Date post: | 17-Oct-2014 |
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Business |
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Getting Good And Staying Good At (Out)Sourcing
Alan McSweeney
November 24, 2013 2
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 cost-effective, 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 3
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
November 24, 2013 4
Divestment Of Non-Core Functions
• Organisations divesting themselves of what they see as non-core functions
• Application of Coase’s 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
CoreOrganisation
Functions
NonCore
Function
NonCore
Function
NonCore
Function
NonCore
Function
NonCore
Function
NonCore
Function
NonCore
Function
NonCore
Function
November 24, 2013 5
Divestment Of Non-Core Functions
• Shrinking core competency focus as organisations move from in-house solution delivery to sourcing solutions externally
ShrinkingCore
NonCore
Function
NonCore
Function
NonCore
Function
NonCore
Function
NonCore
Function
NonCore
Function
NonCore
Function
NonCore
Function
November 24, 2013 6
(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
NonCore
Function
NonCore
Function
NonCore
Function
NonCore
Function
NonCore
Function
NonCore
Function
NonCore
Function
NonCore
Function
November 24, 2013 7
(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
November 24, 2013 8
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?
November 24, 2013 9
Avoiding The Outsourcing Value Lost
Outsourcing Potential Value
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
Lost value can be 30%-60% of originally expected
November 24, 2013 10
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?
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
November 24, 2013 11
November 24, 2013 12
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
November 24, 2013 13
All Too Often Procurement Throws A Solution Over The Wall To Delivery
Procurement Delivery
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 procurement’s viewpoint lead to costs during implementation and operation
November 24, 2013 14
November 24, 2013 15
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 andthe outsourcing organisation that depends on the choices the parties make and their subsequent behaviour
• An unwise choice can have serious and enduring negative consequences
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
November 24, 2013 16
November 24, 2013 17
Getting Costs and Benefits Right Is Very Important
• Small error in costs will accumulate and become substantial over the life of the contract
November 24, 2013 18
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
November 24, 2013 19
Outsourcing Death Spiral
Naive And Simplistic
Expectations
Over-Dependence On Service Provider As
Strategic Partner
No Governance Model
Insufficient Understanding Of Current State Of Services Being
Outsourced
No Defined Outsourcing
Strategy
No Service Catalog
No Defined Future
Operating Model Or
Architecture
Oversimplification Of Outsourcing
Process
Underestimated And Unquantified
Resource Commitment
Invalid Assumptions
Unarticulated Expectations
Incomplete Contract
Incomplete SLAs/OLAs
Insufficient Management And Oversight
Lengthy Negotiations
Unanticipated And Large Out-
Of-Scope Services
High Management
Resources And Costs
Backsourcing/ Insourcing/
Circumvention of Arrangement
Development Of Parallel IT
Services
Constant Renegotiations
Breakdown Of Relationship
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
November 24, 2013 20
Myth Of Outsourcing “Strategic Partnership”
• Don’t do business with friends
• Don’t 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
November 24, 2013 22
Efficiency/ Utility
Make It
Cheaper
BusinessEnhancement
Make It Better
Transformational
Make Me Money
Increased Scope and Complexity of Outsourcing Arrangement
Primary focuses on cost control and cost reduction,
with the aim of maintaining consistency in
service delivery
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
Making An Explicit Decision On Where You Want To Be On The Outsourcing Spectrum
Efficiency/ Utility
Make It
Cheaper
BusinessEnhancement
Make It Better
Transformational
Make Me Money
Increased Scope and Complexity of Outsourcing Arrangement
Focus on Buying Focus on Tactical Sourcing with Some
Organisational Restructuring
Focus on Strategic Sourcing With Substantial Organisational Change
November 24, 2013 23
Change In Relative Importance Of OutSourcing Objectives Over Time
November 24, 2013 24
-20 -10 0 10 20 30 40 50 60 70 80 90 100
Reduce Costs
Increase Service
Flexibility and Scalability
Support and
Enable Growth
Gain Access to
New Technologies
Transform Processes
Align Support Function
with Strategy
Improve Process
Efficiency
Improve Compliance
Capabilities
Drive Organisational
Culture Change
Gain Access To
Talent and Capabilities
You Start Looking to
Achieve This
You Evolve Over Time Into Looking At
Achieve This
Outsourcing Effectiveness At Achieving Business Benefits
November 24, 2013 25
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
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
Very Effective Somewhat Effective Not Effective
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
November 24, 2013 26
Important Supplier Selection Factors
November 24, 20130% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
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
Mission Critical Important But Not Critical Somewhat Important Not Important
November 24, 2013 27
Important Supplier Selection Factors
• Use these factors to evaluate suppliers and look for proven competence and referenceable delivery
November 24, 2013 28
Strategic And Operational Skills Of High Performing Acquisition-Oriented Organisation
November 24, 2013 29
Governance Service Delivery Business Vision Architecture
Internal IT Function Management
External IT Function Business Alignment
Business System Thinking
Contract Management
Effective Contract Enablement and Acceleration
Informed Product and Service Acquisition
Vendor Development
Architecture Planning and Design
Relationship Building and Maintenance
End-to-End Systems and Technology View
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
November 24, 2013 30
Areas Of Importance For Outsourcing Organisations During Outsourcing Implementation and Operation
OngoingInitiation Implementation CompletionAnalysis
Service Transfer
November 24, 2013 31
Outsourcing Planning
Outsourcing Agreements
Service Transfer
Service Provider Evaluation
Sourced Services Management
Outsourcing Completion
Outsourcing Strategy Management
Governance Management
Relationship Management
Value Management
Technology Management
People Management
Knowledge Management
Organisational Change Management
Threat Management
Skills To Look For In Outsourcing Service Providers During Outsourcing Implementation and Operation
OngoingInitiation Implementation Completion
November 24, 2013 32
Service Design and Deployment
Service Transfer
Service Delivery
Contracting Service Transfer
Knowledge Management
Relationship Management
People Management
Performance Management
Threat Management
Technology Management
Strategic And Operational Skills Of High Performing Acquisition-Oriented Organisation
November 24, 2013 33
Business ITSupplier
Ecosystem
IT Mediates Between the Business and the Supplier
Ecosystem, Acting as a Lens Focussing Business Needs on
Appropriate Suppliers
IT Needs To Focus
Appropriate Services on Appropriate
Suppliers
Decisio
n in P
rincip
leAnaly
se
Mark
et Rese
arch
Select
ion a
nd Deci
sion
Nego
tiatio
n
Servic
e Desi
gnTra
nsitio
n
Servic
e Deliv
ery
Refresh
Lack Of Focus During Key Outsourcing Stages Leads To Loss Of Value
November 24, 2013 34
Value Gap Cause by “Fire and
Forget” Approach to Outsourcing
Loss Of Interest During Key
Implementation and Operational Stages
Level of Focus,
Attention and
Interest
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
November 24, 2013 35
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
November 24, 2013 37
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
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
November 24, 2013 39
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
November 24, 2013 40
Specific Acquisition Capabilities And Their Relationships
Configuration Management (CM)
Process and Product Quality
Assurance (PPQA)
Measurement and Analysis (MA)
Decision Analysis and Resolution
(DAR)
Quantitative Project
Management (QPM)
Organisational Performance Management
(OPM)
Organisational Process
Performance (OPP)
Causal Analysis and Resolution (CAR)
Organisational Process Definition
(OPD)
Organisational Process Focus (OPF)
Project Planning (PP)
Requirements Management
(REQM)
Agreement Management (AM)
Solicitation and Supplier Agreement
Development (SSAD)
Acquisition Requirements
Development (ARD)
Acquisition Technical
Management (ATM)
Acquisition Verification (AVER)
Risk Management (RSKM)
Acquisition Validation (AVAL)
Integrated Project Management (IPM)
Acquisition High
Skilled
Capabilities
Acquisition Project Capabilities
Acquisition Support Capabilities
Acquisition
Organisational
Capabilities
Project Monitoring and Control (PMC)
Organisational Training (OT)
November 24, 2013 41
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
• 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
November 24, 2013 42
Acquiring Acquisition Capabilities – Focus on Skills That Add Value
Acquisition Technical Management (ATM)
Organisational Process Performance (OPP)
Organisational Performance Management (OPM)
Acquisition Validation (AVAL)
Quantitative Project Management (QPM)
Causal Analysis and Resolution (CAR)
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)
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)
Initial Sets Improving Skilled and Experienced Very Capable
Acquisition Skills and Capabilities
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)
November 24, 2013 43
November 24, 2013 44
More Information
Alan McSweeney
http://ie.linkedin.com/in/alanmcsweeney