Download Information Technology Sourcing: A Decade of Learning

Global Information Technology Sourcing
“Night Watch” or “Company of Captain Frans Banning Cocq and Lieutenant
Willem van Ruytenhurch”, by Rembrandt van Rijn (1606-1669) – rijksmuseum
1
Global Information
Technology Sourcing
Mary C. Lacity
Professor of IS
University of Missouri-St. Louis
Leslie Willcocks David Feeny
Thomas Kern
Joseph Rottman
Rudy Hirschheim
2
Readings
Cullen, S., Seddon, P., and Willcocks, “Managing
Outsourcing: The Life Cycle Imperative,” MIS
Quarterly Executive, March 2005, pp. 229-246
Rottman, J., and Lacity, M., "Proven Practices
for IT Offshore Outsourcing," Cutter Consortium,
Vol. 5, 12, 2004, pp. 1-27.
Lacity, M., "Twenty Customer and Supplier
Lessons on IT Sourcing," Cutter Consortium, Vol.
3, No. 3, pp. 1-23, 2002.
3
“Sorry, the Board is outsourcing
your job to guy in India who’ll be
CEO for a 10th of your salary.”
4
Session Objectives
Understand Different Sourcing Models:
Staff Augmentation (Primarily Domestic)
Fee-for-service (Domestic & Offshore)
Joint ventures (Domestic & Offshore)
Captive centers (Offshore)
BOT (Offshore)
Understand the Outsourcing Life Cycle (Company Perspective)
Architect/Engage/Operate/Regenerate
Understand 4 phases of an IT sourcing markets (Market
Perspective) (Hype, Cost Focus, Quality Focus, Value-Added
Focus)
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The proven practices for domestic and offshore IT outsourcing
Session Objectives
The proven practices for domestic and offshore IT outsourcing
1.
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15.
16.
Treat IT as a Portfolio (Selective Sourcing)
Identify Core Capabilities for Insourcing
Best source non core capabilities
Consider Time & Material contracts when business or technical requirements are certain
Consider exchange-based contracts for stable, non-core activities requiring customization
Consider netsourcing for highly standardized, non-core activities
Consider customer-supplier joint ventures only if there is a proven market
Ensure all layers of the service stack are adequately provided
Compare RFP to internal bids
Involve senior management and IT management in sourcing decisions
Detail contracts
Keep contracts short enough to retain relevancy but long enough for supplier to recoup
Put core capabilities in place to protect the customer interests as well as foster supplier success
Embrace the dynamics of the relationship
Consider incremental outsourcing to develop expertise with outsourcing (learning curve)
Hire help
Covered in Presentation
Covered in Reading
6
Lacity, M., "Twenty Customer and Supplier Lessons on IT Sourcing," Cutter Consortium, Vol. 3, No. 3, pp. 1-23, 2002.
Session Objectives
The proven practices for domestic and offshore IT outsourcing
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Escalate the strategic importance of new sourcing options after conquering the learning curve
Select an offshore sourcing destination based on business objectives
Select an offshore sourcing model that balances costs and risks
Create a centralized program management office to consolidate management
Hire an intermediary consulting firm to serve as a broker and guide
Select suppliers by considering 12 supplier capabilities
Use pilot projects to mitigate business risks
Give customers a choice of sourcing location to mitigate business risks
Hire a legal expert to mitigate legal risks
Openly communicate the sourcing strategy to all stakeholders to mitigate political risks
Use secure information links or redundant lines to mitigate infrastructure risks
Use fixed-priced contracts to mitigate workforce risks
Design effective organizational interfaces
Elevate your own organization’s CMM certification to close the process gap between you and your supplier
Bring in a CMM expert with no domain expertise to flush out ambiguities in requirements
Negotiate the CMM processes for which you will and will not pay
Tactfully cross-examine, or replace, the supplier’s employees to overcome cultural communication barriers
Require supplier to submit daily status reports
Let the project team members meet face-to-face to foster camaraderie
Consider innovative techniques, such as real-time dashboards, to improve workflow verification, synchronization, and management
Manage bottlenecks to relieve the substantial time zone differences
Consider both transaction and production costs to realistically calculate overall savings
Size projects large enough to receive total cost savings
Establish the ideal in-house/onsite/offshore ratio only after the relationship has stabilized
Give offshore suppliers domain specific training to protect quality and lower development costs
Overlap onshore presence to facilitate supplier-to-supplier training
Develop meaningful career paths for subject matter experts, project managers, governance experts, and technical experts to help
ensure quality
Create balanced scorecard metrics
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Rottman, J., and Lacity, M., "Proven Practices for IT Offshore Outsourcing," Cutter Consortium, Vol. 5, 12, 2004, pp. 1-27.
15 Years of Sourcing Research
1989-2001: Outsourcing: n = 72 organizations:
British Aerospace DuPont
Inland Revenue
Enron
IRS South Australia
1989-1996: Insourcing/Backsourcing: n = 18 organizations:
Westchester County
Occidental Petroleum Ralston Purina
Vista Chemicals
1999-2001: Application Service Provision: n =10 organizations:
Corio
EDS
Host Analytics
mySAP
Zland
2001-2004: Business Process Outsourcing: n = 4 organizations:
BAE Systems Lloyd’s of London
2004-2005: Offshore Outsourcing: n = 39 organizations:
Anonymous Case Studies: Primarily Fortune 500 companies & their offshore suppliers
2005: Global IT Workforce Development: Team of 20 researchers In - Progress:
Corporate members of the Society for Information Management
8
Case Study Outcomes
n = 116 sourcing decisions
Outcome
Percent of Decisions
Yes, most expectations met
58%
No, most expectations not
met
Mixed Results; some major
expectations met, other major
expectations not met
Too early to determine
22%
9%
11%
9
Customer Rating of Supplier Performance
Customer Rating of Vendor Performance
113 Contracts Rated
Mean Response = 6.47
30
25%
25
19%
Number of Contracts
20
14%
14%
15
10
5
5%
4%
2%
2%
1
2
6%
4%
4%
Overall, suppliers are
earning a “good” report
card, but there are many
opportunities for
improvement.
0
0
Poor
3
4
Satisfactory
5
6
Good
7
8
9
10
Excellent
10
30
32%
22%
34%
23%
15%
10
0
10%
10%
Assist cash flow problems
37%
39%
Balanced processing loads
70%
Access to new IT
42%
Improved business flexibility
42%
Better management control
50%
Focus on core business
48%
Improved use of IT resource
41%
55%
Improved IT flexibility
52%
Refocus in-house IT staff
56%
Access to scarce IT skills
Better quality service
40
(B) Significant cost reduction
50
(A) Some cost reduction
70
Cost reduction (A&B)
number of respondents
Anticipated verses actual benefits from IT outsourcing
n = 98 US and European respondents
80
Anticipated
Actual
60
53%
45%
49%
41%
34%
32%
24%
22%
20
15%
15%
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Major Domestic Sourcing Models
“contract labor”, “consulting” “staff augmentation”
A client buys in labor to supplement in- house capabilities, but the client manages
the person, usually onsite at client site.
“fee-for-service” or “exchange-based” or “traditional” outsourcing
A client pays a fee to a supplier in exchange for the management and delivery of
specified IT products or services.
“joint ventures” “strategic partnerships”
“A specific type of contract entered into by two or more parties in which each agrees
to furnish a part of the capital and labor for a business enterprise, and by which each
shares in some fixed proportion in profits and losses.” -- American Heritage
Dictionary
12
Domestic Sourcing Models
Suited IT
Activities
Contract
Type
Location
Of Supplier
Staff
Staff
Augmentation
Core or non-core capabilities;
Customized products &
services;
Uncertain business or
technical requirements
Time & materials
Customer site
Fee-for-Service
Non-core capabilities
Customized products or
services
Stable business & technical
requirements
Highly customized
contract defining costs
and services
Mixed
Joint Venture
Customer & supplier have
different but complementary
capabilities;
Significant market for
venture's product & services
Highly customized for
operations, broadly
defined for revenue
sharing
Mixed
Netsourcing
Non-core capabilities
Standard products or services
Stable business & technical
requirements
Generic contracts
Not on customer site
13
Major Offshore Sourcing Models
Captive
Joint
Venture
Build
Operate
Transfer
Fee-forservice
Customer builds,
owns, staff, and
operates offshore
facility
Customer and
offshore supplier
share ownership
in offshore
operations
Offshore supplier
owns, builds,
staffs, and
operates the
facility;
ownership and
staff transfer after
completion
Customer signs a
contract for
services in
exchange for a
fee
Cost & Risk Highest
High
Medium
Low
Ability to
Control
Depends on
ownership
Medium
Low
Description
Highest
Examples
14
Size of Different IT
Sourcing Markets in 2005
IT Market:
Approximate Size:
IT Outsourcing
$250 billion
Business Process Outsourcing
$200 billion
Offshore Outsourcing
$30-$50 billion
Netsourcing/
Application Service Provision
$1 to $4 billion
Comprised by averaging various reports from Gartner, Yankee, and IDC
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Figure 1: The Outsourcing Lifecycle Model: Phases and Building Blocks
Source: Cullen, Seddon, Willcocks, “Managing
Outsourcing: The Lifecycle Imperative, MIS Quarterly
Executive, March 2005.
16
Source: Cullen, Seddon, Willcocks,
“Managing Outsourcing: The Lifecycle
Imperative, MIS Quarterly Executive, March
2005.
Phase 1: Architect
Building Block 1
Investigate
Goal
Veracity, not
ideology
Key Outputs
Gather
insight
Building Block 2
Target
Goal
Appropriate
services
identified
Key Outputs
Building Block 3
Strategize
Goal
Informed, not
speculative
strategies
Test
expectations
Outsourcing
model/mode
Collect
market
intelligence
Target
services
identificatio
n
Rollout
Peer
assessment
Profiles
Program
Phase 2: Engage
Building Block 4
Design
Goal
Well designed
future state
Key Outputs
Strategic
“rules”
Skills
Communications
strategy
Business
case rules &
base case
Feasibility
& impact
analysis
Key Outputs
Building Block 5
Select
Goal
Best value for
money
Blueprint
Scorecard
Key Outputs
Draft SLA
Competitive
stages
Draft price
model
Evaluation
team
Draft contract
Selection
strategy &
criteria
Relationship
Retained
organization
Contract
mgmt function
Bid package
Bid facilitation
Evaluation
Due diligence
Phase 3: Operate
Building Block 6
Negotiate
Goal
Complete,
efficient
contract
Building Block 7
Transition
Goal
Efficient
mobilisation
Key Outputs
Building Block 8
Manage
Goal
Phase 4:
Regenerate
Building Block 9
Refresh
Results
Negotiation
strategy
Key Outputs
Negotiation
team
Transition
team
Relationship
Effective
negotiations
Managed
staff
Meetings
Key Outputs
Admin &
records
Next gen
options
Risk mgmt
Outcomes &
lessons
Final plans
Knowledge
retention &
transfer
Transfers
Governance
structures
setup
Engineering
Acceptance
Goal
Key Outputs
Refreshed
strategy
Reporting
Issues,
variations &
disputes
Continuous
improvement
Evaluations
Knowledge
refresh
Requirements
refresh
Options
business case
& strategy
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Example of large
fee-for-service outsourcing deal
• In 1997, DuPont signed a series of 10 year
contracts in 22 countries worth $4 billion
with CSC and Andersen Consulting, making
it the second largest IT outsourcing deal at
the time.
• 58% of the annual $690 million IT budget
was outsourced.
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Company Background
Revenues
Profits
Number
employees
–
–
–
–
–
2004
2003
$27,340 million
$26,996 million
$1,780 million
$973 million
60,000
81,000
Founded in 1902 in Wilmington, Delaware
Percentage of sales outside US:
53%
20 strategic business units:
70 countries
Joint ventures
>120
www.dupont.com
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DuPont’s IS Department
Prior to Outsourcing
1989 $1.2 billion spent on IT per year:
“He didn’t ask what value, only that the number was too big”. -- IS
Global Planning Manager
Scope of Information Systems
•
•
•
•
•
•
•
Mainframe and Midrange Computers 800
Personal Computers
65,000
Local Area Networks
>500
Telephones
120,000
Data Exchange Customer Links
>2,500
Business Information Systems
>3,000
E-mail messages per month
17,000,000
20
IS Organizational Structure
Prior to Outsourcing
Centralized:
Regional Centers:
Decentralized:
CIO
Business Information Board, senior VPs
3,000 people provided to the 20 SBUs:
data and applications
planning and security
data center operations
telecommunications
Asia, Canada, Europe, Mexico, South America,
and US.
1,000 IS staff worked on SBU specific systems
Reported to VP of IS within SBU
21
Major IS Cost Reduction
Effort: 1991-1996
• 1996 Reduced IS costs by 45%
• $690 million spent per year on IT
• The users were forced to accept cost reduction measures.
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Consequences of IS Cost Cuts
• No disruption in service
• SBU managers applauded the IS group on their continuous cost
reduction performance:
• “While the people who use systems day to day don’t feel the same, no
body ever complained at the senior VP level, they loved it.” -- IS
Global Planning Manager
• IT assets and skills were not being renewed
• IS infrastructure needed several hundred million dollars worth of
investments.
• The IS group was operating on borrowed time, and any data
center disasters would potentially cripple DuPont.
“The data centers were bandaided together. ” -- IS Global Planning
Manager
23
Outsourcing Objectives
•
•
•
•
•
Avoid cost of renewal
Move from 90% fixed costs to variable
Further reduce costs (7% savings estimated)
Faster flexible service
Improved IS careers
Initiated by CIO, supported by senior management.
14 Month Decision Process
Phase 1: Architect
24
Evaluation:
RFP Process
• In February of 1996, DuPont created a “three foot” RFP.
• The RFP contained no cost data, but provided details on every IS
job and the services provided.
• April of 1996, twelve companies were invited to respond, but no
internal bid was invited.
• Four companies responded: IBM, Phillips, CSC and AC.
• In June of 1996, CSC and AC were selected as partners.
Phase 2: Engage
25
Negotiations
Due Diligence:
• From August until December of 1996
• 100% of the infrastructure would be given to CSC
• Applications would be divided based on competency.
Contract Negotiations:
• December of 1996 until the 2nd quarter of 1997
• Negotiated 22 global contracts
• All the RFPs requirements had to be translated into legal
requirements.
“The transformation was frustrating” -- Global Alliance Manager
• Legal experts
• Technical experts for service level agreements
Phase 2:Engage
26
Negotiations:
Contract Overview
• 1997
$4 billion worth of contracts:
* $3.45 billion to CSC
* $ .55 billion to AC
• CSC
• AC
• DuPont
-- 2600 people (64%) provide global infrastructure &
applications
-- 400 people (10%) provide chemical applications
-- 60 people ( 1%) manage contract
-- 1000 people (25%) provide business IT leadership
4060
Phase 2:Engage
27
Negotiations:
Price Work Units
Overall master service agreement, no billing occurs at this level
• 22 country contracts
• Pricing schedule that reflects cost of living
• Local currency
• 20 different billing units, including:
 stand-alone desktops
 desktops connected to a LAN
 mainframe MIPS
 gigabytes of storage
 tape mounts
 UNIX boxes
 IS staff charges by job category.
Phase 2:Engage
28
Negotiations:
Contract Service Levels
• Document current service levels as the baseline
• Set goals of long-term service improvement, especially in the area
of desktop computing.
• 600 services defined at different locations world-wide.
• For each location, determine standard, differentiated, or no
service.
• Ranked services by criticality
• Escalation procedures, cash penalties for non-performance
• Procedures defined for root cause analysis
• In the spirit of a “partnership”, no cash penalties in the first year
Phase 2:Engage
29
Transitions:
Distribute Contract
• Transforming a 30,000 line legal contract into daily work practices
“The lawyers delivered 10 boxes to the office and said, ‘that’s the
contract’. The contract is 30,000 lines long. It’s impossible to
execute the relationships from this contract.” --Global Alliance
Manager
• A 2 inch summary document was made of the contract
• Still about 18 months worth of work to translate the contract into
daily work practices.
Global Alliance Manager called experts and asked,
“why didn’t you tell us we weren’t even close to done?”
Phase 3: Operate
30
Transition Phase:
Manage volume additions
Demand Management (volume):
• Demand used to be constrained by central IS
“What we found is that everyone is using more IT than baseline.”
-- Global Alliance Manager
•
“In old times, each SBU bought from global leverage (i.e., centralized IS
group). There was lots of negotiating pressure to keep costs down.” -Global Planning Manager
Difficult to forecast demand, which means lost discounts
Phase 3: Operate
31
Transition Phase:
Monitor service/price
Service Management (Quality):
• Monitoring Service Levels
• In actuality, 90% of the service lapses within the first 8 months
were inherited from DuPont.
Financial Management (Price):
• Work on 150 major projects was halted due to lack of project
pricing.
• Bills have been incorrect by millions of dollars
• Primarily cause: services have not been fully defined.
– What should be included in mainframe billable units?
– What should be included in a standard PBX upgrade cost?
Analyst time? Installation? Wiring? Shipping and handling?
Phase 3: Operate
32
Supplier Relationships
Collaborating and Competing:
• CSC and AC have separate contracts
• Competitive bidding for additional services: CSC, AC
or other parties
• Structure of the deal requires the suppliers to
cooperate:
Users call one help desk run by CSC, but their calls are
seamlessly forwarded to either a CSC or an AA person,
depending on the question.
AC is developing some SAP applications that will have to run
on the CSC infrastructure.
Phase 3: Operate
33
Partnering in Practice
• Act on the intent of the contract, rather than the exact content of
the contract
• Rely on continuity of experience
• Additional negotiations not officially amended to contract
• Implemented Problem Resolution Process
• Joint DuPont-supplier teams are assigned responsibility for major
areas.
• Each management team told lower level IS employees to do the
work, we’ll worry about price.
• The operating principle of each team is to be fair, not to exploit
any contract inefficiencies.
Phase 3: Operate
34
New Work
• Y2K Project
 $400 million
 DuPont decided to refresh technology rather than just merely Y2K
comply
 CSC and Andersen brought in 400 additional people world-wide
 DuPont is extremely pleased with quantity and quality of skill access
• SAP Project
 Replaced legacy systems such as process control and supply change
management
 AC had SAP software expertise
 CSC needed some investment in SAP skills
 DuPont transferred additional 300 people from decentralized IS staff
Phase 3: Operate
35
Assessment
What is going well?
•
•
•
Access to Skills and Talent
 CSC and AC provide 400 Y2k people
 DuPont transferred an additional 300 decentralized IS staff to become SAP
experts
 DuPont bought back certain skills
Skill upgrades
 AC and CSC have reskilled talent
 better and more rigorous development methodologies
 function point productivity has improved
Infrastructure Investment
 CSC made major improvements worth millions of dollars to the infrastructure
such as the 3 mainframe mega-data centers and tcom.
 Now use mega center in Newark for 20 other non-DuPont clients.
Phase 4: Regenerate
36
Assessment
What is not going so well?
• Desktop
 DuPont retained a number of suppliers for different desktop functions
 Users satisfaction was very low
 User had multiple suppliers to call for procurement, add, changes, and
deletions, maintenance, help desk
 3 month improvement process, DuPont handles systems integration
 Users now have one-stop shopping
External sales and joint revenues is “small potatoes”
Phase 4: Regenerate
37
Final Thoughts
• This is a commercial business transaction, not a
partnership
• Requires massive effort of hands on management
everyday
• Needed to retain about 60 more people for technical
direction and strategy, such as, “should we do X, Y, or
Z?”
• Constant negotiations and interpretations of the
contract due to business and technology changes
• Suppliers have to keep earning the business everyday!!!
38
Size of Market
Customer Learning
Outsourcing Learning Curve
Phase 1:
Hype & Fear
Phase 4:
Institutionalized
Focus on Value-added
Phase 3:
Market Matures
Richer Practices Emerge
Focus on Quality
Phase 2:
Early Adopters
Best & Worst Practices Emerge
Focus on Costs
Time
39
Proof of Customer Learning:
Success Rates Over Time
Year Contract
Was Signed
YES,
NO, most
MIXED
results
Total
most
expectation
met
expectation
not met
1984-1991
14
(48.3%)
12
(41.4%)
3
(10.3%)
29
1992 to 1998
41
(73.2%)
8
(14.3%)
7
(12.5%)
56
TOTAL # OF
DECISIONS
55
(64.7%)
20
(23.5%)
10
(11.8%)
85
CONTRACT DATE
(n=85 outsourcing decisions with discernible outcomes)
40
Phase 1: Fear & Hype
“Slaying the IS Dragon with Outsourcery” 1989
“Selling One’s Birthright,” 1989
“Outsourcing: A Game for Losers,” 1995
All artwork and web design © 2002 by Rebecca Kemp
41
Phase 2: Hard Learning From Early Adopters
Selective Outsourcing
not
Total Outsourcing
Detailed Contracts
not
Loose Contracts
Joint Decisions
not
CEO or IT decision
Internal & External Bids
not
Informal Bid Processes
Escalating commitments
not
Instant long-term commitments
Aligned Incentives & Win/Win
not
Us/Them
Transaction & Production Costs
not
Production Costs
42
Phase 2:
Selective Sourcing
N = 102 decisions with discernible outcomes
Decision
Outcome:
Success
Failure
Mixed Total #
Results Decisions
Total
Outsourcing
11
(38%)
10
(35%)
8
(27%)
29
Total
Insourcing
13
(76%)
4
(24%)
0
(0%)
17
Selective
Outsourcing
43
(77%)
11
(20%)
2
(4%)
56
Total #
Decisions
67
25
10
102
43
Year Decision
Was Made
YES,
NO, most
MIXED
results
Total
most
expectations
met
expectations
not met
Selective
Outsourcing
12
(63%)
7
(37%)
0
19
Total
Outsourcing
2
(20%)
5
(50%)
3
(30%)
10
14
12
3
29
Selective
Outsourcing
33
(87%)
3
(8%)
2
(5%)
38
Total
Outsourcing
8
(44%)
5
(28%)
5
(28%)
18
41
8
7
56
55
20
10
1984-1991 Totals
1992 to
Totals
1998
TOTAL
NUMBER OF
DECISIONS
44
85
10
IT Strategy
30%
Procurement
31%
Systems Architecture
30
Systems Design
33%
Systems Analysis
Project Management
40
Help Desk
End-User/PC Support
50
Mainframe
Midrange
Networks
Disaster Recovery
60
Client/Server & PCs
number of respondents
IT activities partially or totally outsourced
n = 98 US and European respondents
70
61%
58%
55%
52%
49%
45%
41%
29%
20
9%
5%
0
45
Phase 2: Hard Learning From Early Adopters
IT Outsourcing 10-15 Years Ago
Selective Outsourcing
not
Total Outsourcing
Detailed Contracts
not
Loose Contracts
Joint Decisions
not
CEO or IT decision
Internal & External Bids
not
Informal Bid Processes
Escalating commitments
not
Instant long-term commitments
Aligned Incentives & Win/Win
not
Us/Them
Transaction & Production Costs
not
Production Costs
46
Phase 2:
Detailed Contracts
N = 87 outsourcing contracts with discernible outcomes
Decision
Outcome:
Mixed Total #
Results Decisions
Success
Failure
Detailed
Contract
45
(75%)
9
(15%)
6
(10%)
60
Mixed
Contract
6
(55%)
1
(9%)
4
(36%)
11
Joint Venture
2
(40%)
3
(60%)
0
5
Loose/Vendor
Contract
2
(18%)
9
(81%)
0
11
Total #
Decisions
55
22
10
87
47
Phase 2: Hard Learning From Early Adopters
IT Outsourcing 10-15 Years Ago
Selective Outsourcing
not
Total Outsourcing
Detailed Contracts
not
Loose Contracts
Joint Decisions
not
CEO or IT decision
Internal & External Bids
not
Informal Bid Processes
Escalating commitments
not
Instant long-term commitments
Aligned Incentives & Win/Win
not
Us/Them
Transaction & Production Costs
not
Production Costs
48
BEST PRACTICES ON
DECISION PROCESS
(n=102 sourcing decisions from case studies with discernible outcomes)
Joint senior management & IT management decision
Decision Sponsor
• Joint Decision
• Senior Level IT Managers Only
• Senior Executives Only
Percent “Successful”
76%
71%
43%
Rationale:
• Sourcing decisions typically required senior management’s larger business
perspective and power to enforce decisions and IT managers’ understanding of
technical requirements for their organizations.
49
Phase 2: Hard Learning From Early Adopters
IT Outsourcing 10-15 Years Ago
Selective Outsourcing
not
Total Outsourcing
Detailed Contracts
not
Loose Contracts
Joint Decisions
not
CEO or IT decision
Internal & External Bids
not
Informal Bid Processes
Escalating commitments
not
Instant long-term commitments
Aligned Incentives & Win/Win
not
Us/Them
Transaction & Production Costs
not
Production Costs
50
BEST PRACTICES ON
DECISION PROCESS
(n=102 sourcing decisions from case studies with discernible outcomes)
Invite both internal and external bids
Sourcing Decision Process
Percent
Successful
• Compared bids to a newly-prepared internal bid
83%
• Compare 3 or more supplier bids (no internal bid)
75%
• No formal bid process
55%
• Compare 1-2 supplier bids (no internal bid)
42%
Rationale:
•
In the past, IT managers were not empowered to institute change. When senior
executives empowered internal IT managers through the threat of outsourcing, internal
IT managers often competed with external vendors by proposing to replicate their
managerial practices.
51
Phase 2: Hard Learning From Early Adopters
IT Outsourcing 10-15 Years Ago
Selective Outsourcing
not
Total Outsourcing
Detailed Contracts
not
Loose Contracts
Joint Decisions
not
CEO or IT decision
Internal & External Bids
not
Informal Bid Processes
Escalating commitments
not
Instant long-term commitments
Aligned Incentives & Win/Win
not
Us/Them
Transaction & Production Costs
not
Production Costs
52
SHORT CONTRACTS
(n=85 outsourcing decisions with discernible outcomes)
Shorter contracts were more successful than longer contracts.
Contract Duration
• Less than 4 years
• Between 4 and 7 years
• Greater than 7 years
Percent Successful
88%
59%
38%
Rationale:
•
•
•
As contracts matured, they became obsolete as technology/business conditions changed.
Fixed price, long-term contracts did not adapt prices to technology’s high
price/performance improvements.
Short term contracts motivated vendor performance to ensure contract renewal.
53
Phase 2: Hard Learning From Early Adopters
IT Outsourcing 10-15 Years Ago
Selective Outsourcing
not
Total Outsourcing
Detailed Contracts
not
Loose Contracts
Joint Decisions
not
CEO or IT decision
Internal & External Bids
not
Informal Bid Processes
Escalating commitments
not
Instant long-term commitments
Aligned Incentives & Win/Win
not
Us/Them
Transaction & Production Costs
not
Production Costs
54
Problems with early fixed-price,
long-term, exchange
Based relationships:
Excess fees
Fixed prices soon exceeded market prices
Failure to define & thus improve service levels
Inability to adapt to changes in business or
technology
Loss of power due to monopoly supplier condition
Inability of customer to manage the relationship
55
Strategic Partnerships
Example: Swiss Bank/Perot
•
•
Announcement in 1996: Swiss Bank signed a 25-year outsourcing deal with
Perot Systems worth $6.25 billion. The partners will sell client/server
solutions to the banking industry (Schmerken and Goldman, 1996).
Outcome in 1997: Swiss Bank reduced scope and value of contract to 10
years, $2.5 billion.
Example: Delta Airlines/AT&T
•
•
Announcement in 1996: Delta Airlines and AT&T form Transquest to
provide IT solutions to airline/travel industry. Deal is worth $2.8 billion. 10
year contract.
Outcome in 1997: Venture terminated; Delta brought IT back in-house
56
Strategic Partnerships
Example: Xerox/EDS
•
Announced in 1996: The Xerox-EDS contract provides for future shared
revenues for the development and sale of a global electronic document
distribution service. Contract worth $3.8 billion, 10 years. At the time of the
contract signing, the President of EDS and CEO of Xerox announced:
“We realized that each of our companies brought to the table specific best-inclass capabilities that enabled a level of performance that neither could
achieve independently. This is a case of two technology companies enabling
one another to achieve a shared vision for adding value for their customers.”
(reported on October 10, 1996 on WWW at http://www.xerox.com
/PR/NR950321-EDS.html)
• Outcome in 1998: Contract completely renegotiated; reject strategic
partnership model and enacted exchange-based relationship.
Lesson: It requires 10 times initial investment to transform an in-house
system to a commercially viable product.
57
Strategic Partnerships
Example: South Australian Government and EDS
• 9 year, $600 million (AUD) contract for economic development of
South Australia
• Strategic goal: pump $200 million into South Australian economy
increase employment in IT sector
provide international marketing channels
housing starts and other multiplier effects
• Outcome:
EDS has exceeded yearly targets;
moved 600 EDS employees to Adelaide
established an IPC, IMC, SEC
Lesson: advantage is effective for first adopter but difficult to duplicate
58
Phase 3: Market Matures
Richer Practices Emerge
CUSTOMER
9 Core Customer Capabilities
Feeny & Willcocks, SMR,1998
SUPPLIER
12 Core Supplier Capabilities:
Feeny, Willcocks, Lacity, 2004
59
60
9 IT capabilities customers need
in-house to make outsourcing successful
Business and IT Vision
Business Systems
Thinking
Relationship
Contract
Builder
Facilitation
IS
Leadership;
Informed
Design of IT
Architecture
Technical
Architecture
Buying
Contract
Technical
Monitoring
Doer
Delivery of IS
Service
Vendor
Development
Feeny & Willcocks, Sloan Management Review, Vol. 39, 3, 1998, pp. 9-21.
61
12 capabilities suppliers need
to make outsourcing successful
Relationship Capabilities
Planning &
Contracting
Organization Design
Governance
Business
Management
Delivery
Capabilities
Domain
Expertise
Customer
Development
Leadership;
Program
Management
Process
Re-engineering
Behavior
Management Technology
Sourcing
Exploitation
Transformation
Capabilities
62
Phase 4:
Sources of Customer Learning:
Institutional Isomorphism
Consultants
Conferences
Benchmarks
Kodak Effect
Lawyers
Powerful Parties
Normative
Influences
Mimetic
Influences
ISOMORPHISM:
Reasoned Adoption
Of Best Practices
Coercive
Influences
63
Adapted from DiMaggio & Powell,The New Institutionalism in Organizational Analysis, Chicago, 1991
Phase 4:
Focus on Value-Added:
Example of Enterprise Partnerships
Xchanging Human Resource Services
(XHRS)
Xchanging Procurement Services
(XPS)
Xchanging Insurance Services
(XIS)
Xchanging Claims Services
(XCS)
Lacity, M., Feeny, D., and Willcocks, L., European Management Journal, Vol. 22, 2, April, 2004, pp. 127-140.
Lacity, M., Feeny, D., and Willcocks, L MIS Quarterly Executive, Vol, 2, 2, 2003, pp.86-103.
Lacity, M., Willcocks, L., and Feeny, D, Cutter Consortium, Vol. 5, 2, 2004, pp.1-25.
64
Feeny, David, Willcocks, Leslie, and Lacity, Mary, Business Process Outsourcing: The Promise of the Enterprise Partnership Model,
Templeton Executive Briefing, Templeton College, Oxford University, ISBN 1 873955162, 2003, 44 pages.
Offshore Sourcing
Phase I: Fear & Hype
Phase II: 28 Lessons Learned
65
Phase 1: Fear & Hype
“The Outsourcing Bogeyman,” 2004
“Offshore Outsourcing Dragging Down Bonus Pay,” 2003
“Software:Will Outsourcing Hurt America’s Supremacy?” 2004
66
Offshore Challenges:
How can we develop and implement a global sourcing
portfolio?
(6 practices)
How can we mitigate risks?
(6 practices)
How can we effectively work with offshore suppliers?
(9 practices)
How can we ensure cost savings while protecting quality?
67
(7 practices)
Practices to develop and implement a
global sourcing portfolio?
Practice
1. Escalate the strategic importance of new
sourcing options after conquering the
learning curve
Equally
Important
for Domestic
& Offshore
More
Important
for Offshore
X
2. Select an offshore sourcing destination
based on business objectives
X
3. Select an offshore sourcing model that
balances costs and risks
4. Create a centralized PMO
X
X
5. Hire intermediary consulting firm
6. Select suppliers by considering 12 supplier
capabilities
Previously covered
in presentation
Unique to
Offshore
X
X
To be covered
in presentation
Covered in
reading
68
2. Select an offshore sourcing destination based on
business objectives
Sample Offshore Venue Comparison
Source: NeoIT
69
Better Location Criteria: Market expansion, leverage existing facilities, customer service
Practices to Mitigate Risks
Practice
7. Use pilot projects to mitigate
business risks
Equally
Important
for Domestic
& Offshore
More
Important
for
Offshore
X
8. Give customers a choice to mitigate
business risks
X
9. Hire a legal expert to mitigate
political risks
X
10. Openly communicate sourcing
strategy to mitigate political risks
X
12. Use fixed price contracts to
mitigate workforce risks
X
Previously covered
in presentation
Unique to
Offshore
To be covered
in presentation
Covered in
reading
70
How can we mitigate risks?
Legal Risks
Political Risks
Business Risks
Workforce Risks
Logistical Risks
Social Risks
Infrastructure Risks
71
Risk
Category
Sample Risks
Equally Risky
for Domestic
& Offshore
Backlash from external
customers damages reputation
Business
More Risky
for Offshore
X
No overall cost savings
X
Poor supplier capability, service,
financial stability, cultural fit
X
Wrong types of activities
outsourced
X
Inability to manage supplier
relationship
X
Inefficient/Ineffective judicial
system in offshore locale
X
Infringement of IP Rights
Legal
Risk
Unique to
Offshore
X
Export Restrictions
X
Inflexible labor laws
X
Difficulty obtaining visas
X
Changes in tax law erode savings
Inflexible contracts
Security/Privacy Breech
X
X
X
72
Risk
Category
Sample Risks
Equally Risky
for Domestic
& Offshore
Backlash from internal IT staff
Political
Workforce
Social
Logistical
Risk
Unique to
Offshore
X
Perceived as unpatriotic
X
Democrats threaten punishment
X
Political instability in offshore
country
X
Unstable U.S./offshore country
relations
X
Supplier employee
turnover/burnout
X
Inexperience supplier employees
X
Poor communication skills
X
Loss of in-house capability
Infrastructure
More Risky
for Offshore
Poor telecommunications
X
X
Poor utilities
Cultural Differences
X
X
Holiday & Religious Calendar
X
Time Zone Challenges
X
Managing Remote Teams
X
73
How can we mitigate risks?
7. Use pilot projects to mitigate business risks.
Biotech launched 17 pilot projects:
4 Indian suppliers (2 large, 2 small)
Staff augmentation (time & materials) and end-to-end (fixed
price)
Old (ERP) and new (wireless) technologies
Re-platforming and systems development
20 person day to 800 (4 FTEs for 8 months)
74
How can we mitigate risks?
7. Use pilot projects to mitigate business risks.
Ideal pilot size:
according to Gartner Group is 10-15 FTEs for 6 months
according to Biotech 4 FTEs for 5 months
according to SourceQuest – 2 man years; $50,000 - $100,000
"I am not sure our selection of projects told us as much as it could have. Bad project selection
skews your results in both ways. If the pilot was too small, it led the teams to conclude the
overhead is too large and we can't be successful, we won't have savings. We had other projects
that were not complex that lead us to believe, offshore is wonderful, it's wildly successful. But we
didn't really test the supplier's capabilities. Neither view is correct. "--Laura, Global Leadership
Team member
75
How can we mitigate risks?
8. Give customers a choice to mitigate political risks
Financial Services Company & Retailer:
The Business Sponsor Chooses:
Offshore: Low Costs
Domestic: Lower risks
76
How can we mitigate risks?
10. Openly communicate the sourcing strategy to all
stakeholders to avoid political risk.
Biotech:
Open communications
Using offshore to replace domestic contract labor, not internal IT
Sold as “Doing more with a flat IT budget”
Financial Services:
Closed communication to avoid panic when “simply testing the waters”
IT staff panicked when 11 Indians showed up in cubicles
CTO held town meeting, sold concept as meeting refinance boon
No firings but no hires when natural attrition occurs
From prior cases:
Need bonus pay if asking internal IT to build their own guillotines
77
Practices to Effectively Work with Suppliers
Equally
Important for
Domestic &
Offshore
Practice
13. Design the customer/supplier interfaces
More Important
for Offshore
Unique to
Offshore
X
14. Elevate your own organization’s CMM certification
X
15. Bring in CMM expert with no domain knowledge to
flush out ambiguities
X
16. Negotiate CMM documents
X
17. Cross-examine, or replace, the supplier’s employees to
X
overcome cultural communication barriers
18. Require daily status reports
X
19. Let project team members meet face to face
X
20. Consider deal time dashboards
X
21. Manage bottlenecks exacerbated by time zone
differences
X
Previously covered
in presentation
To be covered
in presentation
Covered in
reading
78
How can we effectively work
with offshore suppliers?
13. Design the customer/supplier interfaces
Retail & Industrial Equipment Manufacturing:
Architects/
DBAs/etc.
Offshore
Supplier
Delivery
Team
PMO
Offshore
Supplier
Delivery
Team
Local
Business
Units
Project
Managers
Onsite Supplier
Engagement Manager
Offshore
Supplier
Delivery
79
Team
How can we effectively work
with offshore suppliers?
13. Design the customer/supplier interfaces
Architects/
DBAs/etc.
PMO
Local
Business
Units
Biotech:
Onsite Supplier
Project Managers
Offshore
Supplier
Delivery
Team
Offshore
Supplier
Delivery
Team
Offshore
Supplier
Delivery
Team
Project
Managers
Offshore
Supplier
Delivery
Team
Onsite Supplier
Project Managers
Offshore
Supplier
Delivery
Team
Offshore
Supplier
Delivery80
Team
How can we effectively work
with offshore suppliers?
13. Design the customer/supplier interfaces
Kaiser & Hawk, 2004
VP IS
Relationship
Manager
Director
Anchor
Project
Manager
Anchor
Team Lead
Team Lead
Team Lead
Team Lead
Development
Staff
Development
Staff
Development
Staff
Development
Staff
81
Issues Dealing with CMM
U.S. Participants’ Reservations with CMM
Questionable Value/Cost:
”The overhead costs of documenting some of the projects exceeded the value
of the deliverables." – Pam, Global Team Leader member
"You ask for one button to be moved and the supplier has to first do a twenty
page impact analysis--we are paying for all this documentation we don't
need." – Project Manager
“Mistakes upstream replicate downstream”
“CMM Certification is no substitute for experience”
82
Lesson 14: Elevate your own
organization’s CMM
certification to close the
process gap between you and
your supplier
Lesson 15: Bring in a CMM
expert with no domain
expertise to flush out
ambiguities in requirements
Lesson 16: Negotiate the
CMM processes for which you
will and will not pay
83
Practices to Ensure Cost Savings
While Protecting Quality
Equally
Important for
Domestic &
Offshore
Practice
More
Important for
Offshore
22. Consider both transaction and production costs
when calculating overall savings.
X
23. Size projects large enough to receive total cost
savings
X
Unique to
Offshore
24. Do not establish the ideal inhouse/onsite/offshore ratio until supplier
X
25. Give offshore suppliers domain specific training
to protect quality
X
26. Overlap onshore presence to facilitate supplier to
supplier training.
27. Develop meaningful career paths for SMEs, project
X
X
managers, governance experts to ensure quality
28. Create balanced scorecard metrics
Previously covered
in presentation
X
To be covered
in presentation
Covered in
reading
84
How can we ensure cost savings while
protecting quality?
22. Consider both transaction and production costs
Transaction costs of offshore outsourcing: 15.2 to 57% of contract value
Transaction costs of domestic outsourcing: 4 to 10% of contract value
Transaction costs include:
Vendor selection & negotiation
Transitioning work
Layoff and retention
Lost productivity due to cultural issues
Managing the contract
Studies done by Meta, Gartner, Renedis;
Amrosio, J., “Experts Reveal Hidden Costs of Offshore IT Outsourcing,” CIO Magazine, April, 2003.
85
http://commonziffdavisinternet.com/d
ownload/0/2216
How can we ensure cost savings while
protecting quality?
23. Size projects large enough to receive total cost
savings
Only anecdotal evidence of size needed to ensure 15 to 20% overall cost savings:
80 to 100 FTES – Personal Experience of Research Practice Director, Gartner
87
How can we ensure cost savings while
protecting quality?
24. Do not establish ideal in-house/onsite/offshore ratio
until supplier relationship has matured
15% customer staff on site to serve as project managers
15% supplier staff on site to serve as liaisons and project managers
70% supplier staff offshore
Nationwide had 50/50 ratio with Wipro until
Relationship matured
Biotech had supplier staff work in Biotech’s R&D
Facilities for data access and updates
88
28: Create balanced metrics
SUPPLIER
MANAGEMENT
% of supplier business
% supplier of choice
Utilization Rates
OVERALL
SUPPLIER
PERFORMANCE
COMPARATIVE
COSTS
Onsite/offsite/offshore
Cost per function point
VISION & STRATEGY
% Unfavorable Turnover
% Delivered On-time
Cooperation Satisfaction Score
COMPARATIVE
EFFICIENCY
QUALITY OF WORK
Error rates
Quality of code scores
Employee-to-supplier work ratio
89
Session Objectives
Understand Different Sourcing Models:
Staff Augmentation (Primarily Domestic)
Fee-for-service (Domestic & Offshore)
Joint ventures (Domestic & Offshore)
Captive centers (Offshore)
BOT (Offshore)
Understand the Outsourcing Life Cycle (Company Perspective)
Architect/Engage/Operate/Regenerate
Understand 4 phases of an IT sourcing markets (Market
Perspective) (Hype, Cost Focus, Quality Focus, Value-Added
Focus)
90
The proven practices for domestic and offshore IT outsourcing
Session Objectives
The proven practices for domestic and offshore IT outsourcing
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
Treat IT as a Portfolio (Selective Sourcing)
Identify Core Capabilities for Insourcing
Best source non core capabilities
Consider Time & Material contracts when business or technical requirements are certain
Consider exchange-based contracts for stable, non-core activities requiring customization
Consider netsourcing for highly standardized, non-core activities
Consider customer-supplier joint ventures only if there is a proven market
Ensure all layers of the service stack are adequately provided
Compare RFP to internal bids
Involve senior management and IT management in sourcing decisions
Detail contracts
Keep contracts short enough to retain relevancy but long enough for supplier to recoup
Put core capabilities in place to protect the customer interests as well as foster supplier success
Embrace the dynamics of the relationship
Consider incremental outsourcing to develop expertise with outsourcing (learning curve)
Hire help
Covered in Presentation
Covered in Reading
91
Lacity, M., "Twenty Customer and Supplier Lessons on IT Sourcing," Cutter Consortium, Vol. 3, No. 3, pp. 1-23, 2002.
Session Objectives
The proven practices for domestic and offshore IT outsourcing
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
Escalate the strategic importance of new sourcing options after conquering the learning curve
Select an offshore sourcing destination based on business objectives
Select an offshore sourcing model that balances costs and risks
Create a centralized program management office to consolidate management
Hire an intermediary consulting firm to serve as a broker and guide
Select suppliers by considering 12 supplier capabilities
Use pilot projects to mitigate business risks
Give customers a choice of sourcing location to mitigate business risks
Hire a legal expert to mitigate legal risks
Openly communicate the sourcing strategy to all stakeholders to mitigate political risks
Use secure information links or redundant lines to mitigate infrastructure risks
Use fixed-priced contracts to mitigate workforce risks
Design effective organizational interfaces
Elevate your own organization’s CMM certification to close the process gap between you and your supplier
Bring in a CMM expert with no domain expertise to flush out ambiguities in requirements
Negotiate the CMM processes for which you will and will not pay
Tactfully cross-examine, or replace, the supplier’s employees to overcome cultural communication barriers
Require supplier to submit daily status reports
Let the project team members meet face-to-face to foster camaraderie
Consider innovative techniques, such as real-time dashboards, to improve workflow verification, synchronization, and management
Manage bottlenecks to relieve the substantial time zone differences
Consider both transaction and production costs to realistically calculate overall savings
Size projects large enough to receive total cost savings
Establish the ideal in-house/onsite/offshore ratio only after the relationship has stabilized
Give offshore suppliers domain specific training to protect quality and lower development costs
Overlap onshore presence to facilitate supplier-to-supplier training
Develop meaningful career paths for subject matter experts, project managers, governance experts, and technical experts to help
ensure quality
Create balanced scorecard metrics
92
Rottman, J., and Lacity, M., "Proven Practices for IT Offshore Outsourcing," Cutter Consortium, Vol. 5, 12, 2004, pp. 1-27.