1. The Outsourcing Process
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2. Agenda Rationale Strategy Development Approach Model & Agreement
Conclusion
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3. The Outsourcing Rationale
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4. Outsourcing first became prevalent in industries experiencing severe profit pressures or troubled companies
However, outsourcing is being increasingly used for more strategic reasons
Focus on core competencies
Cost reduction in non-strategic areas
Bilateral benefits
Legacy Systems transformation
Upgrade technology expertise and/or environment
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5. Focus on core competencies Cost reduction in non-strategic areas
Outsourcing first became prevalent in industries experiencing severe profit pressures or troubled companies
However, outsourcing is being increasingly used for more strategic reasons
Focus on core competencies
Cost reduction in non-strategic areas
Bilateral benefits
Legacy Systems transformation
Upgrade technology expertise and/or environment
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6. Maintaining competitive posture
The changing market place has transformed outsourcing into a high stakes game with serious implications
Maintaining competitive posture
Cost of reversing decision (in-sourcing)
User service levels and “ownership of own destiny”
Litigation and conflict resolution
Constraint on business growth and flexibility
Maintaining “knowledge”
Ownership of strategic property or proprietary interests
True ROI and economic costs
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7. Structured properly, outsourcing provides tangible benefits
Refocusing on primary business
Transformation of service levels and user attitudes
Direct and permanent cost reductions, lower overhead
Resolves political differences
Improves ROI
Enhances performance
Can “leapfrog” to better technology
Increase individual productivity
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8. Outsourcing involves a myriad of issues and considerations
Outsourcing involves a myriad of issues and considerations. Clear business purpose and rigorous planning process are prime ingredients of success
Business issues
Participation/business council
Shareholder value
Growth/change (buy, sell)
Risk
Level of outsourcing
Customer issues
Vendor issues
Participation/business council
Service Transition
Cost/chargeback
Help support
Agendas/conflicts
Flexibility
Contract length
Technology changes
Liabilities/insurance
Stability
Outsourcing
decision
People issues
Transition process
Transfer – who goes/stays
Salaries/benefits
Emotion
Rumor management
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9. Outsourcing Strategy Development
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10. Option development and selection Corporate level screening
A Company must develop the most viable outsourcing strategy applying analysis tools and performing corporate screening
Analysis tools
Option development and selection
Competitive analysis
Resource value line analysis
Strategic & economic analysis
Interaction value
analysis
Create
options
Design evaluation criteria
Evaluate options
Corporate level screening
Iterative process
Economic
Strategic
Cultural
Strategy
recommendation
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11. Resource line value analysis
Knowledge Tree risk analysis for determining the optimal degree of outsourcing
Issues
Activities
Deliverables
Which activities can potentially be contracted to an IT Service Provider?
Evaluate all work activities performed to date by IT personnel along the lines of effectiveness and efficiency
Resource line value analysis
Higher risk
Lower risk
Which activities do we do most effectively and efficiently?
Compare effectiveness and efficiency using other companies and third-party IT Service Providers as benchmarks
Effectiveness
Efficiency
Strategic IS decisions
Do we have the right kind of skills for achieving high effectiveness or efficiency?
Resource management
Prioritize the activities which may potentially be contracted to an IT Service Provider
System definition
System development
What is the risk to the organization by contracting out an IT activity?
End user support
Conduct a risk analysis for each option
Application maintenance
Include a study of the work activities at the Company to identify potential economies of scale
Etc.
How does the risk change as we include more IT activities to the mix?
Etc.
Operations
Technical support
Telecommunications
(Example: IT outsourcing)
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12. Value Focused Thinking
Screening criteria should include strategic, economic and cultural perspectives
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Viable options
Focus on core competence ?
Access to new technologies and critical skills
Strategic use of information
Competitive advantage
Flexibility
Service pricing
Internal labor cost
Reduced training cost
Capital investment avoidance
Revenue generation
Communication
Corporate morale
Attitude towards change
Emotions
Optimal option
Strategic implications
Economic implications
Cultural implications
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13. The Outsourcing Approach
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14. The outsourcing process has four main phases
Feasibility
Analysis
Vendor
Procurement
Contract
Negotiations
Implementation
Establish Objectives
Risk assessment
Review current operations
Assess problems and opportunities
Define Scope
Determine outsourcing strategy
Develop RFP
Develop financial baselines
Develop service level baselines
Establish evaluation criteria
Identify potential outsourcing vendors
Evaluate vendor proposals
Develop strategies
Set expectations and goals
Drive negotiations
Develop transition plan
Build contract management capabilities
Customer communications and orientation
Outsourcing relationship management
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15. The Outsourcing Model & Agreement
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16. Outsourcing agreement
Main components of the outsourcing model between the Company and its Service Provider
Outsourcing agreement
(service to be provided)
Vendor
(provider of service)
Service Provider
Customer
(receiver of service)
Company Departments
Agreement — the legal document binding vendor and customer
Components
Services provided by vendor to the customer according to the contract
Management
Roles & responsibilities between vendor & customer in carrying out the contract
SLA
Outlines the service level promised by the vendor for each contract component
Pricing
Pricing scheme used by the vendor to determine the dollar value of the contract
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17. Companies should pay particular focus on some components of the outsourcing agreements
Terms & conditions
Overall scope of agreement
Mutual protection
How the parties are protected within agreement
Contract termination
Conditions leading to contract termination
Statement of legal responsibilities of both parties
Legal
Outsourcing contract between The Company and Service Provider
Statement of work
Overview of services according to the outsourcing components
Financial agreement
How vendor compensation is managed
Performance measurement
How performance is measured and reported
Basic procedures governing the relationship
Business
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18. Conclusion
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19. In the final analysis — an outsourcing decision is based on…
e.g. A need to achieve more effective service delivery at an affordable cost
Identification of needs
An understanding that each business has different requirements and different goals
Establishing unique objectives
Gaining consensus
The degree of support by all functions within the business
Modeling the relationship
A complete understanding of structure, benefits, and pitfalls
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