Aditi Parekh | Brian Honaker | Johann Fischer | Matt Blair

OFFICE SUPPLY, INCOUTSOURCING IT INFRASTRUCTURE

TO MAXIMIZE BUSINESS VALUES544 - 12235 - DECEMBER 7, 2009

• Decrease infrastructure costs by utilizing a more specialized, third-party staff. Business Strategy

• Experience cost-savings during the 2nd year, but face increased expenditures during 1st year.Costs/Benefits

• Maintain availability and performance through SLAs with the vendor.Implementation

• Ensure a smooth transition through a formalized change-management program.Change Management

• Mitigate risks by documenting procedures and improving employee awareness.Risks

Outsourcing at OSI – Team 4

2

Recommendations for Outsourcing at OSI

Strategy Costs/Benefits Implementation Change Mgmt RisksOVERVIEW

IT functions provide cost savings, not long-term strategic value.

The IT infrastructure is difficult and expensive to maintain.

There are issues with retention of talented IT staff.

System downtime results in immediate losses.

The bulk of IT spending is in support, not transformation.

Outsourcing at OSI – Team 4

Having OSI run in-house IT is no longer valuable to the business

Strategy Costs/Benefits Implementation Change Mgmt Risks

3

TIS employs industry experts and has experience working with other large companies.

TIS can standardize IT to raise service levels and lower costs.

TIS can quickly scale and provide flexible cost structures depending on OSI’s IT needs.

TIS’s industry knowledge and experience will allow for greater security.

Outsourcing at OSI – Team 4

Outsourcing IT to TIS will allow OSI to focus on core business activities instead of maintenance

Strategy Costs/Benefits Implementation Change Mgmt Risks

4

Retailers Home Depot and UK’s Tesco outsource their IT functions in order to support existing systems and develop new applications.

Tesco saves an estimated $100 million every year.

Citibank sold its Citigroup Technology Services to focus on its banking and financial services.

Outsourcing at OSI – Team 4

IT outsourcing is a successful strategy for other major global companies

Strategy Costs/Benefits Implementation Change Mgmt Risks

5

Additional Notes Regarding Outsourcing Easier access to new technology, reduction in start-up costs. Use of specialized, experienced IT personnel to manage issues. Decreased depreciation, utilities and maintenance expenditures.

Outsourcing at OSI – Team 4

Outsourcing IT will cover many costs normally associated with managing infrastructure

6

Year 1 Year 2 Year 3 Year 4 Year 5

Base Case $ 60,862 $ 61,542 $ 62,409 $ 64,170 $ 65,693

Outsourced $ 70,315 $ 42,941 $ 43,613 $ 36,655 $ 38,146

Savings $ (9,452) $ 18,601 $ 18,795 $ 27,515 $ 27,546

Strategy Costs/Benefits Implementation Change Mgmt Risks

Infrastructure Costs over the Next Five Years (000’s)

http://www.macquarietelecom.com/hosting/it_outsourcing.htm

Total Savings: $83,000NPV @ 8%: $37,700

$30M

$35M

$40M

$45M

$50M

$55M

$60M

$65M

$70M

$75M

1 2 3 4 5Years From Now

Infrastructure Costs over the Next Five Years

Base case

Outsourced

-$9[-$9]

$19[$10]

$19[$29] $27

[$56]$28

[$84]

By outsourcing IT infrastructure, OSI will

see positive returns over in-house IT as early as

year 2.

Expected total annual IT cost-savings will reach

11% during year 2 and 16% by year 5.

Outsourcing at OSI – Team 4Strategy Costs/Benefits Implementation Change Mgmt Risks

Outsourcing IT infrastructure will significantly reduce total IT expenditures

7

Focus on innovation instead of support.

Increased security, relieved liability.

High performance, externally managed IT.

Improved Performance

of IT Infrastructure

Less customizable infrastructure adjustments.

Reliance on a 3rd party for critical operations. Increased Exposure to

Risk

Outsourcing at OSI – Team 4

IT outsourcing improves IT performance, but increases exposure to risk

Strategy Costs/Benefits Implementation Change Mgmt Risks

8

• Due Diligence

• Define

• Implement

• Review

• Maintain

Service Levels

Std. Operating Procedures

Communications Plan

Metrics and Reporting

Quality Assurance

Outsourcing at OSI – Team 4Strategy Costs/Benefits Implementation Change Mgmt Risks

Five requirements for implementing a successfulIT outsourcing strategy

9

Solution: IT infrastructure outsourcing Step 1 – Identify

Overview of given service levels Analyze actual IT-architecture

Step 2 – Define Definition of the processes Evaluate required data management and technology

Step 3 – Implement Transferring given IT and purchase new IT Restructuring of IT infrastructure

A state-of-the-art IT infrastructure has five steps

Outsourcing at OSI – Team 4Strategy Costs/Benefits Implementation Change Mgmt Risks

10

Solution: IT infrastructure outsourcing Step 4 – Review

Testing of implementation Improve performance Cut-over to new IT-infrastructure

Step 5 – Maintain Ensure provided SLA levels Continuous improvement initiatives

(cont’d)A state-of-the-art IT infrastructure has five steps

Outsourcing at OSI – Team 4Strategy Costs/Benefits Implementation Change Mgmt Risks

11

The transition to new systems will take one year

Outsourcing at OSI – Team 4Strategy Costs/Benefits Implementation Change Mgmt Risks

12

Identify processes & architecture

Definition of processes

Transferring IT

Restructuring IT

Testing and Improvement

Cut-over

Ensure and improve IT infrastructure

Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011

2month

2m

2m

3m

4m

2 weeks

4 years

http://articles.techrepublic.com.com/5100-10878_11-5074869.html

• Procedures for handling change• Roles and responsibilities of IT staff• Measurements and metrics for change management• Assignment of priorities

Define

• Execute break out procedures when necessary• Track with the original change management planMonitor

• Modify the change management plan as required• Report on changes implementedModify

A change management initiative will help OSI keep employee morale high

Outsourcing at OSI – Team 4Strategy Costs/Benefits Implementation Change Mgmt Risks

13

Divide the IT staff into 2 categories: Supporting the services provided by TIS. Developing in-house capability to research innovative

technologies.

Conduct employee motivation program to make the employees understand the benefits of the outsourcing program.

Outsourcing at OSI – Team 4

IT outsourcing provides additional opportunities for current OSI IT employees

Strategy Costs/Benefits Implementation Change Mgmt Risks

14

Risks in Outsourcing

S514 – Justin Greis – VRM Presentation (October 13, 2009)

Outsourcing at OSI – Team 4Strategy Costs/Benefits Implementation Change Mgmt Risks

IT outsourcing involves various categories of risk15

Brand Damage

Brand Damage

Service Interruptions

Operational Risk

Contractual Risk

Compliance Risk

Category Example Mitigation Impact

Compliance Risk

Vendor does not meet OSI’s minimum standards for compliance.

Ensure that TIS has the required policies for compliance

Contractual Risk

Risk of running into disagreements with the vendor

Have necessary service level agreements in place

Operational Risk

Operational efficiency decreases due to the change in process

Implement change management initiatives for more efficiency

Service Interruption

System break downs and unexpected behavior might occur during the transition period

Run the parallel systems for the initial year

Brand Damage

Customers face issues and lose trust over the organization

Make customers aware of the changeover and have alternateoptions available

Outsourcing at OSI – Team 4

Various approaches to mitigate risks

Strategy Costs/Benefits Implementation Change Mgmt Risks

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Lower IT-cost of about 30% in year 2 and

about 43% in year 4.

Improvement of performance, security and availability.

IT Infrastructure Outsourcing Agreement

Outsourcing at OSI – Team 4Strategy Costs/Benefits Implementation Change Mgmt Risks

A solution to save money, increase performance and provide scalability over time

RECOMMENDATIONS

17

NPV of $37.7 million over 5 years.

Aditi Parekh | Brian Honaker | Johann Fischer | Matt Blair

OFFICE SUPPLY, INCOUTSOURCING IT INFRASTRUCTURE

TO MAXIMIZE BUSINESS VALUES544 - 12235 - DECEMBER 7, 2009

QUESTIONS / COMMENTS

Financial Analysis Defining Change Management

Appendices

Outsourcing at OSI – Team 4Strategy Costs/Benefits Implementation Change Mgmt RisksAPPENDIX

19

Financial Analysis

Outsourcing at OSI – Team 4Strategy Costs/Benefits Implementation Change Mgmt RisksAPPENDIX

Quantitative Costs/Benefits Analysis20

Microsoft Office cel 97-2003 Workshe

Defining Change Management (1)

http://articles.techrepublic.com.com/5100-10878_11-5074869.html

Step 1: Define change management process and practices

Procedures for handling changes

Roles and responsibilities of the IT support

Measurements for change management

Tools to be used

Type of changes to be handled and how to assign priorities

Back-out procedures

Step 2: Receive change requests

Receive all requests for changes, ideally through a single change coordinator. Change requests can be submitted on a change request form that includes the date and time of the request.

Step 3: Plan for implementation of changes

Examine all change requests to determine:Change request prioritization

Resource requirements for implementing the change

Impact to the system

Back-out procedures

Schedule of implementation

Outsourcing at OSI – Team 4Strategy Costs/Benefits Implementation Change Mgmt RisksAPPENDIX

21

Defining Change Management (2)

Step 4: Implement and monitor the changes; back out changes if necessary

At this stage, apply the change and monitor the results. If the desired outcome is not achieved, or if other systems or applications are negatively affected, back out the changes.

Step 5: Evaluate and report on changes implemented

Provide feedback on all changes to the change coordinator, whether they were successful or not. The change coordinator is responsible for examining trends in the application of changes, to see if:Change implementation planning was sufficient.

Changes to certain resources are more prone to problems.When a change has been successfully made, it is crucial that the corresponding system information store be updated to reflect them.

Step 6: Modify change management plan if necessaryConsider reexamining your change management discipline if:

Changes are not being applied on time.

Not enough changes are being processed.

Too many changes are being backed out.

Changes are affecting the system availability.

Not all changes are being covered.

Outsourcing at OSI – Team 4Strategy Costs/Benefits Implementation Change Mgmt RisksAPPENDIX

22