Vanilla, Chocolate, or Rocky Road: What Flavor of Outsourcing Do You Want?

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Everest Group expert, Eric Simonson, will discuss how buyers can capture hidden value by understanding and identifying their company’s outsourcing solution as one of four basic outsourcing models.

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Vanilla, Chocolate, or Rocky Road: What Flavor of Outsourcing Do You Want?

  1. 1. Today’s webinar is brought to you byOutsourcing CenterToday’s webinar Upcoming webinarVanilla, Chocolate, or Rocky Road: What Flavor Key Market Developments in Q1-2010: Marketof Outsourcing Do You Want? Vista Report BriefingSynopsis: Date & Time:Everest expert, Eric Simonson, will discuss how Thursday, May 13, 2010buyers can capture hidden value by understanding 9:00 AM CDT/10:00 AM EDTand identifying their company s outsourcing solution company’s Speakers:as one of four basic outsourcing models. Eric Simonson, Managing Principal- Research, Everest Group Anand Ramesh, Research Director, Everest GroupAbout Outsourcing CenterOutsourcing Center is the world’s most prominent internet portal for authoritative information on outsourcing.The Center’s mission is to build the industry by helping people understand how to create value throughoutsourcing.outsourcing We serve the outsourcing community through: Trusted and objective third-party perspective Database of over 81,000 opt-in subscribers Relevant media including editorials, research, whitepapers, and the annual Outsourcing Excellence AwardsFor more information, contact Peter Bowes at pbowes@everestgrp.com 1 Proprietary & Confidential. © 2010 Outsourcing Center
  2. 2. Q&ATo ask a question during the Q&A session Click the question mark ( q (Q&A) button located on the floating tool bar in the bottom right ) g g of your screen. This will open the Q&A Panel Be sure to keep the default set to “send to a Panelist” Then, type your question in the rectangular field at the bottom of the Q&A box and click the send button to submit 2 Proprietary & Confidential. © 2010 Outsourcing Center
  3. 3. Introduction Eric Simonson Managing Principal, g g p , Research Everest Group esimonson@everestgrp.com 3 Proprietary & Confidential. © 2010 Outsourcing Center
  4. 4. Vanilla, Chocolate, or Rocky Road:What Type of Outsourcing Do YouWant?April 27, 2010
  5. 5. Everest serves the outsourcing and offshoring marketthrough a unique portfolio of offerings Consulting Research Comprehensive portfolio of services that spans Central source of strategic intelligence, analysis, the sourcing lifecycle and insight Deep industry and functional expertise p y p Recognized for fact-based analysis and insight into g y g Approach that joins corporate strategy and emerging issues experience-based insight Recognition as market authority in Global Sourcing and location-related topics Flexible delivery model Broad range of options for engaging with Everest in manner which best meets the needs of a situation or organization Support can range from targeted inquiries to full support for critical initiatives Everest advantage Served over 25% of the Global 250 Proven methodologies for approaching complex Extensive touch points across the sourcing value projects chain h i Recognized thought leadership – Total Value R i d th ht l d hi T t lV l Deepest primary research agenda on Global Equation (TVE), Joint Design, NASSCOM India Sourcing BPO study, and other industry-leading innovations 5 Proprietary & Confidential. © 2010, Everest Global, Inc.
  6. 6. As an industry, outsourcing is still working to identifywhat types of solutions are optimalHistorical context Current state IT infrastructure began with a There are a wide array of solutions “complete transfer” model The positioning of these alternative This shaped much of the solutions is often unclear and confusing industry’s belief system regarding – even to those whom develop them how to define a “solution” (e.g., scope, flexibility, pricing models, Many concepts are being used to delivery models) describe the future direction of outsourcing, often implying that the BPO and offshoring spurred the concept is the best or only option. growth of outsourcing i the l h f i in h last Examples i l d E l include: decade and challenged many Platforms industry beliefs – often in subtle Transaction pricing ways which were/are not fully Non-linear growth recognized i d Cloud Cl d Although the design of the solution is important, the associated g g p , management model for capturing the value is equally important; pricing models must then reflect the nature of the solution 6 Proprietary & Confidential. © 2010, Everest Global, Inc.
  7. 7. Three discussion topics 1. Solution design 2. Intended approach for capturing value 3. Pricing models 7 Proprietary & Confidential. © 2010, Everest Global, Inc.
  8. 8. Four basic solution types in outsourcing Description When applicable/commonManaged service Solution is pre-built and Generally point solutions (e.g., common across buyers y p y , payroll, managed data back-up) g p) which are modular and limited scope Plug & playTransfer and sell Solution must be tailored to each Solution is technology-centric andback buyer, but supplier’s experience y , pp p p previous investments by supplier in y pp Purchase provides a robust template technology add significant value transformation Buyer willing to change to new model to take advantage of these investmentsPure lift & shift Solution is similar to current state, Limited change is appropriate but with labor arbitrage and/or Environment already optimized Near-term cost incremental process Desire near-term cost savings, savings improvements but limit change in the near-termGuided General direction of solution is Nature of required change is not fullyoptimization known, but will evolve in the known, so solution must be easy for Co-manage/ near- and medium term (e.g., supplier and buyer to change transform p process model refinements, , Buyer committed to actively y y business requirements change) managing the solution in partnership with supplier 8 Proprietary & Confidential. © 2010, Everest Global, Inc.
  9. 9. Examples of solution types Finance & accounting Information technologyManaged service Collections Managed data back-up Plug & playTransfer and sell Shared service center Traditional asset-heavyyback transfer with transaction model for IT infrastructure Purchase pricing (includes assets and data transformation center services)Pure lift & shift Department transfer with Remote infrastructure FTE pricing management (RIMO) Near-term cost savingsGuided Shared-service center Large scale applicationoptimization optimization with FTE modernization Co-manage/ Co manage/ pricing transform 9 Proprietary & Confidential. © 2010, Everest Global, Inc.
  10. 10. Example of multiple solution models of ITinfrastructure outsourcing EXAMPLE – DATA CENTER CTraditional Infrastructure Outsourcing (IO) Infrastructure Management Outsourcing (IMO)Infrastructure Tower Application Hosting Infrastructure Managed Remote Infrastructure Mgmt.Outsourcing Services Services (IMS) Outsourcing (RIMO)Transfer of responsibility Assumption of delivery of Assumption of operational Transfer of responsibility forfor entire IT towers (e.g., several cross-tower responsibility by supplier delivery of RemoteData Center) including functions related to of certain end-to-end Infrastructure Managementmanagement and operations and support of functions related to the (RIM) tasks to an externaloperations an application (e.g., SAP) physical IT infrastructure supplierExample: Data Center Example: SAP hosting Example: Managed Example: ServerOutsourcing Back-up Service Monitoring OutsourcingManagement Outsource functionOperations Remote Outsourced application services edSoftware Outsourced labor/taskHardware Data center Data center Network Data center Data center 10 Proprietary & Confidential. © 2010, Everest Global, Inc.
  11. 11. Three discussion topics 1. Solution design 2. Intended approach for capturing value 3. Pricing models 11 Proprietary & Confidential. © 2010, Everest Global, Inc.
  12. 12. Capturing value from outsourcing – two primarymanagement models Most natural alignmentMonitor and Traditional three-level approach for Managed servicemeasure “governance” Focuses on managing the contract and supplier performance Plug & play Governance team represents business users, but is Transfer and sell separate/centralized back Mindset: hold the supplier Purchase accountable (their problem now) transformationJoint Focuses on finding ways to Pure lift & shifttransformation improve the solution, regardless of which party is “responsible” Near-term cost savings Intentionally strives to challenge the status quo via new initiatives Many responsibilities closely Guided tied/embedded with business users optimization Mindset: leverage the supplier to Co-manage/ help improve results transform 12 Proprietary & Confidential. © 2010, Everest Global, Inc.
  13. 13. Traditional three-level governance models utilizedefined structures and processes to monitorperformance and resolve issues Strategic egic StrateHigh-levelHigh level performance reporting ponsibility Functional direction/strategy(e.g., Supplier scorecard) Tactical priorities to support strategyMajor project status Approval of plans/budgetsPlans/budgets for review Decisions on out-of-scope changesOut-of-scope change requests Resolution of issues nance Resp Managerial lEscalated issues ManagerialSummary performance reporting (e.g., Tactical directionservice levels met/not met) Prioritization of projects MProject status Decisions on out of scope changes out-of-scope GovernOut-of-scope change requests Resolution of issuesPlans/budgets for input ationalEscalated issues Operational / Tactical OperaDetailed performance reporting (e.g., Operational prioritiesspecific service level metrics) Performance enhancement plansIssues Resolution of issues Service Delivery 13 Proprietary & Confidential. © 2010, Everest Global, Inc.
  14. 14. Joint transformation enables optimization of end-to-endprocesses that “de-risks” delivery and identifiesopportunities the change scope Existing step Original end-to-end process Originally transitioned to supplier Added by buyer (shadow) Eliminated post-services integration Transitioned to supplier post-services integration Process after initial/typical transition Buyer: B -11 + 4 = - 7 11 Supplier: +11 Process after joint transformation Buyer: - 11 + 1 -5 = -15 Supplier: pp +11 - 2 + 5 = +14 14 Proprietary & Confidential. © 2010, Everest Global, Inc.
  15. 15. Joint transformation can drive tighter integrationbetween suppliers and buyers, helping both achievetheir near and long-term objectives Drive organizational changes needed to effect the transition Achieve the business Enforce accountability for the case actions required to capture benefits Track cross-process impacts of the changesJoint transformation Enhance visibility and control Optimize value from Strengthen alignment with the supplier business Extend leverage of supplier’s capabilities 15 Proprietary & Confidential. © 2010, Everest Global, Inc.
  16. 16. Three discussion topics 1. Solution design 2. Intended approach for capturing value 3. Pricing models 16 Proprietary & Confidential. © 2010, Everest Global, Inc.
  17. 17. Three approaches to pricing in an outsourcingrelationship Economic Model Continuum Input Output Outcome Hybrids Hybrids model model model Labor Payment Business Material Process Invoice Outcomes Facilities Claim Pricing Mechanisms Per unit of Per unit of process or Value Input business activity Share 17 Proprietary & Confidential. © 2009 Everest Global, Inc.
  18. 18. Each of these approaches have clear value and risks,that need to be assessed for applicability Pros Cons Commonly used when… Simple and easy to Does not create natural Transaction volume is understand incentives for supplier unknown / not validatedInput model Ease of market price improvement Transaction volume is not comparability Not closely tied to business closely tied to supplier’s need/outcome cost drivers Does not provide useful Output is not defined consumption data Closely tied to buyer’s Not directly tied to desired Transaction business activities; only business outcome volumes are knownOutput model pay for consumption May not provide strong Supplier’s cost drivers are Encourages productivity incentive for suppliers to aligned with revenue units and efficiency innovate Detailed consumption data Enhanced visibility into Can be more difficult to is needed for buyer’s consumption pattern budget and benchmark internal cost allocation Closely tied to desired Difficult to isolate supplier Desired outcome and business outcome contribution and quantify accountability can be clearlyOutcome model Properly aligns buyer impact on outcome defined and captured and supplier interests to Supplier’s ability to achieve contractually encourage partnership, outcome may be restricted by Innovation / improvement is innovation, and buyer’s process, system, etc. critical to success continuous improvement Impossible to benchmark 18 Proprietary & Confidential. © 2009 Everest Global, Inc.
  19. 19. Broadly, the use of output-based pricing is on the rise Predominant pricingProcess (varies by solution type) Pricing trendF&A Input-based Input based Increasing shift to Output based Output-basedHR Output-based Output based with more nuancesProcurement Output-based Output-based (combined with value- share)IT Infrastructure Output-based Output-basedIT – Remote IT Input-based Input-basedInfrastructureIT – Input-based p Early signals in adoption of Output-based y g p pApplications pricingDev and Maint.Source: Everest Research Institute (2008) 19 Proprietary & Confidential. © 2009 Everest Global, Inc.
  20. 20. Summary of key messages Choose the solution based upon an intersection of: Preferred type of solution Experience and preference of supplier with the solution type (different than scope of service) Solution design and the management model for capturing value must be aligned Pricing models are impacted by the solution and how value will be measured In contrast to traditional outsourcing philosophies (e.g., tightly define scope), in some situations outsourcing is more effective with active changes to scope, processes, and incentives which help focus the efforts of the supplier and buyer on the most relevant sources of value 20 Proprietary & Confidential. © 2009 Everest Global, Inc.
  21. 21. Q&A Attendees will receive an email with a link to download today’s webinar presentation. To access a recorded audio version of this webinar, please contact Mark Williamson, mark.williamson@everestgrp.com For advice or research on outsourcing, please contact Everest: Eric Simonson, esimonson@everestgrp.com For background information on Everest, please visit: g ,p www.everestgrp.com www.everestresearchinstitute.com Thank you for attending todayTo ask a question during the Q&A session Click th Cli k the question mark (Q&A) button located on the floating tool bar in the bottom right of your ti k b tt l t d th fl ti t l b i th b tt i ht f screen. This will open the Q&A Panel Be sure to keep the default set to “send to a Panelist” Then, type your question in the rectangular field at the bottom of the Q&A box and click the send button to submit 21 Proprietary & Confidential. © 2010 Outsourcing Center

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