Learning wasthe best answer to the RFP.

To select the best-in-class, instructor-ledtraining delivery partner, the followingobjectives and criteria were stipulated:• Expansion of the customer base for SES's

products and services• Maintenance of SES's current high level of

customer satisfaction for ILT delivery• Provision of ILT delivery coverage,

coordinated with SES's planned exitlocation dates

• Provision of uninterrupted employment forimpacted Sun resources (apply EU legalrequirements in the US as well).

• Ensure that this change is transparent toSun customers

• The selling and marketing of SES productsand services should be performed inharmony with Sun's sales and servicesmarketing organisations.

Challenges• Crucially, the transition would need to take

place without impacting on trainingdelivery. The magnitude of this challenge isbrought into focus when you consider thescope of the deal: 12 countries in EMEAand 20 locations in the US.

• The transition would have to abide by EUlaws with regards to “Acquired RightsDirective” (ARD), and particularly the“Transfer of Undertaking, Protection ofEmployment” (TUPE).

• The project would require adequatecommunication throughout the process.

• Overall, it would require the managementof Sun's largest ever outsourcing deal.

Process of Outsourcing

Due diligenceWhat are the different parts of the business

to be outsourced?

• Global Delivery Partner (GDP) The GDP would cover the majority of thecourses to a certain level in the curriculum.(See also CoLE below)

• Authorized Sun Education Centers (ASEC direct)ASEC direct is the name of most of theexisting local partners who are already inplace. They work under the 'direct'concept, which describes the split of thetasks between Sun (sales, marketing,administration, enrollment of students,invoicing) and the Partner (coursedelivery). At the point of contact,customers deal directly with Sun, while thepartner is actually responsible fordelivering the courses.

• ASEC indirectCompared to the direct version of an ASEC,an indirect partner is responsible for theentire business transaction (sales,marketing, administration etc) andtherefore covers the contact with thecustomer, too. Sun simply provides thestudent handouts to the partner who ispaying a license fee for it.

• Centers of Learning Excellence (CoLE)CoLEs remain Sun-owned trainingfacilities, which deliver high end andinternal technical training to our partners,customers and internal employees. It was the intention of the deal to outsource

almost the entire business to the selectedGlobal Delivery Partner. However, the CoLEbusiness would be continuously delivered bySun directly when the negotiations started.

Negotiation PhaseHaving selected a partner, the pressure

was on to come to an agreement as soon aspossible. The chance of negotiations breakingdown was a risk, however unlikely. Both sideslined up their teams, which would initiate thenegotiations. At this point, it was March 2003.The goal was to start this new relationship atthe beginning of Sun's fiscal year in July.

Perhaps unsurprisingly, those negotiationstook longer than expected and the agreementwas finally signed in August.

Transition PhaseThe outsourcing deal was restricted to the

US and EMEA, purely because in Asia and thePacific geographical area (APAC) there isalready a partner model in place. The SESrevenue numbers in the US were 28%. InEMEA the figure was 72%. Consequently, therewas a huge focus on EMEA right from thebeginning. In addition, transferring SES'sbusiness in EMEA to Accenture Learning wasmuch more time-consuming due to the legalrequirements. Meeting the EU laws, withregards to the 'Acquired Rights Directive'(ARD) and the 'Transfer of Undertaking,Protection of Employment' (TUPE), as it iscalled in the UK, is not an easy task. Speciallegal skills are necessary to eliminate the riskof being sued, and the resulting penalty fees.

One of the most delicate parts of theprocess was providing the appropriate amountof communication to everybody who wasaffected. Primarily, the employed staff neededto be informed very carefully. As is often thecase, the risk of losing the best people first is

Some were notinterested at all. Others

asked for severalconditions to be met.Several partners wereinterested but weren'tready for such a huge

transaction at that time.

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pretty high. Obviously rumors spread aroundamongst the staff but keeping them informedkept the risk of any unwanted departures to aminimum. By the same token it's equallyimportant to manage the motivation of thestaff in order to get their buy-in for theoutsourcing decision, which is essential forthe transition.

From an operational point of view, thetransition had to be done as smoothly and astransparently as possible. The customersshould attend the courses as they've alwaysdone. Most of the training locations are thesame, although Accenture has subleasedthem. The instructors have been transferred toAccenture, but are continuing their teachingactivities. The administrative activities remainwith Sun and therefore, for example, theenrollment and invoicing process didn'tchange from a customer perspective.

In the US the transition was alreadyscheduled for September 2003, while in EMEAit took several months longer to get all thecontracts and local service agreements (LSA)signed. Two transition dates were scheduledfor EMEA, December 2003 and January 2004.Because it took longer than expected tofinalise the LSAs and get the signatures fromeach country manager.

ResultsThis contract has been in place for over 18

months. Both parties have had enough time toget used to a lot of new processes and anynecessary adjustments to the contract havebeen implemented. The majority of thetransferred staff have accepted their newemployer and are continuing their efforts inthe training business as expected.

Because the relationship with Accenture iscontinuously improving and the originaltransition worked out well, other parts of thebusiness are being outsourced. The Centers ofLearning Excellence (CoLE) were transferredin 2005. By doing this, the high-end customertraining and the internal technical training(ITT) are now delivered by Accenture as well.

Regardless of this transition, the businessitself continues to develop and now we faceother challenges - to add new businesses tothe contract (for example, remote laboratorycapabilities - the 'live virtual classroom').

ConclusionsBy outsourcing the training delivery to a

global delivery partner, Sun was able toachieve its goals of reducing the space of Sunbuildings, adjust the headcount numbers bytransferring the people within the scope of theproject to the global delivery partner and inaccordance with regional legal requirements.Finally, SES retained responsibility for Sun'sintellectual property, while the delivery of itscontent is in the hands of partners, incompliance with Sun's philosophy.

Another valuable lesson learned fromexperience was the need for regular meetingson all levels, in order to react quickly toaddress any impending concerns. A close viewof the development of the project is essential.The flexibility to make adjustments is crucial,

though be prepared that this in itself leads tolots of new meetings and conference callsacross all organisational levels.

Last, but not least, it is important that thetwo parties involved create, maintain andenjoy a trusted relationship. You must create alevel of understanding which enables the twopartners to address all the small and largeissues which regularly and inevitably pop upand enables you to resolve them to obtainmutually positive result.

About the Author

Since October 2004 Stephan Gropp isresponsible for managing the education businesspartner relationships on a global basis for SunMicrosystems. Before that he was the Senior Directorof Sun Educational Services in EMEA beingresponsible for the entire education business in thatregion. Together with his team he led the outsourcingproject of the instructor led training to Accenture in2003 in his timezone. He joined Sun in 1998 asGeneral Manager for Educational Services inGermany/Austria. Mr. Gropp has been in the ITindustry for more than 25 years. He has been aDirector of Consulting and Training services withInformix in Central and Eastern Europe. Prior to thathe was at Amdahl for 15 years where he held varioussupport positions as Soft and Hardware specialist,including 5 years as Technical Support Manager forCentral Europe.

Obviously rumorsspread around amongst

the staff but keeping theminformed kept the risk ofany unwanted departures

to a minimum.

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OUTSOURCING IN GERMANYMAIN LEGAL AND COMMERCIAL ISSUES IN LOCALOR MULTI-JURISDICTION ARRANGEMENTS

The transfer of contracts under Germanlaw often requires the prior consent of thecontract counter-party, which is a time-consuming process to collect requiredconsents prior to signature of the agreement.

Transfer of EmployeesWhen transferring business to a service

supplier, employees are often the mostimportant 'asset'. In Germany - as in all EUmember states - the Acquired Rights Directive(ARD) applies, which was transformed intonational law by sec. 613 a German Civil Code.German Labour Courts diligently follow thejurisdiction of the European High Court of Justicein the interpretation of the Acquired RightsDirective so that German law leaves some roomto structure the deal in one-way or the other. Inmulti jurisdiction agreements, however, theARD-related legal situation has to be assessedand reflected on a country-by-country basissince the interpretation and the scope ofapplicability differs from country to country.

Selection of Service Provider(a) Regulatory Aspects

If the Customer's business is subject toindustry specific regulations, such as thoseapplicable in the financial sector, it is alsoimportant to ensure compliance with thelocal regulatory regime. In Germany, sec.

Legal Work Starts LongBefore Negotiation ofContract

While outsourcing can generate significantvalue if structured and managed effectively, itmay also create significant risks in connectionwith and following the transfer of operations tothe service supplier. Therefore, it is importantto collect all relevant data with respect to theexisting environment to identify any legal andcommercial issues that may arise.

Internal Due DiligenceIn order to collect relevant data and to

identify legal and commercial issues and risks,the outsourcing customer (the 'Customer')should diligently review its business unitcurrently producing the respective services. Thisincludes collecting data regarding all relevanttangible and intangible assets, but alsoreviewing all contracts with third party suppliers(e.g. licensors, lessors, maintenance servicesuppliers, landlords etc.), which the Customer isconsidering transferring to the service supplier.In Germany, specific requirements apply for thetransfer of certain assets, i.e. the inclusion oflists in the transfer agreement in which eachasset piece is clearly identified.

The transfer of real property in Germanyrequires notarisation, which may lead to aneed to notarise the entire agreement.

Following the path taken by the US and UK-based companies over the past few years, German companies increasingly useoutsourcing to consolidate internal operations and systems into common platforms and processes. The growth in outsourcingactivity in Germany involves not only IT and communication services, but also business processes, e.g. securities transactions,payment transactions and loan administration, manufacturing, audit and finance, human resources, procurement and facilitiesmanagement services. Offshoring, i.e. outsourcing to service providers located in low cost countries such as India, China orIndonesia, has been greeted enthusiastically, however, Germany has not yet seen many offshoring projects (other than singularsoftware development projects). Rather German companies have discovered the CEE countries (= Central Eastern Europeancountries) as 'near-shore' destinations. However, most projects in Germany are not cross-border in nature.

Dr. Joachim SchreyRechtsanwalt, Partner

Clifford Chance

GovernanceSECTION 2


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SECTION 2Governance


25a of the German Banking Act (Kredit-wesengesetz, 'KWG') imposes specificrequirements as regards to the service sup-plier's ability to perform in terms of qualityand quantity. The management of afinancial institution has to evaluate theperformance of a service supplier prior toentering into an outsourcing arrangement.It must be able to prove its evaluationactivities vis-á-vis the Federal Banking Authority (Bundesanstalt fürFinanzdienstleistungsaufsicht, 'BaFin').Although it has not yet been finally trans-formed into national law, the paper'Outsourcing in Financial Services'published by The Joint Forum in February2005, comprises nine 'Guiding Principles'applying also to the insurance industrywhich requires an 'appropriate duediligence in selecting third-party serviceproviders' too.

(b) Impact of the Sarbanes-Oxley ActThe Sarbanes-Oxley Act 2002 (SOX) mayapply to German companies if (a) they areregistered according to sec. 12 of the USSecurities Exchange Act 1934 (i.e. arelisted on a US stock exchange or (b) haveat least 300 shareholders residing in theUS. It may also apply to significant Germansubsidiaries of listed companies. SOX andits supporting legislation have potentialimportance to both outsourcers and theircustomers. The most important impact ofSOX on outsourcing arrangements resultsfrom sec. 404 (management assessment ofinternal controls), according to which theSecurities Exchange Commission (SEC)shall prescribe rules requiring each annualreport to contain an internal controlreport, which shall (i) state theresponsibility of management forestablishing and maintaining an adequateinternal control structure and proceduresfor financial reporting; and (ii) contain anassessment, as of the end of the mostrecent fiscal year, of the effectiveness ofthe internal control structures andprocedures for financial reporting.Moreover, an independent auditor of theCustomer is required to opine onmanagement's assertion over internalcontrol in addition to the auditor's opinionon the fair presentation of financialstatements. In order to make its annualassertion on the effectiveness of itsinternal control, management will berequired to document and evaluate all

controls that are significant to the financialreporting process (sec. 404 SOX). IfCustomer uses a service supplier to processtransactions, host data or other significantservices, Customer's management will lookto the service supplier for information onthe design and operating effectiveness ofthe service supplier's controls. Customer'smanagement will either need to conduct anevaluation of the service supplier'scontrols, or it may obtain a SAS no. 70auditor's report from the service supplier, togain an understanding of the servicesupplier's control. Service suppliers thathave Customers or want to acquireCustomers to which SOX will apply, shouldtherefore expect an increase in demand forinformation on its controls. Vice versa,Customers should diligently review theinternal control and reporting processespotential service suppliers already have inplace. Although SEC issued new SOXcompliance guidelines on 16 May 2005which should provide IT service supplierswith some relief in terms of the number ofIT controls to be assessed yearly, SOX-compliance will be one of the mostimportant factors in selecting a servicesupplier.

DEAL STRUCTURE In outsourcing arrangements within

Germany, parties usually use a deal structurecomprising of a transfer agreement settingout the principal commercial terms for thetransfer of assets, contracts and employeesand a service agreement setting out the

principal commercial terms applicable to theprovision of services which may be formedby several documents (e.g. the masterservice agreement, several exhibits on thesecond level, addenda on a third level). Thismodularisation makes it easier to properlyimplement any future changes by justreplacing the relevant document with anewer version.


In multi-jurisdiction arrangements, thedeal structure should reflect the need for bothcentral control and local implementation. Inmany multi-jurisdiction arrangements aglobal master agreement setting out theprincipal commercial and legal terms of thearrangements including global reporting linesand governance structures are combinedwith local implementation agreements on acountry-by-country basis.

SERVICES

Scope of servicesThe reason why many outsourcing deals, in

the past, were seen very critically and some ex-perts held the position that nearly 50% of the(IT) outsourcing deals did not achieve theirinitial economic goals, is that parties had notdefined the scope of services thoroughlyenough. Therefore, one of the first things aCustomer should do when preparing anoutsourcing project is to scope its own servicesand the service levels it is currently achieving.An incomplete description of services, however,will lead to an incomplete range of servicesbeing rendered which (i) makes the Customer'smanagement dissatisfied with the supplier'sservices; and (ii) leads to a steady flow of workorders generating additional costs for theCustomer. Furthermore, the parties have tokeep pace with either the often dramaticchanges in scope of the market place (avoidingthat the outsourcing contract is out-of-datebefore it has been signed) and should retain thebenefits of outsourcing even in an ever-changing environment. Therefore, partiesshould devote a lot of their attention to definingprocedures on how to keep the arrangement'flexible', fair and attractive to both parties evenin a permanently changing environment.Instruments in how to keep both partiesmotivated to follow a high rate of businesschange can be gain sharing or incentives todeliver continuing, maximised benefits.

Service level agreements More or less the same applies to the

definition of service levels: For manyCustomers it is often difficult to clearly identifytheir existing service level baselines sincehistoric data is not available, measuringprocedures are not implemented and costs arenot allocated to services and service levels.Moreover, business departments in aCustomer's organisation are often reluctant toclearly define their service level expectations

In multi-jurisdictionarrangements, the deal

structure should reflect theneed for both central

control and localimplementation.


GovernanceSection 2


in relation to the business impact of theservices concerned.

If and to the extent that the Customercannot define the scope of the services andservice levels required prior to signing, itusually makes no sense to tie down theservices and service levels required under theoutsourcing arrangement by reference to 'astandard market practice' since outsourcingis always a tailor-made individual solution.

AUDIT RIGHTS ANDOBLIGATIONS, INPARTICULAR IMPACT OFSOX

One of the major tasks of Customersentering into an outsourcing arrangement is tohave the necessary commercial andoperational processes and instrumentsavailable to ensure that it is able to effectively

manage its supplier and the risks relating tothe outsourced services. For example thecircular issued by BaFin interpreting the rightsand obligations under sec. 25 a KWG requiresthat financial institutions establish a dedicatedorganisational unit within their organisation tomonitor the services rendered, to control theprocesses within the service supplier'sorganisation. Outsourcing a service not onlymeans restructuring the Customer'sorganisation vis-à-vis a service supplier; butalso an internal restructuring, e.g. im-plementing procedures, how to request;additional or changed services (includingsaying goodbye to the 'Hey-Jo' principle), toplace work orders with the service supplieretc., all of this in a structured, welldocumented and controllable manner.

Companies to which the SOX requirementsapply, must realise that having outsourced cer-tain services, which are relevant for their SOX-compliance does not mean that their respon-sibility for compliance is outsourced, rather itremains responsible under SOX. The parties

have to agree how to implement the necessarytools, audit rights and to provide necessarydata and reports, to enable the Customer tocomply with SOX. The implementation of ITILprocesses (Information TechnologyInfrastructure Library) will not be sufficient;additional control mechanisms will benecessary to fully comply with the frameworkof SOX legislation.

Data Protection and Privacy IssuesData protection compliance for the

processing of personal data in Germany orwithin the EU or EEA member states isgoverned by the European Data ProtectionDirectives (directives 2002/58/EC,97/66(ECand 95/46/EC)). To the extent that the GermanData Protection Act is applicable, it generallyallows data processing on behalf of aCustomer which requires, however, the

Customer's right to give binding instructionson how to process individual-related data. Inmulti-jurisdiction arrangements, it is worthnoting that several EU member states offertheir citizens greater levels of protection.Multi-jurisdiction arrangements covering non-EU/EEA countries, the data transfer fromGermany thereto must comply with additionalrequirements, which are reflected in theEuropean Commission standard clauses.Cross-border arrangements with US-basedservice suppliers can be facilitated if the USservice supplier has adopted the 'SafeHarbour' framework.

In addition to the applicable dataprotection regimes, several industries inGermany have to take into consideration,special criminal law-based privacy regimes,including sec. 203 German Criminal Code.

Termination, (Re-)MigrationIn Germany, parties are in principle free to

agree upon termination rights for breach,change of control, convenience etc. The right

to terminate an agreement for a good cause(for an important reason), however, ismandatory under German law so that it cannotbe excluded. Unfortunately, German law doesnot define a catalogue of 'important reasons',so that the parties should define a non-inclusive catalogue of instances when animportant reason shall be deemed to be given(e.g. if the service supplier should not meetagreed service level with a significant grade ofunder performance and for a significant periodof time).

Following termination, the transfer of theservices back to the Customer or anotherservice supplier is critical. Nevertheless, inmany cases parties simply forgot to agree uponterms and conditions for such (re-)migrationscenarios. A (re-)migration to the Customer orto another service supplier is usually a highlysophisticated procedure which has to bediligently planned. The parties should be awarethat they will not be able to define themigration scenario in every detail at thebeginning of the arrangement; it will rather bea separate project, which has to be initiatedlong before the final date of expiration.

LiabilityGerman law provides for some restrictions

as regards limitation of liability and a verystrict regime if liability is limited in standardterms. Often, customers tend to achieve an ex-tremely broad range of protection, e.g. througha high level of liability from the service sup-plier. A high level of liability will increase thecosts of the services and often also requires ahigher level of customer's management.

SUMMARYIn summary, the implementation of an

outsourcing arrangement within Germanyrequires long-term and diligent preparation aswell as the consideration of many legal andcommercial issues in a fair, detailed and'flexible' agreement. The level of complexityincreases in multi-jurisdiction outsourcingarrangements. Particular compliance issuesarise if the customer is subject to SOX, whichhas produced and continues to produce acontinuous flow of guidelines and standards.

[email protected]

Companies to which the SOX requirements apply,must realise that having outsourced certain services,

which are relevant for their SOX-compliance does notmean that their responsibility for compliance is

outsourced, rather it remains responsible under SOX.



EVOLVING OUTSOURCING THROUGH VALUE CHAIN ANALYSIS


and can utilise best practices. Downsides:these engagements can last 9-12 monthsplus, are costly, do not come withguaranteed results, and are often highlydisruptive. While suitable for order-of-magnitude change, for truly large-scaleoperations the advisor may not havesufficient knowledge of applicable bestpractices or may lack the ability to imposechange effectively.

4 Outsource It. Re-engineering + guarantee.The customer determines what functions itwould like a supplier to perform andcontracts for the provision of thoseservices for a price. As price and pricingmechanisms are pre-agreed, the customercan focus on the remainder of itsoperations and leave changing theoutsourced component to the supplier.

Today, where an operation must rapidlyacquire capabilities necessary to deliver best-in-class, risk-mitigated change on-time andon-budget, an outsourcing contract is oftenthe most rational approach in the face ofuncertainty of future outcomes. Outsourcingappears to be here to stay and will continue togrow by providing a broader spectrum ofservices and integrating closer withcustomers' operations.

Keeping the right balance is not easy,and, in a demanding economic environment,continuous improvement at an operationallevel is essential. Managers are constantlyseeking ways to implement change todeliver or support company objectives, andthe solutions to achieve this must becontinually 'sourced' from the viableoptions. The problem is, there are only a fewsuch options:1 Do Nothing. Used when the value of

change does not warrant its cost. Oftenoverused, leading to the perception thatthere is a fundamental breakdown withinthe organisation.

2 Change It (alone). Basically, re-tooling bydeveloping new processes, and trainingexisting staff and/or hiring the requisiteskillsets. For the right type of change, thisentails the least disruption for theoperation, but places the burden squarelyon the operation itself to identify andimplement change.

3 Change It (with assistance). Typically usedwhen large-scale change is required andthe requisite know-how - how to performthe change, what the end result should be -is not available internally. Upside: theleading consultants are knowledgeable ofthe level of effort required to effect change

The concept of outsourcing provides customers with a business proposition compelling to both executives and managers: thesupplier offers to take over operations and perform to the same or a higher standard, for the same or a lower price.

But how can a supplier, an outsider with little understanding of the inner workings of the customer's operation, deliver more forless - especially against the customer's own workforce which is unencumbered by profit margins? The answer lies in the limitednumber of options available to balance cost and effectiveness satisfactorily.

Elizabeth WeirPartnerPillsbury Winthrop Shaw Pittman LLP

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GovernanceSECTION 2


ISSUESWith commercial-grade outsourcing now

in the middle of its second decade, customersnow expect more from outsourcing than asupplier maintaining the status quo at a lowercost. To appreciate why it has taken so long tocome to this seemingly simple conclusion,understand that, while the theory behindoutsourcing has the customer specifying theoutputs and the supplier how to achieve them,the theory has rarely been put into practice.

There are many explanations for this, butthe most compelling is that leading-edgeadopters learned to survive by mitigating risksinherent in change. As one of the largest risks inthe early outsourcings was the supplier's abilityto perform adequately, it made sense for thesupplier's obligations to be highly controlled.

Rather than describing the supplier'ssolution to achieve the customer's objectives,outsourcing contracts based the scope of workon a detailed description of the customer'soperations. This was highly negotiated.Suppliers did not want to take on moreresponsibility (risk) than customers had donehistorically, and customers did not want to becharged additional amounts for any serviceswhich had been performed internally, but whichwere not described in the scope of work.

As each new outsourcing customer was asinterested in mitigating outsourcing risks as itsearliest adopters, the words and themechanisms supporting the outsourcingprocess became de rigueur. For informationtechnology outsourcing (ITO), this produced aset of established services for performing thevarious IT components. These components,'towers', appeared to facilitate benchmarking,ushering in inevitable commoditisation andfocus on price as the primary differentiatorbetween suppliers' offerings. Over time, thisled the outsourcing industry to the conclusionthat, if towers were commodities, selecting thebest supplier for each tower ('best-of-breed'sourcing) would achieve the best possibleservice at the lowest cost.

SYMPTOMSSo is tower-oriented sourcing the end-

state? 'Yes' for some, but, resoundingly, 'no'for those on the leading-edge, seeking toadvance the practice by: (1) creating valuefrom outsourcing arrangements rather thansimply reducing cost; and (2) shifting fromrelationships characterised by limitedaccountability to more broadly defined,predictable relationships with outsourcing

suppliers - two seemingly obvious,incontrovertible objectives, except…. such atransition requires a comprehensive re-toolingof the outsourcing industry (suppliers,consultants, lawyers, benchmarkers, etc.). Themanner in which an outsourcing transaction isproduced is well-established and does noteasily lend itself to achieving these objectives,for a number of reasons, including:1 Schedule of Work. As discussed above,

this is based on what the customer doestoday, so what is done today should be doneby the supplier tomorrow. But why thenoutsource? If simply to achieve the same forless, using history to describe the future isreasonable, but what if the customer wantsmore or better than they have today?

Basing the schedule of work onhistorical activities requires articulating,accurately and comprehensively, what isdone today (no mean feat) and, as nothinghas otherwise changed, the wording isgenerally heavily negotiated. Further, thecustomer's additional requirements (i.e., the'more' or 'better' elements) must also bedocumented, triggering more negotiation.

Neutral terminology that both partiescan use to describe the relevant operationsis essential. If this were based on bestpractices promulgated by the appropriatestandards-based organisations, customerscould be assured that what they do (nothow they do it) would be adequatelydescribed, and suppliers, usuallyproclaiming their use of best practices,would be free to perform without risk ofcontractual non-compliance with theschedule of work. Further, since thesupplier needs to change the way in whichthe underlying services are performed inorder to deliver cost reduction, describingthe customer's recipe is superfluous.

2 Customer Objectives. A key customercomplaint is that suppliers do not, withoutadditional (revenue) incentive, voluntarilymake meaningful changes to theenvironment. There are two main reasons

for this: (1) the practice of defining theschedule of work, based on a snapshot ofwhat the customer's operation waspreviously doing, unless specificallyincluding a well-developed set of changeactivities; and (2) failure either to specifythe customer's objectives upfront or todevelop the basis for future change.(a) Re-defining the Schedule of Work.

Base it on industry-standard processes,rather than past performance, andinclude appropriate mechanisms toallocate responsibility for the variousaspects of change.

(b) Lack of objectives/change mechanism.This requires a fundamental change inthe sourcing process. Currently, most'sourcings' are designed to ensure thesuppliers competing for a customer'sbusiness are all bidding on the samework, or even to price implementation ofcustomer-developed solutions. Whilethis may work for certain smallercustomers or problems with well-knownsolutions, it is not designed to leveragesuppliers' access to subject-specificknowledge and their experience.

What is needed is a shift to outcome-oriented outsourcing. Rather than tellingthe supplier what the customer does today,describe the supplier's obligations andobjectives that the supplier must meet.Instead of judging by price alone, thesuppliers' full depth of abilities would be ondisplay for review, selection andcontractual obligation.

3 Towers of Service. Based on thesuccessful principles of business processre-engineering, identifying value-creationopportunities cannot be achieved byconsidering the macro level. Rather, theoperation must be disaggregated to itsbase processes to understand what anorganisation is doing and how it interactsinternally and with others.

Developed initially for pricing purposes,'towers' are generally groupings of varioustechnologies or other things on whichprocesses are performed. While beneficialfor developing pricing constructs, this hasinstitutionalised the belief that towers aresomehow compartmentalised andtherefore safe to source individually.

Unfortunately, this has contributedsignificantly to service delivery failure andcustomer dissatisfaction. The tower-based

Neutral terminology thatboth parties can use todescribe the relevant

operations is essential.


SECTION 2Governance



mindset results in the development of asourcing strategy focusing simplistically onwhich tower(s) should be outsourced,rather than considering the full spectrum ofbase processes and analysing the relevantoperation to determine the right sourcingapproach to achieve required objectives.By splitting an operation by tower,processes that span the various towers (ofwhich there are many) are broken,requiring the customer to provide the glueto integrate now-separated processes intoa coherent function.

Even more damaging is the valuedestroyed by the tower mindset.Businesses have worked hard to tear downsilos in product production and reap therewards: look at car manufacturers re-engineering the development process forproducts; retail banks realising businessbenefits from packaging and co-ordinatingfinancial products. While work processesmay be organised vertically, they movehorizontally across the operation. The keyto value-creation is a process-orientedapproach, not tower-based segmentation.

What is needed is a mechanism fromwhich the key sourcing decisions at eachstage (e.g., strategy, transaction, operation)can be made. By using a commondenominator across the sourcing lifecycle:(a) the re-work inherent in developingdifferent tools and documents for eachstage is eliminated; (b) the potential forgaps/overlaps in sourcing the operation issignificantly reduced; and (c) critically,value can be created by ensuring keyprocesses are, wherever possible, left intactor analysed as to how the various deliveryactors can achieve the desired outcome.

4 Best-of-Breed Sourcing. For varyingreasons, customers, advisors and evensome suppliers like the concept of best-of-breed sourcing: customers - assemblingthe best suppliers is perceived to generateoptimal results; advisors - this producesmore deals; and suppliers - this createsmore opportunities to get business.

For the customer, this benefit is rarelyachieved. Assembling the best parts doesnot necessarily create the best result, as theinteroperability of the parts is lacking. By default, the customer inherits the problemof making it work - not what it intended.

Customers also discover that they lackthe stamina to undertake this number ofoutsourcing transactions.

A mechanism to help the customerand its suppliers understand the impact ofa planned outsourcing on the totality ofthe operation is required. By looking at

the whole rather than simply the portionto be outsourced, it should be possible toidentify the linkages and interactionsrequired to manage the whole effectively.

5 Governance. As outsourcing has grown inpopularity, the issues that both parties havein trying to develop symbiotic relationshipshave multiplied. To date, the cure has beento increase the level of governance. But,the type of problems producing greatestcustomer/supplier friction are notappropriately solved this way; they requiresolutions at an operational level, in otherwords, some means of allowing bothparties to understand high importanceinteractions which can either create ordestroy value.

Accordingly, the sourcing processshould be modified to identify anddocument, with substantial specificity, theintended interactions and how each shouldbe addressed. A supplier's willingness todevelop such interactions and standardprocess for identifying, documenting andimplementing them should, for thecustomer, be a key selection criterion.

SOLUTIONPillsbury Winthrop Shaw Pittman has

developed a second generation methodologyfor approaching large-scale, complexoutsourcing transactions. This methodology,through consistent application of a value chainconstruct, provides a rigorous yet flexiblestructure that can be applied to the

management of the entire sourcing lifecycle. Itcan be applied equally to outsourcings andrenewals/renegotiations, as well asconsolidations, acquisitions and divestitures;ITO and business process outsourcing (BPO).

The key attributes of this patent-pendingmethodology are:1 The construction of an operating model for

the entire operation - the 'retained' as wellas the 'sourced' components - identifyingall service delivery actors (internal andexternal) and allocating them to specificfunctions. Contrast the traditional scopingmodel focussing solely on the componentsto be sourced without the context to makestrategic and transactional decisions.

2 The operating model is expressed as the fullspectrum of processes specific to theorganisation's operations (a 'value chain').The IT value chain contains over 70processes (e.g., change management,security architecture, standardsdevelopment, communications operations).For each, the model identifies the elementson which such processes are enacted (e.g.,PCs, telephones, routers, circuits, servers,applications, third-party contracts).

3 The processes are defined, where possible,using terminology provided by standards-based organisations (e.g., ITIL, PMI, SEI,TTGI). Feedback from suppliers, as well asactual experience, indicates this approachcan dramatically shorten the time requiredto negotiate scope.

4 Applying the operating model to a specificoutsourcing, the scope of the transaction isdefined by processes and elements, ratherthan towers. This approach provides acomplete mapping of how the sourcedfunctions fit into the customer'sorganisation and enables areas ofinteraction between supplier(s) andcustomer to be identified. Once identified,the level of complexity and risk can beevaluated and, if necessary, either thescope adjusted or interaction modelsdeveloped before contract signature. Thishelps ensure the relevant supplier isaccountable for end-to-end responsibilityfor outsourced processes, reducing post-signing implementation risk.

5 The approach is designed to facilitate thecapture of data such as personnel,equipment, applications, etc., using thesame organisational structure in which thescope is defined. This aligns the data withthe customer's view of its existing

While work processes may be organised vertically,they move horizontally across the operation. The key to value-creation is a process-oriented approach, not

tower-based segmentation.


GovernanceSECTION 2


organisation, making data collectioneasier, and providing the preciseinformation needed by suppliers to designinformed service and price proposals.

6 By organising the scope of a transactionalong process lines, the methodologymakes it easier to identify where servicelevel requirements are needed and/orassess whether service level coverage isadequate. Moreover, it provides amechanism to link price to scope, therebyresolving some of the more heatedcustomer/supplier discussions.

7 By employing a construct referred to as the'Three T's' (T3) - Transfer, Transition andTransformation - the methodologyprovides customers with a tool to expressdesired outsourcing objectives to assistsupplier proposals to respond to customerneeds without unduly restricting suppliers'creativity in solution-development. As indicated below, T3 provides, dependingon the particular stage, the rationale for theoutsourcing and its objectives.

8 Lastly, the methodology addresses thesubstantial shortcomings associated withreliance on governance alone as the cure fora poor relationship. Governance models areinsufficient to resolve the operational issuesthat tend to generate bad relationships.Accordingly, the methodology identifies theareas which, as a result of sourcingdecisions, may cause friction and utilisesdetailed interaction models to design andenhance the desired manner of interchangebetween the parties.

CONCLUSIONThe standard outsourcing paradigm, 'I (the

outsourcer) will perform the same services youpreviously performed, to the same or higherstandards, for the same or a lower price', ispredicated on history, requiring suppliers tounderstand what the customer was previouslydoing, the level of performance and its cost.Obtaining the necessary facts is time-consuming, expensive and subject topotentially divisive negotiations.

The alternative approach described aboverevolutionises the entire outsourcing processby applying to it 'value chain' analysis. Insteadof focusing on history, the methodologydecomposes the relevant business practicesalong a value chain, and maps these processesto a uniquely-created "span" describing thefactors of production used in these businessprocesses across relevant geographies andbusinesses. The resulting matrix can then beused to develop a scope/operating model andappropriate service measures for the proposedoutsourcing relationship. Together withinteraction models depicting the potentiallyhigh-friction customer/supplier contacts and apricing model relating pricing metrics todelivery obligations, this creates a customer-supplier relationship organised around howthe customer's business actually operates.Revolutionary.

TransferAsset, People, Knowledge

Technology Change, Best Practice Implementation

Continuous ImprovementOperating Model, Business Process

Operate “Future”

Operate As Is, Where Is

As Is, Where Is

ContractEffective Date

End ofTransition

End ofTransformation

End ofTerm

TargetAchieved

Transition

Transformation

Figure 1.


Solution Index


SolutionIndex

TOP_05_Solution index.qxd 22/6/05 10:35 pm Page 1



Solutions Index

ACS is the leading provider of diversified, end-to-end business process outsourcing (BPO) and information technology (IT) outsourcing solutions to commercial and

ACS p99 www.acs-inc.com/emea government clients worldwide.

Atos Origin is a leading international IT services company.Its business is turning client vision into results through the application of consulting, systems integration and managed

Atos Origin p72 www.atosorigin.com operations.

Founded in 1959, Computer Sciences Corporation is a leading global IT services company with approximately

CSC p60 www.CSC.com 90,000 employees located around the world.

IBM Global Services provides comprehensive IT services integrated with business insight to reduce costs, improve

IBM p20 www.ibm.com/services productivity and assert competitive advantage.

Siemens Business Services is one of the world's top 10 outsourcing providers serving over 200 major clients in

SBS p28 www.siemens.com/sbs 44 countries.

Simmons & Simmons is a leading international law firm with over 1,000 legal staff in 19 business and financial

Simmons & Simmons p84 www.simmons-simmons.com centres across Europe, the Middle East, Asia and the US.

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