Outsourcing Global Information Technology Resources

1

• Outsourcing Global Information Technology
  Resources

2

• Outsourcing relationships fail for many reasons.
  Chief among them are unrealistic expectations
  lack of a formal bid process so-called
  relational contracts that assume the vendor will
  act as a strategic partner but that fail to spell
  out the details and failing to manage the
  relationship once the contract has been signed -
  Divorce Your Outsourcer, Computerworld, August
  1996

3
Questions to Consider

• Was Information Management (IM) a Core Competency
  for Xerox?
• Was the IM Outsourcing an Appropriate Decision?
• Does Outsourcing Give Xerox a Competitive
  Advantage?
• Was the Outsourcing Process Taken By Xerox
  Appropriate?

4
Key Definitions
CIM Corporate Information Management Legacy
System Transaction Processing System
Originally Designed for a Specific
Task Proprietary System System Designed
for a Specific Task by an Internal IM
Organization Emerging Technology On-line
publishing, digital video, image (as it relates
to this case) communication over the internet,
digital copying and printing
5
Case Study Team

• Jim Bodine
• Jeff Muckler
• Eric Mendola
• Ron Volans
• Amy Esposito

6
The Industry
7
(No Transcript)
8
Industry Evaluation

• Market Analysis
• Trends
• Key Success Factors
• Attractiveness

9
Industry Evaluation

• Environmental Analysis
• Threats
• Opportunities
• Uncertainties

10
Industry Sales
11

• Overview / History
• Image and Positioning
• Objectives
• Core Competencies / Strengths
• Weaknesses

12

• Overview / History
• Image and Positioning
• Objectives
• Core Competencies / Strengths
• Weaknesses

13

• Overview / History
• Image and Positioning
• Objectives
• Core Competencies / Strengths
• Weaknesses

14

• Overview / History
• Image and Positioning
• Objectives
• Core Competencies / Strengths
• Weaknesses

15

• Image and Positioning
• Objectives
• Core Competencies / Strengths
• Weaknesses

16
Competitor Strength Grid
17
The Company
18
Company Background Description

• A global enterprise addressing the worldwide
  document processing market which develops,
  markets, services, and finances a complete range
  of products and services designed to make offices
  around the world more productive.

19
BackgroundHistory

• 1959 - Model 914 Copier Introduced
• 1970 - Literal Monopoly on the Market
• 1975 - FTC Settlement Occurs
• 1976-1982 - Share Decreases to 13
• 1980 - Focus on Leadership Through Quality

20
Xerox Introductions Market Share
New Product Copier Introductions
Market Share
21
Yet, Net Income is Declining
22
Background Corporate Restructuring 1992

• Decision Making Moved Closer to Customer
• Greater Focus on Core Competencies
• Focus on Core Business
• Focus on Benchmarks
• Workforce Reduction

23
Information Management

• 1970s - CIM Established
• 1987 - General Services Division
  EstablishedMission of CIM was now to . . .
  develop the IT strategy for Xerox and ensure
  that it was implemented in all the business
  units.
• 500 Million IT Budget

24
Information ManagementIT Strategy Consulting
Firm Finds Problems

• No coordination of money spent each year
• No Corporate-Wide Management of IM Investment
  Priorities
• A Peripheral Player in IT Management
• Narrowly Focused IM Talent Pool
• Senior Managers Stingy With IT Infrastructure
• Redundant / Overlapping Efforts
• No Staff Development Mechanisms

25
Centralizing IMWallington Presents at
Presidents Council Meeting April, 1993

• 670 Million spent on IM in 1992
• Forecast to grow to 1 Billion by 2000
• . . . Amounts to 3.7 of total revenues!

26
IM 2000 Reengineering ProjectMid-1993

• Identification of IM problem areas
• Strategies to address those problem areas
• Projects implemented to fix problem areasGoal
  Move IM to a new information systems
  infrastructure.

27
Regional IM Infrastructure
28
Product Line Focus(Many different products per
circle)
29
Problems Revealed

• Aging applications portfolio
• Proprietary technologies from previous structure
• Large spending for legacy systems
• Autonomous culture allowed for costly duplication

30
IM 2000 - Strategies

• Reduce / Redirect
• Infrastructure Management
• Leverage Worldwide IM Resources
• Business Process Driven Solutions

31
IM 2000Internal Obstacles Remain

• Conflict between IM problems and IM customers -
  the business divisions
• Little discipline of both time and money
• Internal costs of 55 million for hardware
• Viewed as an expense center by top executives

32
IM 2000External Forces Create Final Pressures

• Increasingly competitive environment
• Forced to adapt quickly

33

• . . . Top IM managers began to realize they
  would not be able to change quickly enough
  without outside help.

34
Outsourcing XeroxWhat?Why?How?
35
What was and What is Outsourcing

• Outsourcing was looked upon as the business
  strategy associated with downsizing
• Outsourcing now is looked upon as utilizing the
  best expertise in local laws and business customs.

36
What is Outsourcing?

• Is the strategic use of outside resources to
  perform activities traditionally handled by
  internal staff and resources.
• Mgmt strategy by which and organization
  outsources major, non-core functions to
  specialized, efficient services providers.
• Wholesale restructuring of the corporation around
  core competencies and outside relationships.

37
What is Outsourced?
38
Industry Trends in Outsourcing

• According to the Outsourcing Institute, 80 of
  Fortune 500 companies outsourced some or all of
  their information management function in 1997.
• These services accounted for 42 billion dollars
  in1996, a number expected to grow exponentially
  in the next decade.

39
Porters Five Forces
Threat of new entrants

• Bargaining power of suppliers

Competition among existing firms
Bargaining power of existing firms
Threat of substitute products
40
Reason for Five Forces

• Basis of competition
• Focus on core competency
• Create a competitive advantage
• Build barriers to entry
• Build switching costs
• Change the basis of competition
• Balance power in supplier relationships

41
Basis of Competition
Competitive Advantage
Differentiation
Lower Cost
Broad Target
Cost Leadership
Differentiation
Competitive Scope
Differentiation Focus
Narrow Target
Cost Focus
42
Need for Outsourcing is driven less by cost
than..

• Rapid access to new technologies and skill sets.
• Better responsiveness to changing conditions.
• Faster IT cycle times.

43
Top Reasons Companies Outsource

• Reduce and control operating costs.
• Gain access to world class capabilities.
• Resources are not available.
• Allows you to free up resources (people and
  capital) to work on your core business (i.e..
  focus).
• Improves capacity and quality.
• Makes new business possible.

44
Reasons Companies do NOT Outsource

• Difficult to successfully implement.
• Problems regaining knowledge.
• Differing company strategies.
• Core competency.
• Lack of control.
• Lack of expertise.

45
IT Outsourcing

• Fastest growing area for outsourcing today.
• Executives are currently outsourcing
• Maintenance / repair
• Training
• Applications development
• Consulting and reengineering
• Mainframe data centers

46
IT Outsourcing

• Executives are considering outsourcing
• Client / servers
• Networks
• Desktop systems
• End-user support
• Full I/T outsourcing

47
Outsourcing at Xerox

• Outsourcing versus integration.
• Create winwin relationship.
• Share values to create a true partnership.
• Develop spirit of the contract for senior
  management to and understand.
• Create infrastructure to support companies
  strategic direction in the 90s.

48
Outsourcing Process
Phase I - Fact Gathering
Phase II - Request for Proposal and Data Gathering
Phase III - Feasibility and Management Approval
Phase IV - Baseline Building and Evaluation
Phase V - Due Diligence and Contract Awarded
49
Phase I - Fact Gathering
Vendor Selection
Benchmarking
IT Partner
Outsourcing Objectives
50
Phase I - Fact Gathering

• Vendor selection team
• Cross-functional representatives
• Establish outsourcing requirements, objectives,
  goals, and timeline
• Conduct industry benchmarking

51
Outsourcing Objectives

• Drive down spending on legacy system
• Improve quality and cost of IM services
• Focus companys resources on the primary mission.

52
Xerox Benchmarking

• Outsourcing Strategies
• Outsourcing Processes
• Vendor references
• Human resource impact

• Companies
• Salomon Brothers
• General Motors
• Equifax
• First Boston

• ATT
• Kodak
• Sun Microsystems
• McDonnell Douglas

53
Vendor Selection

• Financial
• Translation of productivity savings to Xerox
• Flexibility in meeting Xerox financial
  requirements
• Experience in engineering financial environment

• Qualifications
• Global Presence
• Capability to manage globally
• Experienced in large scale outsourcing
• Core strengths in various frameworks
• Mgmt processes and strengths

• Soft Criteria
• Congruence with positive Xerox environment
• Provide benchmark for desired Xerox cultural
  traits

• Human Resources
• Treatment of Xerox employees
• Human resource values

• Technical Solutions
• Productivity Commitment
• Support for existing Xerox diverse environment
• Capability to migrate

54
Outsourcing Process
Phase I - Fact Gathering
Phase II - Request for Proposal and Data Gathering
55
Phase II -Data Gathering and Request for Proposal

• Prepare a Request for a Proposal
• Be structured in a way that will allow
  assessments and comparisons to be done in
  meaningful way
• Define requirements in complete and measurable
  terms
• Describe the type of relationship you are looking
  for
• Explain the problems that you are trying to solve
  
• Ask specific questions about corporate culture
• Present the current costs to the organization
• Specify a service level

56
Phase II -Data Gathering and Request for Proposal

• Data Gathering
• Research the Vendors
• Financial Stability, potential mergers, takeovers
• Questions and Answers

57
Outsourcing Process
Phase I - Fact Gathering
Phase II - Request for Proposal and Data Gathering
Phase III - Feasibility and Management Approval
58
Phase III - Feasibility and Management Approval

• Outsourcing feasibility
• Recommendation to Management for approval to
  proceed

59
Outsourcing Process
Phase I - Fact Gathering
Phase II - Request for Proposal and Data Gathering
Phase III - Feasibility and Management Approval
Phase IV - Baseline Building and Evaluation
60
Phase IV - Baseline Building and Evaluation

• Evaluate the vendor responses
• Systematic
• Measurable
• Meets objectives
• Select the vendor for contract negotiation

61
Lessons Learned - Xerox

• What you want is essential
• Clear objectives are key
• Cross functional team is a necessity
• A good contract requires a lot of data

62
Outsourcing Process
Phase I - Fact Gathering
Phase II - Request for Proposal and Data Gathering
Phase III - Feasibility and Management Approval
Phase IV - Baseline Building and Evaluation
Phase V - Due Diligence and Contract Awarded
63
Phase V -Due Diligence Contract Awarded

• Outsourcing deals that go bad frequently suffer
  from poorly designed contracts - Outsource
  Sense, InfoWorld, September 1996

64
Managing the Outsourcing Relationship

• Create a Shared Vision
• Include Effective Performance Measures
• Use Performance Incentives and Penalties
• Establish Clear Communication Mechanisms
• Develop a Clear Contingency Plan and Exit
  Strategy
• Manage People Issues

65
Negotiate a Sound Contract

• Terms of the Agreement
• Minimum Service Levels
• Ownership Confidentiality of Data
• Warranty
• Incentives

• Disclaimers
• Bankruptcy Contingency
• Force Majeure
• Performance Measures
• Anticipate Change

66
Global Complications

• Various Human Resource / Employee Laws
• Degree of Risk
• Political Instability
• Various Asset Transfer Laws

67
Xerox Outsourcing Partnership
Xerox
Information Technology System Development
EDS
Tactical Implementation
Infrastructure Management
Telecommunications
Mainframe Computer Systems
Desktops
Local Area Networks
68
Xerox Status in June 1994

• Xerox/EDS Core Teams Created
• Massive Internal PR Campaign Initiated
• Switch Incentives Offered
• Assured Confidentiality
• Divorce Issues Addressed
• Annual Price Benchmarking
• Single Global Contract
• Key Global Players Added to Team

69
Xerox Status 1996/1997

• Xerox Satisfaction at the Low End and Dropping
• 2000 Employees Transferred to EDS / 700 Remain
• After 2.5 Years 15 of Proprietary System
  Replaced (Global View)
• 600 Novell LANs installed
• 1000s Desktops and Printers Replaced
• 12 Person Xerox Team Established to Manage
• Contract Amended in Sept 1996

70
Contract Addendum

• Clarified Terms for Desktop and LAN Support
• Established Formalized Response Metrics
• Established Managed Rate Change
• Eliminated Billing Inconsistencies

71
Xerox Status 1999

• EDS Files Suit Against Xerox February 1999

72
Differing Views

• EDS Literature
• Collaborative
• Value Transition Employees
• Communication Key

• Xerox Testimonials
• Technology Transition Painful
• Standard Architecture not as Complete as
  Proprietary Systems
• Spent More Time Co-Managing Than Expected
• More Costly

73
Conclusion
74
Summary - Decision
Printing, Publishing Electronic Media Industry
Competitive Environment
Technologically Focused
Emerging Technology Xerox Core Competency
Information Management Not Core Competency
Outsource Non-Core Competency
75
Summary - Process

• Process
• Focused
• Management Buy-in
• Benchmarking Utilized
• Implementation
• Underestimated Change in Information Technology
• Service Specifics Not Addressed

76
Recommendations

• Outsource Non-Core Competency Functions
• Write Air-Tight Service Level Agreements for
  Every Strategic Business Unit Every Platform
• Define Graduated Levels of Performance and
  Penalties Based on Customer Satisfaction
• Dont Compromise Service Levels with Price
  Negotiation