The AZ of Outsourcing

1
The A-Z of Outsourcing

• Rob Aalders Andy Zaple
• Spring 2003

2
The A-Z of Outsourcing

• Getting into it
• Managing it
• Most ACS members will be involved or committed to
  it at some time.
• When you have to do it - do it right!

3
Getting Into Outsourcing

• The Basics
• Know your motives
• Define your principles
• Be rigorous in RFP
• Form the contract including SLA

4
Know Your Motives
Cognitive Dissonance1

• Party Line
• Resource shortages
• Cost saving
• Focus on the core
• Competitive advantage

• Reality?
• Intuition
• Fear
• Imitation
• Frustration
• Action Man

According to Leon Festinger, this is because any
perceived inconsistency among various aspects of
knowledge, feelings and behaviour sets up an
unpleasant internal state - cognitive dissonance
- which people try to reduce whenever possible
(Festinger, 1957)
5
Know Your Motives

• Kipling them
• Why is outsourcing the best solution?
• What will we outsource all or some?
• How will outsourcing meet the objectives?
• Why cant we meet them ourselves?
• When will they be delivered?
• How will they be delivered?
• Where will we outsource on site or off?

6
Not Knowing Why
7
Map Your Goals
Where you are (Be honest!)
Where you want to be (Strategy Architecture)
How will Outsourcing Get you there?
8
Know Their Motives

• What are the providers goals
• What are their objectives?
• Why and how does your business fit in?
• How will they achieve YOUR objectives?

9
Why Define Principles

• Failure to define principles leaves the company
  open to the opportunistic acts of a transient
  organisation.
• Addresses the governance of complexity by
  concentrating on the fundamentals while leaving
  everything else for resolution by due process
• Outsourcing redistributes responsibility and
  accountability, and when you redistribute
  responsibility and control to others, you must
  reallocate accountability and expertise for
  taking action.
• Your prayers will be answered..if you obey me and
  are willing to put in hand the remedy your
  distress requires.. (Oedipus in Oedipus Rex)

10
Setting Principles

• Example of a Principle

11
Benefits from Setting Principles

• Ensures that decisions are made within a
  considered framework.
• Ensures that the framework is internally
  consistent
• Removes the need to micro-manage every decision.
• Communicates the rules of engagement to all in IT
  business
• Reduces the probability of issues and disputes.
• Protects against arbitrary decisions made out of
  context.
• Supports the proper execution of the service
  level agreements
• Informs those involved peripherally, e.g.
  contractors, suppliers
• Provides a framework for future service level
  variances

12
Map Your Domain

• Know what you are outsourcing

A large national organisation was getting ready
for outsourcing believing there were about five
mid-range systems, the team sent out a message to
all business managers, indicating that if a full
listing was not provided, no support would be
available once the outsourcer had taken over. A
few weeks later the list had increased to over 50
systems and they were still counting. Nick
Kovari
This quote is one of many that could have been
offered - all with the same message!
13
Evaluate - Set Relevant Criteria

• Ensure criteria relate to the outcome
• If Network Stability and Cost are an issue then

Make sure that the criteria relate to the goals
and objectives!!
14
Evaluate - Scale Importance

• Six Levels of Criteria

Ensure the meaning of each level is absolutely
clear!
15
Evaluate - and Reflect!

• Query
• Five year plan, their goals, their objectives
• Talk to their staff - walk around - look at the
  desks
• Talk to their customers
• How will you do it?
• For every major objective - till they squirm!
• It helps them to help themselves
• Three Perspectives
• Commercial - money and contract terms
• Technical - vendors ability to deliver
• Organisational - the people factor

Retro-Engineer their Pricing Model
16
Manage the Contract Formation
and the SLAs that are part of that contract

• Place and Protocol is yours - pick your
  battleground
• The vendors standard form is invariably
  inadequate from the customers perspective
  (Halvey Melby)
• Reflect Goals and Objectives - the Why
• Design the relationship
• Change management process
• Embed the Principles
• Agree YOUR position - IP, damages, remedial
  action, pricing etc
• Document configuration management (the paper
  trail)
• Put your focus on the inevitable divorce

17
Manage the Contract Formation

• The Team
• Contract Team Leader (Program Manager)
• External Consultant who has done this before!
• IT Specialists
• HR Specialist
• Finance and Audit
• Independent Performance measurement specialist
• Mediation/Negotiation specialist
• Risk Management expert
• Legal advisers who have done this before!

The principal cause of the power imbalance is
that the host company does not regard the
contract as part of the outsourcing process. The
vendor, on the other hand, regards the contract
as the final stage in the sales cycle and its
representatives are schooled in how to best close
the deal
18
The Value of a Consultant
19
Manage the Contract Formation

• Cover (apart from the obvious)
• Document management control (Library)
• Publicity and advertising
• Human resources - competency and stability
• Performance dispute resolution
• Ongoing management (Principles)
• Service Level Agreements (Performance)
• Definition of current environment
• Third party performance audit (Honest Broker)
• Termination for various reasons.

20
Manage the Relationship

• Failure in BPO is seldom caused by inability to
  perform. Rather, poor relationship management
  causes a mismatch in results and expectations,
  which leads to dissatisfaction or an inability to
  recognise a cultural gap
• Source Business Process Outsourcing, Sourcing
  Interests Group Research Report 1998
• You can have the best contract in the world, but
  if you dont manage it, it doesnt do you any
  good
• Peter Gearhart, Allied Signal Inc., CIO Magazine
  15/5/96

Administer the Contract.. Manage the
Relationship!
21
Issues in Contract Governance

• Clients do not apply sufficient resource to the
  management of the relationship
• Fail to appreciate scale and scope of management
  task
• Managing the relationship by bullying over the
  trivial or irrelevant
• Number of help desk calls
• Power Outages and Storm Damage
• Uncontrollable hardware failure...

What is the scale and scope of the relationship?
22
Contract Governance Dimensions
Time Horizon
Service Improvement
Strategic Management
Technology Services
Service Delivery
Support Processes
Manage the Relationship
Plan
Administer the Contract
Monitor Control
Core Processes
23
Time Horizons

• Service Delivery (the now)
• Management of day to day service delivery
• Strategic Technology Services (1 - 6 month
  view)
• Management and oversight of current change
  projects
• Service Improvement (3 - 6 month view)
• What improvements to service levels are required?
• How are these going to be achieved?
• Management (18 month - 3 year view)
• What new services will be required to support the
  clients business?
• What service levels will be required (including
  changes to existing service levels)?
• What will be required to develop and implement
  these successfully?

24
Core Processes

• Monitoring Controlling
• Supplier Performance
• Progress towards Strategic Objectives
• Compliance
• Customer/User Satisfaction
• Benchmarking
• Costs
• Benefits

• Planning
• Business Volumes
• Services
• New
• Modified
• Technology
• Capacity
• Budgets

25
Support Processes

• Administering the Contract
• Manage Issues
• Deal with Disputes
• Pay Invoices
• Collect Service Credits
• Maintain record of Communications
• Manage Variations

• Managing the Relationship
• Communicate with all Client Stakeholders
• Educate Client Stakeholders
• Liaise between Stakeholders Vendor -
  organisational Alignment
• Work on Process, Information and Personal Links

26
Clients Governance Organisation

• Leadership
• Chief Sourcing Officer
• Efficiency
• Transition Management
• Contract Management
• Performance Management
• Financial Management
• Effectiveness
• Relationship Management
• Technical Advisors
• Business Process Management
• Architecture Strategic Planning

Source Gartner
Roles Required
27
Clients Governance Organisation

• Behavioral
• Change Management
• Customer Service Orientation
• Influencing Others
• Information Seeking
• Strategic Thinking
• Partnering
• Technical
• Business Requirements Analysis
• Service Performance Analysis
• Project Management
• IS Knowledge

• Business
• Business Function Knowledge
• Client Satisfaction Metrics Knowledge
• Negotiation
• Risk Management
• Strategic Business Planning

Source Gartner
Competencies Required
So what else can go wrong?
28
What can go wrong?

• Not knowing why(Covered this already)
• Measuring the wrong thing
• Measuring the wrong way
• Rewarding the wrong thing the wrong way

29
Remember Your Motives?
Retain and strengthen
Candidate for insourcing
?
?
30
Measurement
Specifying quantifying SLAs
Tracking evaluating service processes
Service Level Management
Service Process Management (ITIL, COBIT, MOF of
roll your own)
Service Needs
Service Process
Design implementation of service processes
Tracking evaluating SLAs

• Service level management is the regular,
  systematic review of service provider performance
  against pre-defined service level targets.
• Aalders The IT Outsourcing Guide, Wiley 2001

31
Setting Service Levels

• Are these still Key?
• What is the value of improving this?
• What is our current performanceOops?
• How should they be measured?
• What is the business impact of failing to achieve
  this level?
• Should this be the subject of rebates and
  bonuses?
• Are there any missing?
• Refer to the ITIL, MOF or COBIT catalogues

32
IBM ATMaster- an example of Best Practice
33
IBM ATMaster- Key Measures
34
IBM ATMaster- Key Measures
35
IBM ATMaster- Measuring the Right Way
Initial Target 95 availability. 7 days, 24 hrs
per day. Measured quarterly
Translated 109.5 hours downtime per Quarter is
acceptable ie the service could be taken down
between the hours of 9 and 5 every Saturday and
service levels would be met! Revised Target 98
availability, Mon-Sat 0700 - 1800 Sun 0800 -
1600. Measured quarterly. More than 19 hours
downtime during these hours per Quarter would
result in service levels being missed.
36
The Exchange- an example of How Not To!

• Electronic Trading platform in UK Life Assurance
• Software development, data centre network
  management provided by ATT
• 33 owned by ATT - the service provider
• 67 owned by Origo Services - the customer
• Open book, cost plus commercial terms

37
Measurement and Reward

• What gets measured, gets done!
• What gets measured properly, gets done in line
  with expectations. usually!
• What gets measured properly, and rewarded
  appropriately, delivers the business outputs you
  aspire to!

38
Measurement and Reward
Checklist

• Measurement is the responsibility of the Provider
  and the customer.
• Focus your measurements on the important issues.
• Beware averaging - some is warranted, but it can
  dilute focus on what counts.
• Monitoring too many targets may distract
  attention from future improvement initiatives.
• Set stretch targets where they really matter.
• Reward over-performance only where real business
  benefits result.
• Rebates are designed to promote future
  performance excellence, not to punish past poor
  performance.
• Even with the balance of bonuses, rebating tends
  to be confrontational.

39
Rewards Rebates
Bonuses due
Stretch
Target
Minimum Acceptable
Rebates due
Improvements Bucket
40
Outsourcing Application Development

• How do we measure it?
• Need to measure outputs not inputs
• Lines of Code?
• Function Points?
• Efficiency comparisons - per line per
  Function Point?
• Realisation of business benefits?
• Or simply on-time, on budget delivery to quality
  criteria?

Application Development is difficult to manage,
whether in-house or outsourced. This doesnt
change the principles weve discussed it makes
them even more important!
41
Sharing Expectations
Building the Foundations of a Successful
Vendor-Client Relationship
Great discoveries and achievements invariably
involve the co-operation of many
minds Alexander Graham Bell
42
Multiple Points of Misalignment
Client
Vendor
Governance
Vendor
Client
Sub- contractors
Operation

• There are multiple opportunities for expectations
  to become misaligned.
• This will tend to lead to sub-optimal behaviors,
  inefficiencies and potential conflict.

43
Improving Performanceby Sharing Expectations

• The Shared Expectations process has been used
  over many years in a variety of projects and
  outsourcing arrangements around the globe.
• The process is implemented through structured,
  facilitated sessions where both vendors and
  clients

• Communicate their expectations of each other
• Set priorities to their expectations
• Score actual performance against expected
  performance for each expectation

• Review gaps between expected performance and
  actual performance
• Drive improvement by creating action plans and
  developing metrics to track progress
• Agree on follow-up procedures to ensure continual
  improvement

44
Shared Expectations Workshop
Client Team
Vendor Team
Our expectations of Vendor
Our expectations of Client

• Each workshop should involve no more than a dozen
  representatives - six from each side
• Representatives should be peers of each other and
  have day-to-day interaction
• Each workshop should be of one full days
  duration, and ideally should take place
  off-site
• A briefing session and social function on the
  evening prior helps create an appropriate
  environment for the workshop

Vendor performance to date against our
expectations
Client performance to date against our
expectations
Vendor expectations of Us?
Client expectations of us?
Our performance to date against their
expectations
Our performance to date against their expectations
Combined Team
Identification of gaps
Agreement on priority issues
Development of improvement plans
Workshop
Implementation
Review
Post Workshop
45
The End Is Nigh

• Consider Termination
• Performance
• Takeovers - them or you
• Changed management philosophy
• Taxation changes
• You will be more vulnerable than when the
  contract was let

Last Take-Aways
46
Closing Thoughts
Let the outsourcer manageDeal with
expectationsRepresent your businessAlign the
culturesPlan for the end .and have a Happy
Christmas
47
Closing Thoughts
Thank you! Rob Aalders Andy Zaple