November 2004 Outsourcing from the strategic point
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November 2004 Outsourcing from the strategic point

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November 2004 Outsourcing from the strategic point November 2004 Outsourcing from the strategic point Presentation Transcript

  • November 2004 Outsourcing from the strategic point of view for Nordic companies Speech at First Baltic IT Cruise 2004-11-22 www.informatics.se [email_address]
  • Jan Book – IT Management Consultant and Strategic Advisor to business and IT executives
    • Partner in the IT Management company Informatics Strategic Advisors
    • Advisor to business and IT executives in strategic IT-matters like IT-strategy, CIO for hire, IT-sourcing, Cost cut / Efficiency, Quality assurance, Investments, Value management, Organisation
    • 30 years of experience from the IT industry and application in end user industries
    • Over 20 years of experience from Nordic and international consultant companies like Enator, SIAR Bossard, Gartner Group and Booz Allen Hamilton.
    • Extensive experience from Nordic and International assignments for clients in Banking, Retail, Energy, Telecom, Public sector and a variety of manufacturing industries like Packaging, Paper & Pulp, Food, Chemicals, Automotive, Assembly, Construction materials and Medical supply.
    • Bachelor degree from the University of Lund Sweden in Economics and Information technology.
    Background and experience
  • Informatics Strategic Advisors gives advice to Business and IT executives in strategic IT matters Informatics business concept and profile
    • Business profile
    • Business driven – Business perspective, change capability and IT knowledge
    • Specialist competence – within IT-management and change management
    • Integrity – IT supply independent, finding pragmatic IT solutions
    • Flexibility – Situational advisory, strategic analysis and change leadership/implementation coaching
    • Efficiency – Build the capability of optimizing value IT and commodity IT simultaneously
    ” Assist management in companies and organizations by enhancing business value and efficiency by IT ”
  • Content
    • Nordic business and IT situation - IT challenges and trends
    • The IT outsourcing market
    • Informatics view on IT Sourcing
    • Development of a forefront sourcing agreement
  • The business climate for many Nordic companies is tough due to strong exposure to export business and international competition
    • Cost cut programs because of fierce competition and weaker financial climate
    • Structural changes because of an increasingly competitive business climate – higher awareness and preparedness for change
    • Outsourcing of production and commodity services to “low cost countries”
    • Short term profit improvement requirements
    Business Challenges
    • Cost efficiency
    • Flexibility
    • Innovation and time to market
    Nordic business climate and challenges
  • The IT situation for Nordic companies is in many cases characterised by weak trust in IT value
    • Backlash from big investments in the 90ies: Y2K, ERP, eBusiness, CRM – where is the business value?
    • Weak trust in the value of IT – fewer major forefront initiatives
    • Efficiency/cost cut programs – where only the cost side is considered
    • Application architecture dilemma – stuck in the middle with incomplete ERP-based architectures
    • Cost efficiency
    • Demonstrate value
    • Balance long term investments
    Nordic IT situation and IT challenges IT Challenges
  • There is no automatic correlation between IT spending and value – Only the companies that have a clear strategic intent and high managerial skills will succeed 100 80 60 40 20 0 -20 -40 Returns on shareholder Equity - % 1000 10000 IT Budget/employee (log) Source: Butler Group IT returns related to investment level
  • After the hype IT is increasingly regarded as a commodity which makes no difference for business competitiveness
    • Digital (IT) infrastructure, the most recent infrastructure investment wave, has now grown mature
    • Investments in IT infrastructure will slow down and competitive advantage will even out like for earlier infrastructure areas
    • Focus will be on
      • Follow rather than lead
      • Minimize investments
      • Reliability
    Productivity in the society Time Railways Electricity Analogue telephony Digital Infrastructure Example of infrastructure investment waves 1850-2000 ? Utilization of economies of scale and low cost country leverage are two concrete examples of this trend
  • Low cost country leverage is basic for making IT services with high personnel intensity more efficient Example of comparable IT service with high personnel intensity: Hourly rate for PC support in different countries - As a complement to efficiency enhancement by introduction of standard products Source: Recent global IT service procurement project
  • Content
    • Nordic business and IT situation - IT challenges and trends
    • The IT outsourcing market
    • Informatics view on IT Sourcing
    • Development of a forefront sourcing agreement
  • The Nordic outsourcing market has grown dramatically in the last few years – but the success story is not complete
    • Many big outsourcing contracts recently – e.g. Ericsson, ABB and SAS
    • Big international players like HP, IBM, Atos Origin, Accenture and Capgemini are dominating
    • Financial backlash from contracts won during the “recession” years
    • In many cases clients are dissatisfied with how they have managed to control their outsourcing partner
    • Business Process Outsourcing is growing
    • Offshoring is also growing
    Trends on the Nordic outsourcing market
  • Companies have outsourced all aspects of IT service provision … while retaining key policy setting activities Source: IDC, 2002 % of respondents IT Activities Outsourced IT Activities NOT Outsourced
    • Policy and standards
    • Governance
    • Mission critical applications and infrastructure
    • Support and maintenance of core process control systems
    53% 48% 36% 22% 20% 8% 4% 0% 10% 20% 30% 40% 50% 60% Application development Infrastructure IT help desk All of IT Application management Specific IT functions Hardware support
  • Cost saving, gain access to outside expertise and service-level improvement, are the key drivers of IT outsourcing Most important reasons for outsourcing Source: The Conference Board Survey on Outsourcing Trends, 2003 77% 70% 61% 59% 56% Cost savings Gain access to outside expertise Improve service Focus on core business Gain access to better technology
  • To minimize these risks, companies look for service providers who can show a strong responsiveness and customer service – providers that have a proven track record Source: IDC, 2002 % of respondents selecting the characteristic Top characteristics sought in an outsourcing provider 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Responsiveness and customer service Guarantees and service level agreements Ability to enable future business strategies Expertise within your industry Price Trusted, strategic relationship with your company Short implementation/transition period Provisioning of best-of breed technology Joint relationship/stake in the business
  • Offshoring/Nearshoring is emerging…
    • Offshore companies from India are dominating in the Nordic area, e.g. Tata Consulting, HCL
    • Few companies are yet using “nearshoring” from the Baltic countries and Eastern Europe
    • Global delivery models from the big international companies are the most common
      • front-office in client country and
      • back-office in low cost countries.
      • e.g. IBM, Accenture, Capgemini, Atos Origin
    • Offshore “barriers” are
      • Language problems (e.g. public sector)
      • Organizational resistance
      • Loss of control
      • Questionable performance
      • Weak outsourcing experience
    Offshoring/Nearshoring status
  • … and 1/3 of the top 100 companies in the Nordic area plan some kind of offshore-activities
    • CIO´s in Sweden's 100 largest companies were asked about outsourcing to “low-cost countries”
      • 1/3 of the companies are planning outsourcing, partly or wholly, to offshore countries but…
      • Only around 20% have experience from “off-shoring”
      • Most positive to off-shoring were the manufacturing industry
    Source: Informatics CIO-survey, 2004
  • According to Gartner Group very few offshore countries have acceptable conditions Rating of sample of offshore countries Poor Fair Good Very good Excellent Source: Gartner Group 2004 Overall climate Data/IP - security Cultural compatibility Political stability Cost Education system Infrastructure Labour pool Government Language Russia Hun - gary Poland Czech Rep. Ireland North Ireland South Africa Israel China India Criterion Overall climate Data/IP - security Political stability Cost Education system Infrastructure Labour pool support Language Russia Hun - gary Poland Czech Rep. Ireland North Ireland South Africa Israel China India Criterion
  • Content
    • Nordic business and IT situation - IT challenges and trends
    • The IT outsourcing market
    • Informatics view on IT Sourcing
    • Development of a forefront sourcing agreement
  • As IT is maturing the perspective on IT is undergoing a dramatic change
    • IT support for competitive uniqueness
    • IT support for core business processes
    • IT support for admin business processes
    • Infrastructure
    2000 ” All IT is strategic” 2010 ” Information supply for competitive differentiation is strategic” Commodity ” The value of IT is questioned”
  • Today certain IT areas are of strategic importance and others are merely commodity Business neutral/ Standardised IT Business critical IT Highest business value Lowest IT-cost Best support for the business model Increased maturity and standardisation Critical borderline
    • Enhance cost efficiency by
      • Standardisation
      • Consolidation
      • Sourcing
      • Low cost country leverage
    • Strengthen the business model with critical information support
      • For competitive differentiation
      • For operational cost efficiency
    The borderline between business critical and business neutral parts of IT in the company Companies that exploit the differences get a dual effect - higher business benefit at lower costs
  • The impact of current IT trends on the internal IT unit is value climbing
    • Capture the value of economies of scale and offshoring
      • Simplify services/reduce complexity/standardize
      • Use economies of scale for ”hard” IT services and offshoring for ”soft” IT services
      • Force IT suppliers to blended services
      • Enhance procurement/supplier management
      • Plan competence shifting
    • Focus integration/information supply, IT controlling and Information security
    • Move closer to the business/add value to the business model
      • Support increased cost efficiency in the business
      • Support increased differentiation in the business
      • Support in capturing the sleeping values of ERP
    Business model Sourcing market 1. 2. 3. Customer relation Technology management Structure management Principles of value climbing in the IT unit Enhancement
  • The impact on IT suppliers is increased proactiveness and understanding of the specific business situation
    • Drive voluntarily a continuous strong cost reduction
      • Propose simplification and consolidation
      • Explore automation in the service delivery
      • Explore low cost country consulting/blended services
    • Get more ”specific-customer-in” (rather than “generic-product/koncept-out” to all customers)
      • Be updated on the customer business model
      • Inspire with solutions that enhance business cost efficiency respective business differentiation for the right parts of the business
    • Be business driven – demonstrate how proposed solutions can have an impact on current business challenges
      • Enhancement of on shore production/administration of the business
      • Control of offshore production/administration of the business
    • Be prepared on tougher negotiations going forward
    Enhancement of IT supplier to ”real” partnership
  • Content
    • Nordic business and IT situation - IT challenges and trends
    • The IT outsourcing market
    • Informatics view on IT Sourcing
    • Development of a forefront sourcing agreement
  • There are different models for outsourcing - Selective sourcing/ multi sourcing has been the most common model in recent major deals… Aff ä r IT - enhet Aff ä r Aff ä r IT-unit Business Business Business Internal IT-supplier Selective/ Multi sourcing (Best-of-Bread) Main contractor Best-of-Bread consortium Aff ä r Business Total outsourcing Maturity/Evolution of sourcing model … however the Main contractor model is gaining ground
  • The target sourcing model includes establishment of efficient sourcing areas with built in competition potential Business centric Technology centric IT Service integration / Main contractor Business integration and buying competence Off shoring vendor Project AM Central server hosting Data & telecom Local operation Target sourcing model CLIENT EXEMPLE Competitive sourcing situation/ dual sourcing
  • The forefront sourcing agreement contains ingredients like main contractor ship, competitive/dual sourcing modules and utilization of blended services A typical modern forefront sourcing agreement
    • Sourcing Agreement key characteristics
    • Main contractor with Service integration responsibility
      • Services in scope: Helpdesk, Application management and selected Infrastructure management services
    • Competitive sourcing model
    • Annual cost reduction by 8-10% through transformation
    • Extended suppliers responsibility for indirect damages
    • Blended service deliveries with on shore front-office and off shore back-office - “Floating” delivery centre model – “striving to find the cheapest location over time
    • High degree of formal control
      • Process & Governance model standardisation – ITIL etc
      • Quality requirements – CMM 5
  • Informatics offers a comprehensive program that achieves a successful outsourcing arrangement with speed and control - while minimizing risk Sourcing Strategy Vendor negotiation Sourcing strategy • Current supplier portfolio • IT supply market potential • Business expectations & requirements • Assessment of IT - market • Detailed IT - service requirement • Future business scenario IT - service Quotations Supplier shortlist Final contract • Negotiation strategy/price • Detailed Business req. • Legal/contractual requirements Procurement & Vendor selection
    • Assessment of current IT suppliers/IT performance
    • Develop sourcing strategy
    Sourcing Strategy Vendor negotiation Sourcing strategy • Current supplier portfolio • IT supply market potential • Business expectations & requirements • Assessment of IT - market • Detailed IT - service requirement • Future business scenario IT - service Quotations Supplier shortlist Final contract • Negotiation strategy/price • Detailed Business req. • Legal/contractual requirements Procurement & Vendor selection IT sourcing activities
    • Develop service requirements
    • Request for information
    • Request for quotation
    • Vendor offers/presentations
    • Evaluation, reference visits
    • Develop service level requirements
    • Make due diligence
    • Drive commercial/contractual negotiations
  • Summary
    • Nordic business and IT situation - IT challenges and trends
      • Cost efficiency is a permanent focus in IT units despite of stronger business climate – The potential is in economies of scale and low cost country leverage
    • The IT outsourcing market
      • Many traditional major sourcing deals in the last few years – but now Offshoring/Nearshoring is emerging and 1/3 of the top 100 companies in the Nordic area plan some kind of offshore-activities
    • Informatics view on IT Sourcing
      • As IT is maturing the perspective on IT is undergoing a dramatic change. The impact on the IT unit is exploration of economies of scale and low cost country leverage together with value climbing
    • Development of a forefront sourcing agreement
      • The forefront sourcing agreement contains ingredients like main contractor ship, competitive/ dual sourcing modules and utilization of blended services