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End-of-Term Strategy: Unlocking Hidden Deal Value

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Everest Group experts will highlight how the end-of-term stage can force organizations to assess the value achieved from their current outsourcing efforts and build next-generation outsourcing …

Everest Group experts will highlight how the end-of-term stage can force organizations to assess the value achieved from their current outsourcing efforts and build next-generation outsourcing engagements focused on driving broader sets of value for both buyer and supplier.

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  • 1. Today’s webinar is brought to you byOutsourcing CenterToday’s webinar Upcoming webinarsEnd-of-Term Strategy: Unlocking Hidden Deal Remote Infrastructure Management: Signs of anValue impending “crisis of genre”?Synopsis: Date and time:Everest experts will highlight how the end-of-term Tuesday, October 13, 2009stage can force organizations to assess the value 10:00 a.m. CDT / 11:00 a.m. EDTachieved from their current outsourcing efforts andbuild next-generation outsourcing engagements Speakers:focused on driving broader sets of value for both  Ross Tisnovsky, Vice President, Research, atbuyer and supplier. EverestAbout 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. 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. © 2009 Outsourcing Center
  • 2. Q&ATo ask a question during the Q&A session Click the question mark (Q&A) button located on the floating tool bar in the bottom right 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. © 2009 Outsourcing Center
  • 3. Introductions Katrina Menzigian Betty Breukelman Vice President, Research Engagement Director Everest Group Everest Group kmenzigian@everestgrp.com bbreukelman@everestgrp.com 3 Proprietary & Confidential. © 2009 Outsourcing Center
  • 4. End-of-Term Strategy: UnlockingHidden Deal ValueOctober 6, 2009
  • 5. Introduction Late last year, Everest conducted a webinar on End-of-Term Strategies (ETS) for outsourcing contracts discussing market changes and considerations when developing an ETS In today’s discussion, we shall delve deeper into a best-practice framework to compare the current outsourcing agreement against the market development and to assess alignment of potential value levers for expansion Some of the key questions that we will explore include:  What is an ETS?  What key dimensions should be considering in reviewing an existing outsourcing agreement?  What market changes could influence your ETS?  What are the key value drivers for an ETS?  What ETS strategic options should be considered?  What is the high-level ETS development timeline? 5 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 6. Agenda Introduction What is an End-of-Term Strategy? Key dimensions of reviewing a current outsourcing agreement Understanding sourcing market changes End-of-Term Strategy options available Key takeaways 6 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 7. An end-of-term event provides several opportunities tobuyers, incumbent suppliers, as well as non-incumbentsuppliersNon-incumbent supplier Buyer opportunitiesopportunities  Review the value derived from Target buyers that might be the outsourcing engagement looking for another suppliers against the original objectives because of one or more of the  Understand recent changes in following: the marketplace across key  The incumbent supplier is dimensions (i.e., process, exiting the market solution, supplier, and pricing)  The overall satisfaction with and evaluate how best to the incumbent supplier is benefit from it low  Identify how best to modify the  Buyer’s future existing deal to access considerations are not enhanced value- creation and aligned with incumbent capture opportunities supplier’s strategy  Realign the overall sourcing strategy with the current and future considerations Incumbent supplier opportunities  Build on the success of the existing relationship by enhancing value through scope expansion  Restructure the engagement to align it with the supplier’s go-forward strategy  Renegotiate to ensure margin protection/ improvement  Exit contracts that cannot be aligned with margin expectations 7 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 8. What is an End-of-term Strategy? An organization currently in an outsourcing services contract that is coming to an end should consider developing its end-of-term strategy (ETS) An end-of-term strategy (ETS) is a strategic plan to review an outsourcing relationship and re-evaluate your sourcing strategy. The key questions that should be addressed are:  Did the relationship achieve its original objectives?  Is the agreement currently achieving its value potential?  How has the outsourcing market place changed?  What needs to be done in advance of and post the end of the deal term? Having a well-thought out ETS in place enables the organization to:  Leverage market opportunities  Correct prior limitations associated with the existing contract  Re-align with business objectives and goals  Strengthen and maximize value from supplier relationship 8 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 9. Agenda Introduction What is an End-of-Term Strategy? Key dimensions of reviewing a current outsourcing agreement Understanding sourcing market changes End-of-Term Strategy options available Key takeaways 9 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 10. Review of the agreement and the market changes usesthe following four dimension frameworkDimensions of current agreement reviewProcess review sub-dimensions: Solution review sub-dimensions: Scope  Technology Performance management  Global sourcing Operational infrastructure  Governance Transition A. Process B. Solution C. Supplier D. ContractSupplier review sub-dimensions: Contract review sub-dimensions: Supplier portfolio  Contract size and duration Supplier strategy and focus  Pricing Supplier capability  Key terms and conditions 10 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 11. Assess outsourced Process maturity and review thecurrent Solution to identify major gaps and levers toexpand valueDimension Sub dimension Brief description Assessing the process coverage and degree of outsourcing to Scope identify opportunities for evolution A. Process Performance Assessment of type and purpose of metrics, number of SLAs, management performance levels, and enforcement strategy Review of transition methodology, resources, engagement Transition modes, and timelines/cost Assessing the underlying technology solution in terms of Technology ownership, fragmentation, and deployment options B. Solution Comparing the global sourcing adoption to the global sourcing Global sourcing market maturity from process and delivery location perspectives Assessing the governance structure in place to address Governance operational and strategic aspects 11 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 12. Evaluate Supplier profile and Contract elements toidentify evolution themes for next stage of relationshipDimension Sub dimension Brief description Assessment of client’s overall supplier portfolio strategy in Supplier portfolio terms of having a single-supplier strategy versus multi- supplier strategyC. Supplier Supplier strategy Examining current supplier’s strategy in the market and & focus assessing their alignment with client’s objectives Supplier Evaluating current supplier’s capability across key parameters capabilities (such as scale, scope, technology capabilities, and delivery footprint) and its positioning as compared to other suppliers in the market Contract size & Comparison of contract size and duration with market average duration in view of the stage of the relationship D. Contract Assessment of the pros and cons of current pricing structure Pricing and indicative overall pricing levels along with pricing evolution opportunities Terms & Coverage of key terms and conditions with potential key conditions additions to formalize in the next stage of relationship 12 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 13. Agenda Introduction What is an End-of-Term Strategy? Key dimensions of reviewing a current outsourcing agreement Understanding sourcing market changes End-of-Term Strategy options available Key takeaways 13 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 14. In the HRO marketplace, 82% of buyers are extendingoutsourcing contracts nearing term Outsourced to a third partyStatus of HRO DealsPercentage 1 Extension 100% = 34 82% 3 Repatriation 12% Multi-process HRO deal 2 Transfer 6%Key reasons behind a high number of extensions are: Buyer-supplier relationship Buyer’s HRO solution Market dynamicsHRO buyers went through intensive renegotiation and/or restructuring to extend their existingcontractsSample size: End-of-term decisions in 34 HRO transactions Source: Everest Research Institute (2009) 14 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 15. Buyers nearing an end-of-term strategy will likely needto reevaluate the sourcing strategy for each HR process A. ProcessShare of extended HRO transactions bychanges in process scopeNumber of transactions Process market drivers  A shift from full-scope approach to componentized 100% = 28 approach  Supplier improvements in service level metrics, Scope expansion reporting, and tracking  Buyers are more knowledgeable and more selective 7% in the service level metrics they choose to purchase  Majority of extended contracts have scope stability with a significant percentage of extended contracts reducing scope of services Scopereduction 39% 54% No scope change Impact to buyers  Outsource end-to-end service delivery model vs. bundled transactional and strategic processes  Existing agreement must be reviewed to ensure currency and applicability of the service levels being applied  Buyers should understand the maturity of theMore than one-third of buyers that extend processes outsourcedcontracts towards term-end reduced the  Multi-vendor strategy option maybe ideal instead ofscope of services single-supplier optionSample size: 28 HRO transactions that buyers extended towards the end of contract term Source: Everest Research Institute (2009) 15 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 16. HRO buyers are increasingly adopting global sourcingas part of their solution set B. SolutionShare of HRO transactions that will near term end during 2010-12 by offshore componentNumber of transactions 100% = 111 100% = 45 1-25% of service offshore 13% >75% of service offshore 36%No offshoring 59% 41% Some offshoring component component 42% 25-50% of 9% service 50-75% of service offshore offshoreSolution market drivers Impact to buyers Shift in market preferences from pure offshoring  Buyers should leverage suppliers’ global delivery towards global sourcing centers of excellence to service global operations Buyer’s adoption of supplier standardized solutions  Global sourcing provides buyers advantages of labor offerings that allows for easier transition of services to arbitrage, increased capacity, and access to large global delivery locations talent pool Buyer increased comfort with global sourcing to deliver  Buyers should place greater importance on location similar or better quality of service optimizationSample size: 111 HRO deals that will expire during 2010-2012 Source: Everest Research Institute (2009) 16 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 17. Suppliers are increasing in scale, capabilities, andservice offeringsShare of HRO transactions near term end during C. Supplier2010-2012 by incumbent supplierNumber of transactions Supplier market drivers  Consolidation of the supplier marketplace 100% = 111  Suppliers have acquired shared services and captive operations from buyer community Others1  Emergence of niche market suppliers Xchanging  Suppliers have new service offerings based on changing Wipro 8% Convergys 3% technologies; i.e., RIMO 3% ADP 27%  Many suppliers have changed their focus on specific ACS 3% geographies, market segments, processes, service 5% delivery models, and technology platformsNorthgateArinso 7% Impact to buyers Ceridian 8% 15%  Buyers should conduct research and due diligence to Accenture understand the current supplier landscape, supplier 9% capabilities, and their solution offerings IBM 14%  Supplier’s current strategy and focus will impact their Hewitt motivation to renew contract and willingness to invest in the future relationshipADP, Accenture, and Hewitt account for 56% of thetotal deals that will near term end during 2010-2012 1 Caliber Point, ExcellerateHRO, Fidelity, Logica, Steria, and TCSSample size: 111 HRO deals that will expire during 2010-2012 Source: Everest Research Institute (2009) 17 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 18. There is a shift in market preferences from FTE-basedpricing to variable-based pricing Pre 2005Pricing structures used within different buyer segments D. Contract 2006-July 2008Percentage 3K-15K employees >15K employees Contract market drivers segment segment  There has been a shift from ‘big-bang’ approach to100% = 118 82 ‘phased’ approach  There is a shift from FTE-based pricing to volume-based pricing plus incentives 42% 77%Base cost plus  Variable pricing allows buyers flexibility to scale up or variable price down based on changing business requirements 31% 49%  Suppliers offer variable pricing structures that bundles license costs, technology costs, and process delivery 58% 21% costs Variable price 68% 44% Impact to buyers  Buyers can consider a ‘phased’ approach to test supplier solutions and solidify relationships Fixed base 0% 2%  Buyer should reassess pricing structures to alignment plus 0% 3% with requires for flexibility and scope and delivery model  It is not an ‘either-or’ decision - FTE-based pricing and volume-based pricing can both co-exist in the same contract 0% 0% Fixed price 2% 5%Sample size: 200 transactions signed as of July 2008 for which data is available Source: Everest Research Institute (2009) 18 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 19. Agenda Introduction What is an End-of-Term Strategy? Key dimensions of reviewing a current outsourcing agreement Understanding sourcing market changes End-of-Term Strategy options available Key takeaways 19 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 20. Developing an ETS should be a collaborative, comprehensive,and non-threatening process designed to identify how to bestleverage the different ETS options by processRenew Renegotiate Restructure Re-compete RepatriateRe-sign existing Modify one or a Re-think the structure Terminate existing Terminate currentcontract terms with limited number of of key contract contract and enter outsourcing contractminimal changes elements of an provisions and key into competitive bid and bring previously outsourcing contract, business terms, and process with outsourced services e.g., price and re-think in-scope potential suppliers to back in-house service levels processes evaluate and select one or multiple suppliers to replace the current services agreementBuyers should take six key questions under consideration in choosing their sourcing option1. To what degree will each sourcing option lead to lower ongoing costs and equal or improved services?2. What is the approximate one-time cost of each sourcing option?3. What is the risk of executing each option?4. What is the effort and duration of implementing each option?5. How can a client maximize its negotiating leverage?6. To what extent is the sourcing option strategically aligned?The optimal sourcing approach is one that is most likely meet a buyer’s targeted outcomesExamples of outcomes:  Financial return  Service quality  Legal and compliance  Acceptable risk 20 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 21. Buyers should initiate an ETS at least two years beforethe end of current contract term, earlier if inclusive oftransition assistance period ILLUSTRATIVE End of term Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 ETS Renew Renegotiate Transition1 Re-compete Transition1 Repatriate Transition1 Restructure Transition1 Re-compete Transition1 Repatriate Transition1 Re-compete Transition1 Repatriate Transition1 Repatriate Transition11 Example assumes current agreement contains provision for transition and transition assistance 21 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 22. Agenda Introduction What is an End-of-Term Strategy? Key dimensions of reviewing a current outsourcing agreement Understanding sourcing market changes End-of-Term Strategy options available Key takeaways 22 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 23. Key takeaways: Best practices for unlocking valuefrom the end-of-term processA combination of the buyer’s business strategy, solution requirements,the desired buyer-supplier relationship, and market dynamics willinfluence buyer’s end-of-term decision Buyers are recommended to conduct a strategic review of their current outsourcing agreement, investigating any major gaps that exist in the current scope, solution delivery model, supplier relationship, and contracting terms A thorough understanding of market dynamics, the supplier landscape, contracting trends, and buying patterns will help identify opportunities to improve contract competitiveness The comparison of the current outsourcing agreement to market trends will enable buyers to identify value levers and implement a strategy that can effectively meet current and future objectives 23 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 24. 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 Ben Kuhn (bkuhn@everestgrp.com) For advice and assistance regarding End-of-Term Strategy, please contact Everest:  Katrina Menzigian, kmenzigian@everestgrp.com  Betty Breukelman, bbreukelman@everestgrp.com For background information on Everest, please visit:  www.everestgrp.com  www.everestresearchinstitute.com Thank you for attending todayTo ask a question during the Q&A session Click the question mark (Q&A) button located on the floating tool bar in the bottom right 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 24 Proprietary & Confidential. © 2009 Everest Global, Inc.