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This ISG white paper assesses recent trends in the mid-tier sourcing marketplace, and basic considerations faced by buyer organizations with …

This ISG white paper assesses recent trends in the mid-tier sourcing marketplace, and basic considerations faced by buyer organizations with
differing levels of outsourcing experience. Risks and opportunities are discussed, and potential sourcing strategy options and key success factors
are outlined.

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  • 1. MINEFIELD? OR GREENFIELD?Challenges and Opportunities for Mid-Tier Sourcing ClientsBy Debora Card, Partner, ISG, and Stanton Jones, Emerging Technology Analyst, ISGwww.isg-one.com
  • 2. INTRODUCTIONISG research shows that mid-size organizations are increasingly turning tooutsourcing IT systems and business processes to reduce costs, increaseorganizational agility and focus on core competencies. In other words, theyoutsource for the same reasons that their larger, global businesscounterparts do.As relative newcomers to the sourcing marketplace, mid-tier businesses canpotentially benefit from the experiences of more mature sourcingorganizations – by adopting established best practices, by leapfrogging to newtechnologies, and by avoiding mistakes of the past. That said, businesses withlimited outsourcing experience often don’t know what they don’t know, andremain vulnerable to the pitfalls inherent in negotiating sourcing contractsand managing relationships.This ISG white paper assesses recent trends in the mid-tier sourcingmarketplace, and basic considerations faced by buyer organizations withdiffering levels of outsourcing experience. Risks and opportunities arediscussed, and potential sourcing strategy options and key success factorsare outlined.MINEFIELD? OR GREENFIELD? ■ DEBORA CARD & STANTON JONES 1
  • 3. NEW ENTRANTSMomentum research from ISG shows that sourcing activity in the Forbes G2000 is relatively entrenched within the world’slargest 500 organizations, with over two-thirds engaged in outsourcing prior to 2008 (see chart below). In the 501-2000range of companies, overall penetration rates are lower, although 109 businesses in this category have entered intooutsourcing agreements between 2008 and 2011.Further, Momentum research shows that a total of 408 service providers are winning deals among the Forbes 2000. Thedays when a few major providers owned the lion’s share of the market are clearly over. While the growing number ofproviders reflects the increasing propensity to engage in specialized multi-provider relationships, it also points to a highdegree of market complexity. Today’s clients require fact-based analyses to understand and effectively navigate a broadrange of provider capabilities and options.INITIAL STEPSMid-tier organizations outsource for a variety of reasons, and may outsource different functions – ranging from payroll to ITto business processes to procurement and sales support. In addition cloud-based strategies are being deployed to supportgrowth or to expand IT capability into other geographies.In many cases, clients seek the basics – cost reduction, offloading of non-strategic functions, the ability to focus on corecompetencies and access to improved technology. At the same time, many mid-sized companies are aiming to leapfrogtheir less agile larger peers by taking a more strategic approach to capability sourcing. These companies may also lack thescale needed to meaningfully benefit from a traditional approach of outsourcing basic back office functions.Regardless of the client organization’s specific situation, the starting point is to focus on a basic strategy; specifically, whatneeds to be accomplished? Cutting costs? Acquiring capabilities? Adding capacity? While this sounds obvious, experienceshows that many outsourcing initiatives fail at this early stage. To facilitate success, key stakeholders must be involved sothat the sourcing strategy is effectively articulated, understood and communicated across both the client and providerorganizations.MINEFIELD? OR GREENFIELD? ■ DEBORA CARD & STANTON JONES 2
  • 4. Once the basic objectives are defined, key considerations Put the right team in place with the right tools: Thearound implementation include the following: client organization team tasked with managing the outsourcer may lack the necessary skills. IndividualsUnderstand the existing environment: Before thrust into a new role often yield to the temptation tooutsourcing, a baseline of current costs and service revert to their comfort zones of “doing” rather thanquality in the context of competitive market trends is “supervising;” duplication of effort and inefficiencyessential. For one thing, it quantifies the potential “size result. To avoid this pitfall, clients need to evaluate skillsof the prize” in terms of an improvement opportunity and requirements and potentially invest in training andand allows the client to clearly define objectives. More proven governance tools and frameworks. Specific skillsspecifically, the baseline allows a client to gauge whether that ISG has identified as key attributes of a successfula vendor’s bid is reasonable, outrageously high or outsourcing manager include strategic leadership and theunrealistically low. ability to wield organizational influence.Expect the provider must make a profit: A successful Focus on continuous improvement: Effectiverelationship has to work for both parties. While clients outsourcing is never a one-and-done proposition, butcan sometimes negotiate extremely low prices, and while requires ongoing attention and governance to respond toproviders will occasionally take on an unattractive deal in constantly-changing business requirements. While theorder to win a logo, ultimately it’s a lose/lose sourcing arrangements of mid-tier organizations may beproposition. The provider will cut corners on service less complex than their global counterparts, the stakesdelivery, find ways to charge for additional services, and for business success are every bit as high.assign their weakest team to the account. Facilitate innovation and transformation: Increasingly,Big isn’t necessarily better. Mid-tier companies may not organizations seek to use outsourcing to transform theirbe best served by the largest, most well-known operational environments and move beyond incrementalproviders. Detailed and reliable market intelligence improvement to a fundamentally new and better way ofregarding the capabilities of tier two and niche providers doing things. To succeed in this approach, serviceis essential to assess business requirements against providers need to bring innovation to the table. To fosteroptions, identify the appropriate candidates and ensure innovation, meanwhile, clients must allow their providersan effective match. the flexibility and leeway to leverage their expertise toDon’t underestimate internal management deliver a solution. In terms of structuring the agreement,requirements: Outsourcing does not mean abdication of this means an increased focus on the “what” of themanagement responsibility. Despite years of experience desired outcome, and a less prescriptive approach towith outsourcing, many businesses continue to defining the “how” of service delivery. (Click here forunderestimate the retained resources required to more on this topic.)manage a service provider. Starting with transition, theclient must dedicate sufficient resources to effectivelymanage its side of the relationship. Broadly speaking, ISGrecommends that the retained resource budget forgovernance should be 3 percent to 5 percent of the totalbudget scope, and can be higher if strategic functions areinvolved.MINEFIELD? OR GREENFIELD? ■ DEBORA CARD & STANTON JONES 3
  • 5. THE NEXT LEVEL To effectively develop and implement an IT-enabled growth strategy, a mid-size business (whetherBusinesses that have an established track record in the outsourced or internally managed) needs a strong,basics of outsourcing may aim to take the next step on business-focused technology leader. This can be a CIO,the maturity scale and integrate multi-sourced models, but can also be a technology-savvy CFO, CMO, or anygovernance mechanisms and process optimization into other senior leader within the company. Without atheir environments. To achieve these increasingly senior executive to lead, educate and driveambitious agendas, mid-tier organizations need to accountability, strategic initiatives usually fail, becauseaddress a range of considerations; including: clear linkage between the technology vision and the Managing multiple contracts and relationships to expected business outcomes is lacking. prevent value leakage Getting multiple providers to collaborate on end- CLOUD BENEFITS to-end processes Responding to changes in the business Cloud-based service delivery is perhaps the single most environment that impact outsourcing partnerships important emerging technology development for mid- Assessing renewal or rebidding options tier companies. Software-as-a Service (SaaS) eliminates the need for a company to invest in servers and developers to support and extend their enterpriseENABLING GROWTH software, as these costs are carried by the SaaS vendors.The opportunity to support and enable growth through As a result, the cost to run and support the softwaree-commerce, mobile technology and enhanced customer dramatically declines. This allows smaller companies tocare is a key driver of IT outsourcing among many mid- run world-class business software that traditionally hassized organization. Rather than simply adding more only been available to large enterprises.servers and more people to the IT operation to support Security is a key concern around cloud-based services.growth, an outsourcer can look beyond the constraints of Contrary to popular opinion, however, the people thatthe existing environment and develop a plan to put an build and support the infrastructure – rather than theoperational environment in place that supports the technology itself – represent the greatest potentialclient’s future state vision. security risk. As most failures and breaches result fromMid-size organizations, moreover, enjoy an advantage as human error, client organizations need to hire qualifiedthey typically don’t have the legacy burden that larger individuals for security roles and ensure proper back-upscompanies do, and can change systems and processes are in place to avoid single points of failure. Regulareasier. They also tend to have fewer applications to infrastructure audits by a third party are also essential,integrate, so building the right infrastructure and regardless of whether the infrastructure is in-house,systems profile can dramatically, and quickly, increase hosted or outsourced.process automation and visibility into key business data.Any IT initiative aimed at driving significant change BPO OPPORTUNITIESrequires project management and governance expertise Cloud-based Business Process as a Service (BPaaS)– capabilities that outsourcers can bring to the table. solutions for e-commerce, account and claimsResearch shows that more than 50 percent of enterprise management and other functions can be an attractiveIT projects fail. In most cases, the failure is caused not by option for mid-tier organizations that seek to adopt best-technology, but by ineffective practices around project in-class practices but might lack the budget or resourcesselection, project management and project oversight. for on-premise applications. The cloud can also be anOrganizations that lack maturity in these key areas tend effective way to hold down costs of system upgrades orto fail more often – and mid-tier organizations rarely software licensing renewals for existing applications.have the time or resources to nurture projectmanagement and governance expertise within theirinternal staff.MINEFIELD? OR GREENFIELD? ■ DEBORA CARD & STANTON JONES 4
  • 6. Cloud-enabled business process outsourcing (BPO) PROVIDER SELECTIONcombines managed services with cloud-based Within the sourcing market in general, and specificallyapplications as a hybrid offering. This approach allows within BPO, service providers are increasingly focused oncompanies to leverage on-demand resources from carving out specializations aligned with industries and/orproviders, utilizing the flexibility of the cloud model to particular client needs. This trend is impacting the mid-dynamically meet peak systems demand without tier sector as well, as a growing number of matureinvesting in local IT resources, and to have the same service providers are entering the space. Increasingprovider manage the business services on that specialization provides clients with the opportunity totechnology. This approach makes it possible to optimize find a provider particularly qualified to understand andboth the business process and technology environments. address their business requirements. It also puts theService providers are today delivering cloud-based BPaaS onus on the client to navigate a maze of options.solutions on a wide range of vertical-specific platforms,including banking, insurance, manufacturing and KEYS TO SUCCESSlogistics. Wherever a mid-tier organization is on its sourcing journey, essential success factors include:PROCUREMENT Knowledge of competitive market standardsImproved procurement practices are increasingly shows clients where existing services stand on theaccessible to mid-tier players. A number of service cost/quality spectrum, what opportunities forproviders are targeting mid-tier companies for indirect improvement exist and whether a proposedprocurement, delivering significant savings through solution is economically viableimproved transactional and sourcing capability on Negotiating expertise is needed to defineindustry-leading platforms. requirements, evaluate proposals and craft aThe stakes are significant. Depending upon the industry successful agreementand the types of goods and services, the procurement Knowledge of provider capabilities allows a clientfunction may comprise as much as 20 percent to 60 to identify and assess vendors best-suited to meetpercent of a business’ entire expense base. ISG has found a particular set of requirementsthat businesses that implement comprehensiveprocurement strategies and best practices can yield, onaverage, 4 percent improvement on external costs, withthe most successful strategies exceeding these results.MINEFIELD? OR GREENFIELD? ■ DEBORA CARD & STANTON JONES 5
  • 7. Additional Resources TMAccessISG is an innovative approach to outsourcing advisory for mid-tier companies that seek to benefit from the TMmethodologies, tools, data and experience of sourcing advisory experts. A subscription knowledge service, AccessISGharnesses the expertise of ISG consultants with unparalleled market research capabilities to enable smart, strategically TMpowerful sourcing decisions. Subscribers can tap into a wealth of data, experience and insights, from the TPI Index , TM TMContract KnowledgeBase , Compass Benchmarking and Sourcing Prevalence Database to extensive research on offshorecity risk assessment, captive benchmarking and the ever-changing cloud, as well as detailed profiles on over 100 serviceproviders across more than a dozen service lines.For more information, contact Ken Ross at ken.ross@isg-one.com or +1 512 964 2840.Debora Card is a Partner with ISG. Contact her at debora.card@isg-one.com or +1 586 677 8351.Stanton Jones is Emerging Technology Analyst with ISG. Contact him at stanton.jones@isg-one.com or +1 281 795 2636.Paul Reynolds, Chief Research Officer, ISG, and Terry Kuester, Partner, ISG, contributed to this report.Information Services Group (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory servicescompany, serving more than 500 clients around the world to help them achieve operational excellence. ISG supportsprivate and public sector organizations to transform and optimize their operational environments through research,benchmarking, consulting and managed services, with a focus on information technology, business process transformation,program management services and enterprise resource planning. Clients look to ISG for unique insights and innovativesolutions for leveraging technology, the deepest data source in the industry, and more than five decades of experience ofglobal leadership in information and advisory services. Based in Stamford, Conn., the company has more than 700employees and operates in 21 countries. For additional information, visit www.isg-one.com. 071912 © Copyright 2012 Information Services Group – All Rights Reserved