iaop chicago chapter april 28
TRANSCRIPT
Offshoring Benefits and Advantage, Still the Same in 2011 as they were
in 2001?
H. Curtis Herge, Jr., COP
Director, Solutions Development
CDI IT Solutions
17177 Preston Road
Suite 300
Dallas, TX 75248-1243
www.cdi-its.com
(585) 260-3261 Mobile
(972) 728-8310 Dallas TX Office
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CDI IT SOLUTIONS
with CURT HERGE
April 28, 2011: The Situation3
Complications?Momentum & Reluctance to Change
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IAOP
Outsourcing Still Makes Perfect Sense, But From Where?• 1979, Michael E. Porter, “How Competitive
Forces Shape Strategy” Harvard Business Review
• “Threat of new Entrants”
• Internet, VoIP
• New competitors are just a mouse-click away
• Business strategies must evolve with the times / technology
Evolve With the Times / Technology?
• 80% of the people who work in mainframe support are 50 years of age or older.
“The Mainframe Skills Shortage”, William Hoffman
• A perplexing combination of factors … is compounding the ability to add mainframe talent, including companies trying to reduce costs through outsourcing mainframe jobs to independent service organizations or offshore, an increasing but still inadequate infrastructure within universities to teach mainframe capabilities.
InformationWeek 5
Problem: Outsourced Mainframe operations require skills like MVS, CICS, IMS, DB2. They will remain critical for many companies to remain a “going concern” for another 10+ years. Offshore supply is fixed. USA demand is growing logarithmically due to demographics/retirements.Solution: Re-onshoring to a new workforce service delivery model.
Your Role in the 5-Stage Outsourcing ProcessA 5-Stage Outsourcing Process
IDEASTAGE
ASSESSMENTSTAGE
IMPLEMEN-TATION STAGE
TRANSITIONSTAGE
MANAGEMENTSTAGE
SERIES OF GATES
QUESTION? APPROPRIATE REAL DEAL EXECUTE OPERATE
TIMELINE? 3-6 MONTHS 6-18 MONTHS
DECISION POLICY POLICY & BUSINESS PROCESSMAKER? BUSINESS UNIT OWNER
UNIT
DECISION SET SET SETCRITERIA?
BusinessStrategy
The process forms a closed loop as the management of the current relationship sets the stage for what’s strategically possible in the future.
9.6 Ability to develop a ‘transition back’ plan and model in event of termination and including the plan as a part of the contract model. © IAOP OPBOK
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4 Reasons to Re-Assess Outsourced Offshoring Decisions
• Offshoring unto itself is not an inherently bad option!
• However, megatrends taken together cause the need to reconfirm old assumptions and decisions made are still on solid foundations:
• transformative patterns of economic, social or environmental activity
• changes in the way successful businesses operate
• adjustments to how consumers live and make buying decisions
• how populist politicians address social and economic issues
• why core technologies used are creating demands for skills that are quickly becoming scarce
Four Reasons to Re-Assess:
1. Offshoring savings are often not realized as assumed by their initial business case
2. Offshoring has placed corporate reputations in jeopardy
3. US Federal, State and Local Governmental actions now prohibit or have created barriers to IT offshoring
4. New offshoring business risks have arisen
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Offshoring Savings Are Often Not Realized as Assumed
• Inflation in India is more than double that in US.
• As offshore locations grow and westernize, prices and wages increase.
• India’s CPI was 10.9% (2009 est.).
• Over the last three years, U.S. firms also had to contend with a weak dollar against foreign currencies, resulting in higher-than-expected invoices paid in U.S. dollars.
• The Indian rupees per US dollar exchange has changed 13% in three years.
www.cia.gov
• “Hidden Cost” industry averages of offshoring lost productivity (2 – 4%) and cost of Governance (3-5%) bring into question any business case’s assumptions for offshoring that were written years ago. IAOP
8© Outsourcingsforum.com
Impact of economics on offshoring• Massive wage jumps in India and China of up to 100% a year mean that cost advantages of offshoring to these countries is rapidly disappearing. • Huge salary inflation impact for senior executives in India and China make offshoring economics harder. • Up to 100% wage inflation in China and 40% in India for experienced business leaders. • Operating costs of managing offshore outsourced operations.Impact of low cost workers arriving in places like UK, France, Germany, Italy driving down labor charges and altering costs of services in … Chicago. • Offshore outsourcing business efficiency and strategy needs review. 9
Offshoring Has Placed Corporate Reputations in Jeopardy
• "Outsourced" is an NBC comedy
• AFL-CIO created a searchable database
• Young workers’ optimism has slumped over the past 10 years. Buying attitudes reflect brand awareness.
• Financial services customers seek reassurance that their data is safe, even though it is being maintained thousands of miles away
• ISO 26000: Companies are thinking twice about employing workers in some countries. Mutual funds now evaluate companies against social criteria. 10
US Federal, State and Local Governmental Actions
A Hypothetical
• US Federal Senate bill S. 3816 "Creating American Jobs and Ending Offshoring Act“ dpc.senate.gov
The Reality
• ITT paid a $100 million penalty, one of the largest penalties ever in a criminal case. violation of the Arms Export Control Act
– ITT exported or caused to be exported defense-related technical data to China, Singapore, and the United Kingdom without having first obtained a license or written authorization from the State Department.
– The technical data included information about a laser counter measure known as a "light interference filter" for military night vision goggle systems.
• State of Ohio “Executive Order 2010-09S”
• The December 2010 State of Ohio Request for Proposal “ODJFS HATS II System – 0A1080” specifically states: “Data and work performed must remain within the boundaries of the continental United States for this Project.” http://findarticles.com/p/articles/mi_6712/is_58_233/ai_n29340678/ 11
New Offshoring Business Risks• Strategic Risks:
– JPMorgan Chase’s decision to first outsource IT and then bring it back in-house stands as a cautionary tale for any CIO considering an outsourcing megadeal. A strategic risk is accepted when outsourcing offshore. CIO Magazine
• Operational Risks:
– Impact on the organization’s people
– Integrating the offshore provider’s processes into the business’s
– Performance, security, data protection and privacy, business disruption, etc.
• Transactional Risks:
– Internal controls
– Termination clauses
– Dispute resolution, liability, indemnity, warranties
– Asset transfers
– Sarbanes-Oxley
– HIPAA
– Basel II 12
Offshoring Factoids to Consider • "... 60 percent of organizations that outsource parts of the customer-facing
process will encounter customer defections and hidden costs that outweigh any potential savings they derive from outsourcing...“
Gartner
• “The truth is, no one saves 80 percent by shipping IT work to India or any other country.”
“The Hidden Cost of Offshore Outsourcing”, CIO Magazine, Jagdish Dalal, International Association of Outsourcing Professionals
“… 53 percent of customers have not realized business value/return on investment from offshore outsourcing.”
CIO Magazine
• "...the number of buyers prematurely terminating an outsourcing relationship has doubled to 51 percent while the number of buyers satisfied with their offshoring providers has plummeted from 79 percent to 62 percent.“
Gartner
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What Needs To Be Done?
14
.
Situation Assessment Strategic Alternatives What do we want to be?
(in customer value terms)
Strategic Imperatives to
Achieve Vision/GoalsAction Initiatives
• Internal Capabilities
and
Core Competencies
•Mega-Trends
- Industry
- Global
- Customers
- Channels
- Technology
- Regulatory
- Transformation
•Customer/Market Input
•SWOT
- Strengths
- Weaknesses
- Opportunities
- Threats
- Gaps
Alternative Development
- Customer Needs
- Key Assumptions
- Target Segments
- Advantages/Disadv.
- Differentiation
- Uniqueness
Scenario Hypothesis:
- Value Proposition
- Products/Services
- Alliances- Funding
• Evaluation Criteria
- Strategic
- Feasibility
- Economics
-Legal/Ethical
Vision Statement
Why we have
a Right to our Vision?
Goals, Objectives and Metrics
(Quantitative
and Qualitative)
$X $X
0
2000
$X $X
NPV
Growth
Opportunities
MaximizeCustomerIntimacy
Maximize
Stockholder
Value
Operational
Excellence
Integrate
Technology
and People
Products/Services
Mergers, Acquisitions & JVs
Database Technology
Integrated Customer
Relationship Mgmt.
Revenue Management
Profit Maximization/Cost Control
Quality, security,
competency
Outsourcing
ERP
Process Innovation
and Technology Depl.
Where are we?
(Preference Based)Why Change?
Why Doable? What
Could/Should we do?
The 5-7 Core Items
We Must Build/Do to WinHow to Get There?
Did we get there?
Increasing detailed market, economic planning, analysis and assessments
Business Strategy & Plan Development Framework
Copyright © 2006 IAOP. All Rights Reserved.
This IAOP Framework Was Used To Make the Outsourcing Decision. It is time to plan for contract renewal. Ask:
How has our business strategically changed since our decision?
Have our requirements and objectives evolved as a result? How?
Problem Evidence
Results Evidence
Has the Business Case been realized? If not, why?
Internal: Changes to the business and/or sourcing baseline
External: Economic factors
Assumptions were flawed
What services can this and other suppliers offer today that were not available then? Should we take advantage of this evolution?
Are there new onshore options we should consider?
What external environmental factors, such as legislation, have changed? How do they impact our decision, or risks, now?
Is a change worth the risk?
Fukushima Prefecture, JapanMarch 12, 2011
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Your IAOP professional
role in Contract Renewal is to facilitate the reassessment
decision process.
3.5 Ability to define a process for prioritizing outsourcing opportunities,
including assessing key factors to be considered in the evaluation and
prioritization process, such as:
3.5.1 The benefit of the opportunity in financial terms
3.5.2 The readiness and stability of current and potential
suppliers
3.5.3 Other potential benefits, such as, freed resources,
increased flexibility, quality improvements, capital cost
avoidance, reduced time to market, etc
3.5.4 Ease of execution factors as, ease of transfer to the new
environment, stakeholder issues, employee considerations,
etc.
3.5.5 Constraints and obstacles to be overcome (e.g. resistance
to change, ‘not invented here’ syndrome, etc.)
3.6 Ability to develop a comprehensive risk analysis matrix that includes:
3.6.1 Strategic risks, such as, loss of control over future
business decisions, loss of domain knowledge, the
stability of the provider, etc.
3.6.2 Operational risks, such as, its impact on the organization’s
people, integrating the provider’s processes into the
business’s, risks from poor performance, security, data
protection and privacy, business disruption etc.
3.6.3 Result risks, such as, how likely the organization is to
achieve its intended results, governance, and the ability of
the organization to work collaboratively with the provider
3.6.4 Transactional risks, such as, termination clauses, dispute
resolution, liability, indemnity, warranties, asset transfers,
and intellectual property ownership
3.6.5 Financial risks, such as underlying cost and currency
fluctuations, and other risks that can have a financial
impact on the organization
3.6.6 Unique risks, such as those associated with offshoring and
with outsourcing at the customer interface, where the
providers’ employees work directly with the
organization’s customers
3.6.7 Identification of the probability, impact, and mitigation of
these risks, including business continuity, contingency,
security and disaster recovery plans
© IAOP OPBOK
Transition? Onshoring?
• How?
• What to look for in a partner to help?
– Demonstrated Competencies
– Total Capabilities
• Transition alone?
• Solution itself?
– Relationship Management
• You
• Your current provider
• New supplier
– Relative Importance (Size, as a Client)
• Need for Risk Management
RFI/RFQ
(Optional)
RFP Evaluate
Due Diligence
Scorecard
Select
Contract Negotiation/Award
RolloutOngoing Support
Research
Special Areas of Focus:
• Contract strategy
• Current provider
• New provider
• Transition planning
• Knowledge & Assets
• Pilot
• Rollout
• Governance and metrics
- Operating model / roles during Transition
- Disengagement considerations
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.
Situation Assessment Strategic Alternatives What do we want to be?
(in customer value terms)
Strategic Imperatives to
Achieve Vision/GoalsAction Initiatives
• Internal Capabilities
and
Core Competencies
•Mega-Trends
- Industry
- Global
- Customers
- Channels
- Technology
- Regulatory
- Transformation
•Customer/Market Input
•SWOT
- Strengths
- Weaknesses
- Opportunities
- Threats
- Gaps
Alternative Development
- Customer Needs
- Key Assumptions
- Target Segments
- Advantages/Disadv.
- Differentiation
- Uniqueness
Scenario Hypothesis:
- Value Proposition
- Products/Services
- Alliances- Funding
• Evaluation Criteria
- Strategic
- Feasibility
- Economics
-Legal/Ethical
Vision Statement
Why we have
a Right to our Vision?
Goals, Objectives and Metrics
(Quantitative
and Qualitative)
$X $X
0
2000
$X $X
NPV
Growth
Opportunities
MaximizeCustomerIntimacy
Maximize
Stockholder
Value
Operational
Excellence
Integrate
Technology
and People
Products/Services
Mergers, Acquisitions & JVs
Database Technology
Integrated Customer
Relationship Mgmt.
Revenue Management
Profit Maximization/Cost Control
Quality, security,
competency
Outsourcing
ERP
Process Innovation
and Technology Depl.
Where are we?
(Preference Based)Why Change?
Why Doable? What
Could/Should we do?
The 5-7 Core Items
We Must Build/Do to WinHow to Get There?
Did we get there?
Increasing detailed market, economic planning, analysis and assessments
Copyright © 2006 IAOP. All Rights Reserved.
17
Organize Business & Outsourcing Strategy
Reassessment Initiative
Review Internal and Core Business Assessment
Which Led to Today's Outsourcing Contract
Evaluate Mega-Trends Since Time of Original
Outsourcing Direction
Evaluate Today's Competitive Positioning and
Actions
Assess Changes in Outsourcing Industry
Capabilities Since The Original Outsourcing
Decision (e.g., eSourcing Capability Model for
Service Providers (eSCM-SP) )
Identify & Evaluate Alternatives (SWOT)
Review The Original Decision Criteria,
Assumptions, Expected Business Case and Other
Expected Results Leading to Today's Contract
Review the Actual Results Achieved
Perform an eSourcing Capability Model for Client
Organizations (eSCM-CL) Self Assessment
Review with Management
Situation
Assessment
Strategic
Alternatives
Evaluate Today's New Directional Alternatives
Evaluation
Criteria
Identify Today's Business Requirements (e.g.,
Mergers, Products, Markets)
Why Change? Identify Today's Other New Requirements (e.g.,
New Channel Sales Partner)
Review with Management
What do we
want to be?
Establish Going Forward Direction (e.g., renew,
change scope, alternative suppliers, alternative
geographies, SLAs, etc.)
What Could /
Should we do?
Define Going Forward Processing Boundaries
Define Going Forward Processing Functions /
Requirements
Design Going Forward Business Process
Architecture
Obtain Management Approval
Strategic
Imperatives to
Achieve Vision /
Goals
Design the Going Forward Outsourcing System
Processes
Design Other Processes (e.g., Governance,
statutory compliance)
Design Transition Approach From CMO to FMO
(e.g., Pilot, Knowledge Transfer, Parallel Support,
Post Transition Support)
Determine Any Transition Resource Requirements
(e.g., Assets, Licenses, Personnel)
Identify Transition Workplan and Milestone Plan
Establish Personnel Requirements (e.g., Customer,
Today's Supplier, New Supplier if any)
Summarize Going Forward Risks & Intangibles
Summarize Overall Going Forward Economics
Finalize Going Forward Decision Justification
Document Going Forward Required Contractual
Terms, Conditions, Service Levels, etc.
Prepare Management Report
Review with Management
Obtain Management Approval
Items We Must
Build / Do to
Win
Outsourcing
Action
Call To Action What new external drivers must be considered in our decision making?
Has the foundation for old decisions shifted?
Was the Business Case delivered?
Was the Quality delivered?
Were the Other objectives achieved? (e.g., sales channel, innovations, access to skills)
What are today’s new business requirements / objectives?
What actions have our competitors taken?
What do self assessments against Benchmarks and eSCM Best Practices tell us?
What new supplier offerings are available now that were not available then?
What other Lessons Learned were discovered that we must fix?
How can we improve engagement governance, ease of communication and reduce Hidden Costs?
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Problem Evidence1. How specifically does _______ show
up? 2. How did you become convinced that
______ is a problem? 3. What lets you know ______ is a
problem? 4. What is there too much of (or too little
of)? 5. What measures, if any, prove that ____
is a problem?
Results Evidence1. How will we know we are successful? 2. What would let us know we had
achieved our desired results? 3. What would there be more of (or less
of)? 4. Looking back, what would we see that
would be different from today?
Discussion?
The Momentum is Yours!
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