1 global information technology sourcing “night watch” or “company of captain frans banning...

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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

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Global Information Technology Sourcing

Mary C. LacityProfessor of IS

University of Missouri-St. Louis

Leslie Willcocks David Feeny Joseph RottmanThomas Kern Rudy Hirschheim

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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.

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“Sorry, the Board is outsourcing your job to guy in India who’ll be CEO for a 10th

of your salary.”

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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)

The proven practices for domestic and offshore IT outsourcing

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Session Objectives The proven practices for domestic and offshore IT outsourcing

1. Treat IT as a Portfolio (Selective Sourcing)2. Identify Core Capabilities for Insourcing3. Best source non core capabilities4. Consider Time & Material contracts when business or technical requirements are certain5. Consider exchange-based contracts for stable, non-core activities requiring customization6. Consider netsourcing for highly standardized, non-core activities7. Consider customer-supplier joint ventures only if there is a proven market8. Ensure all layers of the service stack are adequately provided9. Compare RFP to internal bids10. Involve senior management and IT management in sourcing decisions11. Detail contracts12. Keep contracts short enough to retain relevancy but long enough for supplier to recoup13. Put core capabilities in place to protect the customer interests as well as foster supplier success14. Embrace the dynamics of the relationship15. Consider incremental outsourcing to develop expertise with outsourcing (learning curve)16. Hire help


Covered in Presentation Covered in Reading

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1. Escalate the strategic importance of new sourcing options after conquering the learning curve 2. Select an offshore sourcing destination based on business objectives3. Select an offshore sourcing model that balances costs and risks4. Create a centralized program management office to consolidate management5. Hire an intermediary consulting firm to serve as a broker and guide6. Select suppliers by considering 12 supplier capabilities7. Use pilot projects to mitigate business risks8. Give customers a choice of sourcing location to mitigate business risks9. Hire a legal expert to mitigate legal risks10. Openly communicate the sourcing strategy to all stakeholders to mitigate political risks11. Use secure information links or redundant lines to mitigate infrastructure risks12. Use fixed-priced contracts to mitigate workforce risks13. Design effective organizational interfaces14. Elevate your own organization’s CMM certification to close the process gap between you and your supplier 15. Bring in a CMM expert with no domain expertise to flush out ambiguities in requirements16. Negotiate the CMM processes for which you will and will not pay 17. Tactfully cross-examine, or replace, the supplier’s employees to overcome cultural communication barriers18. Require supplier to submit daily status reports 19. Let the project team members meet face-to-face to foster camaraderie20. Consider innovative techniques, such as real-time dashboards, to improve workflow verification, synchronization, and management21. Manage bottlenecks to relieve the substantial time zone differences22. Consider both transaction and production costs to realistically calculate overall savings23. Size projects large enough to receive total cost savings24. Establish the ideal in-house/onsite/offshore ratio only after the relationship has stabilized25. Give offshore suppliers domain specific training to protect quality and lower development costs26. Overlap onshore presence to facilitate supplier-to-supplier training27. Develop meaningful career paths for subject matter experts, project managers, governance experts, and technical experts to help

ensure quality28. Create balanced scorecard metrics


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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

15 Years of Sourcing Research

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Case Study Outcomesn = 116 sourcing decisions

Outcome Percent of Decisions

Yes, most expectations met 58%

No, most expectations not met

22%

Mixed Results; some major expectations met, other major expectations not met

9%

Too early to determine 11%

10

Customer Rating of Supplier Performance

4%

2% 2%

5%6%

4%

14%

25%

19%

14%

4%

0 1 2 3 4 5 6 7 8 9 10

Poor Satisfactory Good Excellent

0

5

10

15

20

25

30

Num

ber

of C

ontr

acts

Customer Rating of Vendor Performance113 Contracts Rated

Mean Response = 6.47

Overall, suppliers areearning a “good” reportcard, but there are manyopportunities for improvement.

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52%

37%

15%

41% 42%45%

42%39%

32%

23%

32%

22%

10% 10%

70%

48%

22%

56% 55%53%

50% 49%

41%

34% 34%

24%

15% 15%

Co

st r

edu

ctio

n (

A&

B)

(A)

So

me

cost

red

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(B)

Sig

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Bet

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res

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Ass

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0

10

20

30

40

50

60

70

80nu

mbe

r of

res

pond

ents

AnticipatedActual

Anticipated verses actual benefits from IT outsourcingn = 98 US and European respondents

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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

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Domestic Sourcing ModelsSuited ITActivities

ContractType

LocationOf 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

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Major Offshore Sourcing Models

Captive Joint Venture

BuildOperateTransfer

Fee-for-service

Description

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 toControl

Highest Depends on ownership

Medium Low

Examples

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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.

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Goal

Refreshed strategy

Key Outputs

Next gen options

Outcomes & lessons

Knowledge refresh

Requirements refresh

Options business case& strategy

Goal

Efficient mobilisation

Key Outputs

Final plans

Transition team

Managed staff

Knowledge retention & transfer

Transfers

Governance structures setup

Engineering

Acceptance

Goal

Best value for money

Key Outputs

Competitive stages

Evaluation team

Selection strategy & criteria

Bid package

Bid facilitation

Evaluation

Due diligence

Goal

Well designed future state

Key Outputs

Blueprint

Scorecard

Draft SLA

Draft price model

Draft contract

Relationship

Retained organization

Contract mgmt function

Building Block 9Refresh

Building Block 3Strategize

Building Block 2Target

Building Block 5Select

Building Block 7Transition

Building Block 8Manage

Goal

Informed, not speculative strategies

Key Outputs

Rollout

Strategic “rules”

Program

Skills

Commun-ications strategy

Business case rules & base case

Feasibility & impact analysis

Goal

Appropriate services identified

Key Outputs

Outsourcing model/mode

Target services identification

Profiles

Building Block 1Investigate

Goal

Results

Key Outputs

Relationship

Reporting

Meetings

Admin & records

Risk mgmt

Issues, variations & disputes

Continuous improvement

Evaluations

Key Outputs

Goal

Phase 1: Architect

Phase 2: EngageVeracity, not ideology

Gather insight

Test expectations

Collect market intelligence

Peer assessment

Phase 3: Operate

Building Block 4Design

Building Block 6Negotiate

Goal

Complete, efficient contract

Key Outputs

Negotiation strategy

Negotiation team

Effective negotiations

Phase 4: Regenerate

Source: Cullen, Seddon, Willcocks, “Managing Outsourcing: The Lifecycle Imperative, MIS Quarterly Executive,

March 2005.

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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

– Founded in 1902 in Wilmington, Delaware– Percentage of sales outside US: 53%– 20 strategic business units: 70 countries– Joint ventures >120– www.dupont.com

2004 2003

Revenues $27,340 million $26,996 million

Profits $1,780 million $973 million

Number employees

60,000 81,000

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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

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IS Organizational Structure Prior to Outsourcing

Centralized: CIO

Business Information Board, senior VPs

3,000 people provided to the 20 SBUs:

data and applications

planning and security

data center operations

telecommunications

Regional Centers: Asia, Canada, Europe, Mexico, South America,

and US.

Decentralized: 1,000 IS staff worked on SBU specific systems

Reported to VP of IS within SBU

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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

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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

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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

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NegotiationsDue 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

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Negotiations:Contract Overview

• 1997 $4 billion worth of contracts:* $3.45 billion to CSC

* $ .55 billion to AC

• CSC -- 2600 people (64%) provide global infrastructure &

applications

• AC -- 400 people (10%) provide chemical applications

• DuPont -- 60 people ( 1%) manage contract

-- 1000 people (25%) provide business IT leadership

4060Phase 2:Engage

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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!!!

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Outsourcing Learning Curve

Phase 1:Hype & Fear

Phase 2:Early AdoptersBest & Worst Practices EmergeFocus on Costs

Phase 3: Market MaturesRicher Practices EmergeFocus on Quality

Phase 4:InstitutionalizedFocus on Value-added

Siz

e of

Mar

ket

Cus

tom

er L

earn

ing

Time

40

Year Contract Was Signed

YES, most

expectation met

NO, most expectation

not met

MIXED results

Total

1984-1991 14(48.3%)

12(41.4%)

3(10.3%)

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1992 to 1998 41(73.2%)

8(14.3%)

7(12.5%)

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TOTAL # OF DECISIONS

55(64.7%)

20(23.5%)

10(11.8%)

85

CONTRACT DATE(n=85 outsourcing decisions with discernible outcomes)

Proof of Customer Learning:Success Rates Over Time

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Phase 1: Fear & Hype

All artwork and web design © 2002 by Rebecca Kemp

“Slaying the IS Dragon with Outsourcery” 1989“Selling One’s Birthright,” 1989“Outsourcing: A Game for Losers,” 1995

http://www.wildlife-fantasy.com/

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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

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Selective Sourcing

Decision

Outcome:Success Failure Mixed

Results

Total #

Decisions

Total

Outsourcing11

(38%)

10

(35%)

8

(27%)

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Total Insourcing

13

(76%)

4

(24%)

0

(0%)

17

Selective Outsourcing

43

(77%)

11

(20%)

2

(4%)

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Total # Decisions

67 25 10 102

N = 102 decisions with discernible outcomes

Phase 2:

44

Year Decision Was Made

YES, most

expectations met

NO, most expectations

not met

MIXED results

Total


12(63%)

7(37%)

0 19

Total Outsourcing

2(20%)

5(50%)

3(30%)

10

1984-1991 Totals

14

12

3

29


33(87%)

3(8%)

2(5%)

38

Total Outsourcing

8(44%)

5(28%)

5(28%)

18

1992 to 1998 Totals

41

8

7

56

TOTAL NUMBER OF DECISIONS

55

20

10

85

SU

CC

ES

S R

AT

ES

OV

ER

TIM

E(n

=85

out

sour

cin g

dec

isio

ns w

ith d

isce

rnib

le o

utco

mes

)

45

61%58%

55%52%

49%

45%41%

33%31% 30% 29%

9%

5%

Clie

nt/

Ser

ver

& P

Cs

Dis

aste

r R

eco

very

Net

wo

rks

Mid

ran

ge

Mai

nfr

ame

En

d-U

ser/

PC

Su

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ort

Hel

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esk

Pro

ject

Man

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Sys

tem

s A

nal

ysis

Sys

tem

s D

esig

n

Sys

tem

s A

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itec

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Pro

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men

t

IT S

trat

egy

0

10

20

30

40

50

60

70nu

mbe

r of

res

pond

ents

IT activities partially or totally outsourcedn = 98 US and European respondents

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Phase 2: Hard Learning From Early Adopters IT Outsourcing 10-15 Years Ago








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Detailed Contracts

Decision

Outcome:Success Failure Mixed

Results

Total #

Decisions

Detailed

Contract45

(75%)

9

(15%)

6

(10%)

60

Mixed

Contract6

(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

N = 87 outsourcing contracts with discernible outcomes

Phase 2:

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BEST PRACTICES ON DECISION PROCESS

(n=102 sourcing decisions from case studies with discernible outcomes)

Joint senior management & IT management decision

Decision Sponsor Percent “Successful” • Joint Decision 76% • Senior Level IT Managers Only 71%• Senior Executives Only 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.

50









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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.

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SHORT CONTRACTS

(n=85 outsourcing decisions with discernible outcomes)

Shorter contracts were more successful than longer contracts.

Contract Duration Percent Successful• Less than 4 years 88%• Between 4 and 7 years 59%• Greater than 7 years 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.

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Excess feesFixed prices soon exceeded market pricesFailure to define & thus improve service levelsInability to adapt to changes in business or

technologyLoss of power due to monopoly supplier conditionInability of customer to manage the relationship

Problems with early fixed-price, long-term, exchangeBased relationships:

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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

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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-in-class 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.

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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

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Phase 3: Market MaturesRicher Practices Emerge

CUSTOMER SUPPLIER

9 Core Customer CapabilitiesFeeny & Willcocks, SMR,1998

12 Core Supplier Capabilities:Feeny, Willcocks, Lacity, 2004

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Business and IT Vision

Delivery of IS Service

Design of IT Architecture

Business SystemsThinking

ContractFacilitation

TechnicalArchitecture

ContractMonitoring

VendorDevelopment

TechnicalDoer

RelationshipBuilder IS

Leadership;InformedBuying

9 IT capabilities customers needin-house to make outsourcing successful

Feeny & Willcocks, Sloan Management Review, Vol. 39, 3, 1998, pp. 9-21.

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Relationship Capabilities

TransformationCapabilities

DeliveryCapabilities

Planning &Contracting

Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program

Management

12 capabilities suppliers needto make outsourcing successful

ProcessRe-engineering

TechnologyExploitationSourcing

BusinessManagement

DomainExpertise

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Phase 4:Sources of Customer Learning:

Institutional Isomorphism

CoerciveInfluences

Mimetic Influences

Normative Influences

ISOMORPHISM:Reasoned AdoptionOf Best Practices

ConsultantsConferencesBenchmarks

LawyersPowerful Parties

Kodak Effect

Adapted from DiMaggio & Powell,The New Institutionalism in Organizational Analysis, Chicago, 1991

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Phase 4:Focus on Value-Added:

Example of Enterprise Partnerships

Xchanging Insurance Services (XIS)

Xchanging Claims Services (XCS)

Xchanging Human Resource Services (XHRS)

Xchanging Procurement Services (XPS)

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.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.

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Offshore Sourcing

Phase I: Fear & Hype

Phase II: 28 Lessons Learned

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Phase 1: Fear & Hype

“The Outsourcing Bogeyman,” 2004“Offshore Outsourcing Dragging Down Bonus Pay,” 2003“Software:Will Outsourcing Hurt America’s Supremacy?” 2004

http://www.time.com/time/magazine/archive/covers/0,16641,1101040301,00.html

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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? (7 practices)

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Practices to develop and implement a global sourcing portfolio?

Practice Equally Important for Domestic & Offshore

More Important for Offshore

Unique to Offshore

1. Escalate the strategic importance of new sourcing options after conquering the learning curve

X

2. Select an offshore sourcing destination based on business objectives X3. Select an offshore sourcing model that balances costs and risks X

4. Create a centralized PMO X5. Hire intermediary consulting firm X6. Select suppliers by considering 12 supplier capabilities X

Previously coveredin presentation

To be coveredin presentation

Covered in reading

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2. Select an offshore sourcing destination based on business objectives

Source: NeoIT

Sample Offshore Venue Comparison

Better Location Criteria: Market expansion, leverage existing facilities, customer service

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Practices to Mitigate Risks



Unique to Offshore

7. Use pilot projects to mitigate business risks

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



Covered in reading

71

How can we mitigate risks?

Business Risks

Workforce Risks

Social Risks

Logistical Risks

Legal Risks

Political Risks

Infrastructure Risks

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Risk

Category

Sample Risks Equally Risky for Domestic & Offshore

More Risky for Offshore

Risk Unique to Offshore

Business

Backlash from external customers damages reputation

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

Legal

Inefficient/Ineffective judicial system in offshore locale

X

Infringement of IP Rights X

Export Restrictions X

Inflexible labor laws X

Difficulty obtaining visas X

Changes in tax law erode savings X

Inflexible contracts X

Security/Privacy Breech X

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Risk

Category

Sample Risks Equally Risky for Domestic & Offshore

More Risky for Offshore

Risk Unique to Offshore

Political

Backlash from internal IT staff X

Perceived as unpatriotic X

Democrats threaten punishment X

Political instability in offshore country

X

Unstable U.S./offshore country relations

X

Workforce

Supplier employee turnover/burnout

X

Inexperience supplier employees X

Poor communication skills X

Loss of in-house capability X

Infra-structure

Poor telecommunications X

Poor utilities X

SocialCultural Differences X

Holiday & Religious Calendar X

LogisticalTime Zone Challenges X

Managing Remote Teams X

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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) technologiesRe-platforming and systems development20 person day to 800 (4 FTEs for 8 months)

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7. Use pilot projects to mitigate business risks.

"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

Ideal pilot size:according to Gartner Group is 10-15 FTEs for 6 monthsaccording to Biotech 4 FTEs for 5 months according to SourceQuest – 2 man years; $50,000 - $100,000

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8. Give customers a choice to mitigate political risks

Financial Services Company & Retailer:

The Business Sponsor Chooses:Offshore: Low CostsDomestic: Lower risks

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10. Openly communicate the sourcing strategy to allstakeholders 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

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Practices to Effectively Work with SuppliersPractice Equally

Important for Domestic & Offshore


Unique to Offshore

13. Design the customer/supplier interfaces 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 overcome cultural communication barriers

X

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



Covered in reading

79

How can we effectively work with offshore suppliers?

13. Design the customer/supplier interfaces

Onsite SupplierEngagement Manager

OffshoreSupplierDelivery

Team

LocalBusiness

Units

Architects/DBAs/etc.

ProjectManagers


Team


Team

PMO

Retail & Industrial Equipment Manufacturing:

80


Onsite SupplierProject Managers


Team


Team


Team

Onsite SupplierProject Managers


Team


Team


Team

Architects/DBAs/etc.

ProjectManagers

PMO

LocalBusiness

Units

Biotech:


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VP IS

Team Lead

Project Manager

Director

DevelopmentStaff

Team Lead

DevelopmentStaff

RelationshipManager

Team Lead

Anchor

Anchor

DevelopmentStaff

Team Lead

DevelopmentStaff

Kaiser & Hawk, 2004

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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”

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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 youwill and will not pay

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Practices to Ensure Cost Savings While Protecting Quality



Unique to Offshore

22. Consider both transaction and production costs when calculating overall savings.

X

23. Size projects large enough to receive total cost savings

X

24. Do not establish the ideal in-house/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.

X

27. Develop meaningful career paths for SMEs, project managers, governance experts to ensure quality

X

28. Create balanced scorecard metrics X



Covered in reading

85

How can we ensure cost savings whileprotecting quality?

Transaction costs of offshore outsourcing: 15.2 to 57% of contract value

Transaction costs of domestic outsourcing: 4 to 10% of contract value

22. Consider both transaction and production costs

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.

http://commonziffdavisinternet.com/download/0/2216

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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

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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 untilRelationship matured

Biotech had supplier staff work in Biotech’s R&DFacilities for data access and updates

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28: Create balanced metrics

OVERALLSUPPLIER

PERFORMANCE

% Unfavorable Turnover % Delivered On-time Cooperation Satisfaction Score

SUPPLIERMANAGEMENT

% of supplier business % supplier of choice Utilization Rates

COMPARATIVEEFFICIENCY

Employee-to-supplier work ratioQUALITY OF WORK Error rates Quality of code scores

COMPARATIVE COSTS

Onsite/offsite/offshore Cost per function point

VISION & STRATEGY

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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)

The proven practices for domestic and offshore IT outsourcing

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1. Treat IT as a Portfolio (Selective Sourcing)2. Identify Core Capabilities for Insourcing3. Best source non core capabilities4. Consider Time & Material contracts when business or technical requirements are certain5. Consider exchange-based contracts for stable, non-core activities requiring customization6. Consider netsourcing for highly standardized, non-core activities7. Consider customer-supplier joint ventures only if there is a proven market8. Ensure all layers of the service stack are adequately provided9. Compare RFP to internal bids10. Involve senior management and IT management in sourcing decisions11. Detail contracts12. Keep contracts short enough to retain relevancy but long enough for supplier to recoup13. Put core capabilities in place to protect the customer interests as well as foster supplier success14. Embrace the dynamics of the relationship15. Consider incremental outsourcing to develop expertise with outsourcing (learning curve)16. Hire help


Covered in Presentation Covered in Reading

92


1. Escalate the strategic importance of new sourcing options after conquering the learning curve 2. Select an offshore sourcing destination based on business objectives3. Select an offshore sourcing model that balances costs and risks4. Create a centralized program management office to consolidate management5. Hire an intermediary consulting firm to serve as a broker and guide6. Select suppliers by considering 12 supplier capabilities7. Use pilot projects to mitigate business risks8. Give customers a choice of sourcing location to mitigate business risks9. Hire a legal expert to mitigate legal risks10. Openly communicate the sourcing strategy to all stakeholders to mitigate political risks11. Use secure information links or redundant lines to mitigate infrastructure risks12. Use fixed-priced contracts to mitigate workforce risks13. Design effective organizational interfaces14. Elevate your own organization’s CMM certification to close the process gap between you and your supplier 15. Bring in a CMM expert with no domain expertise to flush out ambiguities in requirements16. Negotiate the CMM processes for which you will and will not pay 17. Tactfully cross-examine, or replace, the supplier’s employees to overcome cultural communication barriers18. Require supplier to submit daily status reports 19. Let the project team members meet face-to-face to foster camaraderie20. Consider innovative techniques, such as real-time dashboards, to improve workflow verification, synchronization, and management21. Manage bottlenecks to relieve the substantial time zone differences22. Consider both transaction and production costs to realistically calculate overall savings23. Size projects large enough to receive total cost savings24. Establish the ideal in-house/onsite/offshore ratio only after the relationship has stabilized25. Give offshore suppliers domain specific training to protect quality and lower development costs26. Overlap onshore presence to facilitate supplier-to-supplier training27. Develop meaningful career paths for subject matter experts, project managers, governance experts, and technical experts to help

ensure quality28. Create balanced scorecard metrics


1 global information technology sourcing “night watch” or “company of captain frans banning...

Documents

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