Getting Good And Staying Good At (Out)Sourcing

Alan McSweeney

Increasing Trend In Outsourcing Non-Core Functions

Increasing and continuing trend of organisations moving from in-house solution delivery to sourcing solutions externally Intended to improve operational efficiencies by using external suppliers perceived abilities to provide costeffective, fit-for-purpose solutions quickly using the right technology Responsibility and accountability for solution delivery and operation stills lies with the acquiring organisation

November 24, 2013

Acquisition Trends

Greater level of acquisition Greater acquisition of services with lengthier service relationships Under the Cover acquisition/outsourcing in the form of cloud/XaaS
Cloud leading to ad hoc proliferation of outsourced services as business functions bypass what is perceived as slow, expensive IT

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Divestment Of Non-Core Functions

Organisations divesting themselves of what they see as non-core functions Application of Coases Law on the Nature of the Firm
A firm will tend to expand until the cost of organising an extra transaction within the firm become equal to the costs of carrying out the same transaction on the open market When it is cheaper to buy the service externally it will generally be bought externally
Non Core Function

Non Core Function Non Core Function Non Core Function

Core Organisation Functions

Non Core Function

Non Core Function Non Core Function

Non Core Function

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Divestment Of Non-Core Functions

Non Core Function Non Core Function Non Core Function

Non Core Function

Shrinking Core

Non Core Function

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

Non Core Function Non Core Function

Non Core Function

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(Out)Sourcing Zone Of Opportunity

Outsourcing zone of opportunity represents a challenge for both suppliers and for the acquisition function What is the size of the outsourcing zone? How do you identify your outsourcing zone and then take appropriate action? Fundamental question as to the nature of the organisation
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Non Core Function Non Core Function Non Core Function

Non Core Function

Non Core Function

Non Core Function Non Core Function

Non Core Function

(Out)Sourcing/Acqusition

Greater acquisition of solutions from external suppliers rather than in-house Aimed at improving operational cost-effectiveness and efficiency External suppliers seen as being able to provide solution more quickly, at lower cost and using suitable technology Acquiring organisation still needs to retain accountability for solution

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Questions For Acquisition Function

What value, if any, is outsourcing creating? What are the measures for evaluating outsourcing success and value and are they being achieved? Who owns and manages the outsourcing relationship(s)? How well are the efforts being managed? What are the risks and are they being managed effectively? What other new outsourcing opportunities should we pursue? How are lessons learned from outsourcing experiences applied elsewhere? How do we decide what other services to outsource? Does the approach to outsourcing help maximise value while minimising risk? Are standard methodologies and approaches used to manage outsourcing selection and implementation?
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Avoiding The Outsourcing Value Lost

Outsourcing Potential Value
Lost value can be 30%-60% of originally expected

Lost Outsourcing Potential Value

Outsourcing Value Achieved

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

Costs more than expected, delivers less than expected

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What Are The Real Costs Of Outsourcing?

How realistic are the costs and benefits of outsourcing? How much is the desire to outsource leading to inaccurate estimates, either deliberate or just wishful thinking? How much is the desire to outsource at any cost causing strategic misrepresentation - deliberate distortion of actual costs?

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Errors In Costing

Cost estimates are rarely accurate

What we know about most projects is that they either or both overrun on costs and deliver less than expected Cost overruns are generally caused by a mix of errors in the initial cost estimates and deliberate distortions in order to cause the decision to be made

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Procurement Acquisition

Acquisition is not just about having a separate procurement function that manages supplier selection/ tendering with narrow and singular focus on cost Procurement focus leads to a disconnect between selection and subsequent delivery Effective acquisition means taking a much wider focus than just a financial arrangement

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

Procurement

Delivery

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Beware Of The Externalities Of Procurement-Lead Acquisition and Outsourcing

Externalities are costs that procurement-lead initiatives give rise to but which are paid for elsewhere Apparent cost-savings from procurements viewpoint lead to costs during implementation and operation

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It Is Not All About The Money

Successful outsourcing is not about getting the lowest price at all costs It is about getting the lowest price for a sustainable solution under a reasonable contract from a skilled and experienced service provider An outsourcing arrangement is not a once-off economic business deal that automatically implements itself after the parties sign the contract It is an continuous commercial relationship with long-term economic and strategic consequences and impacts for both the supplier and the outsourcing organisation that depends on the choices the parties make and their subsequent behaviour An unwise choice can have serious and enduring negative consequences
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Outsourcing Transaction Costs

There are (hidden/overlooked) costs associated with sourcing a service externally

Selecting the wrong supplier Costs of writing contract Costs of enforcing contract Having a poor service contract that results in hidden cost and/or reduced service Overlooking personnel issues Loosing control over the outsourced activity Management, quality assurance and supervision overhead Implementation and termination costs Loss of flexibility Loss of integration between applications and data Data extraction costs Security framework implementation

Effective transition to outsourcing requires full knowledge of costs current and future
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Getting Costs and Benefits Right Is Very Important

Small error in costs will accumulate and become substantial over the life of the contract
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A Small Error Over Time Becomes A Big Error

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

Incomplete SLAs/OLAs No Defined Outsourcing Strategy No Service Catalog Insufficient Management And Oversight

No Defined Future Operating Model Or Architecture

Lengthy Negotiations

Incomplete Contract

Breakdown Of Relationship Constant Renegotiations Backsourcing/ Insourcing/ Circumvention of Arrangement

Unanticipated And Large OutOf-Scope Services Unarticulated Expectations

No Governance Model

Development Of Parallel IT Services Oversimplification Of Outsourcing Process

Underestimated And Unquantified Resource Commitment

Insufficient Understanding Of Current State Of Services Being Outsourced

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Invalid Assumptions

High Management Resources And Costs

Naive And Simplistic Expectations

Over-Dependence On Service Provider As Strategic Partner

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Pitfalls Of Outsourcing

Lack of management commitment to getting outsourcing right Limited or no knowledge of outsourcing methodologies and approaches Lack of an outsourcing communications plan Failure to recognise the business risks of outsourcing No using external sources of knowledge and experience Not allocating effective and skilled internal resources Rushing through the initiative to get the outsourcing arrangement in place at any cost Not understand what it takes to make the supplier productive Poor relationship management with supplier and within the organisation Not communicating the operation of the outsourcing relationship to the organisation

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Myth Of Outsourcing Strategic Partnership

Dont do business with friends Dont become overly friendly with those you do business with Outsourcing is a business relationship that will come to an end Keep a strong business focus at all times

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

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Transformational Make Me Money

Efficiency/ Utility Make It Cheaper

Primary focuses on cost control and cost reduction, with the aim of maintaining consistency in service delivery
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Business Enhancement Make It Better

Concerned with organisational productivity and with improving performance leading to achievement of organisational goals

Characterised by a greater partnership between the service provider and the organisation that is focused on innovation and new business, changing the way in which the organisation operates and uses technology
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Making An Explicit Decision On Where You Want To Be On The Outsourcing Spectrum

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exit l p om C d an e p Sco d e as e r c n

Transformational Make Me Money

Efficiency/ Utility Make It Cheaper Focus on Buying

Business Enhancement Make It Better

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Focus on Tactical Sourcing with Some Organisational Restructuring

Focus on Strategic Sourcing With Substantial Organisational Change

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Change In Relative Importance Of OutSourcing Objectives Over Time

Gain Access To Talent and Capabilities Drive Organisational Culture Change Improve Compliance Capabilities Improve Process Efficiency Align Support Function with Strategy Transform Processes Gain Access to New Technologies Support and Enable Growth Increase Service Flexibility and Scalability Reduce Costs
-20 -10 0 10 20

You Evolve Over Time Into Looking At Achieve This

You Start Looking to 30 Achieve 40 This

50

60

70

80

90

100

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Outsourcing Effectiveness At Achieving Business Benefits

Very Effective
Reduce Operating Costs Meeting Regulatory Requirements Standardising Processes Supporting More Effective Organisation-Wide Operations Gaining Access to Capable Talent Forcing Change Into Business Operations Transforming Processes Gaining Access to New Technologies Gaining Access to Analytical Capabilities Providing Innovation 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Somewhat Effective

Not Effective

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Outsourcing Effectiveness At Achieving Business Benefits

What is initially important is not what becomes important Learn lessons from the experience of others to define exactly what you want of your outsourcing arrangement

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Important Supplier Selection Factors

Mission Critical Financial Stability Track Record Of Standard Operational Services Delivery Delivery Talent That Add Values Beyond Standard Operations Knowledge of Specific Industry Processes Ability to Support Change Management and Governance Needs Culture of Supplier's Delivery Organisation Ability ty Transform and Reengineer Existing Processes Global Delivery Scale and Flexibility Ability to Provide Innovation Ability to Support Business Outcomes Rather Than FTE Pricing Ability to Provide Analytical Insight Ability to Promote Gainsharing Initiatives Brand 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Important But Not Critical Somewhat Important Not Important

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Important Supplier Selection Factors

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

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Strategic And Operational Skills Of High Performing Acquisition-Oriented Organisation

Governance Service Delivery Business Vision Architecture
Internal IT Function Management External IT Function Business Alignment Informed Product and Service Acquisition Business System Thinking Contract Management Effective Contract Enablement and Acceleration Vendor Development Relationship Building and Maintenance End-to-End Systems and Technology View Architecture Planning and Design

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Strategic And Operational Skills Of High Performing Acquisition-Oriented Organisation

Define the systems, information and processes needed to deliver on business requirements and optimally acquire and operate them Define and manage the architecture blueprint for the evolving platform that hosts operational systems and processes Manage external supply and acquisition Manage sourcing strategy Understand the external services market and develop and maintain the skills to select, engage and manage internal and external IT resources and services Identify the potential added value from IT service suppliers

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Areas Of Importance For Outsourcing Organisations During Outsourcing Implementation and Operation
Outsourcing Strategy Management Governance Management Relationship Management Value Management Organisational Change Management Outsourcing Planning Service Provider Evaluation Outsourcing Agreements Service Transfer Service Transfer Sourced Services Management People Management Knowledge Management Technology Management Threat Management Outsourcing Completion

Analysis
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Initiation

Implementation

Ongoing

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

Knowledge Management Threat Management People Management Service Delivery Service Design and Deployment Service Transfer Contracting Performance Management Relationship Management Technology Management Ongoing

Service Transfer

Initiation
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Implementation

Completion
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Strategic And Operational Skills Of High Performing Acquisition-Oriented Organisation

Business

IT

Supplier Ecosystem

IT Needs To Focus Appropriate Services on Appropriate Suppliers

IT Mediates Between the Business and the Supplier Ecosystem, Acting as a Lens Focussing Business Needs on Appropriate Suppliers
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Lack Of Focus During Key Outsourcing Stages Leads To Loss Of Value

Level of Focus, Attention and Interest Loss Of Interest During Key Implementation and Operational Stages

Value Gap Cause by Fire and Forget Approach to Outsourcing

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Outsourcing Is Not Just For Christmas

It is for a good chunk of your (business) life An overemphasis on the act of outsourcing rather than on the long-term nature of the business relationship that will follow will lead to trouble The selection process and the tender are not ends in themselves: they are means to an end

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Outsourcing And Due Diligence

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

Discover and become familiar with organisation culture and Build trust management style Confirm any assumptions Verify costs and business case Identify additional risks not already documented Validate the transition plan Validate the infrastructure Validate the operational approach Identify any additional opportunities Ensure no transaction-breaking reasons

Consider taking an M&A approach to implementing outsourcing

Lots of Scope To Get Acquisition Wrong

Inadequate management Unarticulated end-user needs Insufficiently defined requirements Poor supplier selection Defective contract definition Deficient underlying technology selection

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Outsourcing Relationship Management Officer (ORMO)

Develop and manage outsourcing strategy Oversees outsourcing projects and manage portfolio of outsourcing arrangements Continuously appraise the portfolio of outsourcing initiatives to calculate their business value, avoid redundancies in effort, manage risks and develop and report metrics Conduct feasibility analyses for outsourcing initiatives across the organisation Ensure that there is consistency in outsourcing objectives and business objectives Conduct reviews/assessments/lessons learned and manage knowledgebase Ensure compliance with standard outsourcing methodology and process to maintain a standard operational framework

Capabilities Of A High Performing Acquisition Function

Acquisition Project Capabilities

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

Acquisition Organisational Capabilities

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

Acquisition Support Capabilities

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

Acquisition High Skilled Capabilities

Capabilities for quality and process performance, monitoring variation in processes, evaluating the impacts of proposed process changes, and systematically deploying processes across the organisation
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Specific Acquisition Capabilities And Their Relationships

Acquisition Project Capabilities
Solicitation and Supplier Agreement Development (SSAD) Acquisition Requirements Development (ARD) Acquisition Technical Management (ATM) Acquisition Verification (AVER)

Acquisition High Skilled Capabilities

Quantitative Project Management (QPM)

Requirements Management (REQM)

Agreement Management (AM)

Acquisition Validation (AVAL)

Project Planning (PP)

Project Monitoring and Control (PMC)

Risk Management (RSKM)

Integrated Project Management (IPM)

Organisational Performance Management (OPM)

Acquisition Organisational Capabilities

Organisational Process Definition (OPD)

Organisational Process Focus (OPF)

Organisational Training (OT)

Organisational Process Performance (OPP)

Causal Analysis and Resolution (CAR) Configuration Management (CM) Process and Product Quality Assurance (PPQA) Measurement and Analysis (MA) Decision Analysis and Resolution (DAR)

Acquisition Support Capabilities

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Key Acquisition Capabilities

Agreement Management Acquisition Requirements Development Configuration Management Measurement and Analysis Project Monitoring and Control Project Planning Process and Product Quality Assurance Requirements Management Solicitation and Supplier Agreement Development Acquisition Technical Management Acquisition Validation
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Acquisition Verification Decision Analysis and Resolution Integrated Project Management Organisational Process Definition Organisational Process Focus Organisational Training Risk Management Organisational Process Performance Quantitative Project Management Causal Analysis and Resolution Organisational Performance Management

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Acquiring Acquisition Capabilities Focus on Skills That Add Value

Acquisition Skills and Capabilities
Initial Sets
Acquisition Requirements Development (ARD) Agreement Management (AM) Project Monitoring and Control (PMC) Project Planning (PP) Requirements Management (REQM) Solicitation and Supplier Agreement Development (SSAD) Configuration Management (CM) Measurement and Analysis (MA) Process and Product Quality Assurance (PPQA)
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Improving
Acquisition Technical Management (ATM) Acquisition Validation (AVAL) Acquisition Verification (AVER) Organisational Process Definition (OPD) Organisational Process Focus (OPF) Organisational Training (OT) Integrated Project Management (IPM) Risk Management (RSKM) Decision Analysis and Resolution (DAR)

Skilled and Experienced

Organisational Process Performance (OPP) Quantitative Project Management (QPM)

Very Capable
Organisational Performance Management (OPM) Causal Analysis and Resolution (CAR)

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Summary

Understand the size of the outsourcing zone Identify your outsourcing zone and then take appropriate action Beware of proliferation of Under the Cover acquisition/outsourcing in the form of cloud/XaaS as business functions bypass what is perceived as slow, expensive IT Get costs right by being realistic Procurement Acquisition Successful outsourcing is not about getting the lowest price at all costs Avoid the outsourcing death spiral Making an explicit decision on where you want to be on the outsourcing spectrum Develop an approach to outsourcing due diligence Learn lessons from the experience of others to define exactly what you want of your outsourcing arrangement Avoid lack of focus during key outsourcing stages Understand and develop the capabilities of a high performing acquisition function Appoint a Outsourcing Relationship Management Officer (ORMO)
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More Information
Alan McSweeney http://ie.linkedin.com/in/alanmcsweeney

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