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Outsourcing Strategy Survey 2009 2010

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  • 1. Sourcing Transformation OUTSOURCING STRATEGY SURVEY 2009-2010 A Capgemini Consulting survey on Shared Services and Outsourcing October, 2009
  • 2. Introduction ........................................................................................... 3 Executive summary .............................................................................. 4 Background ........................................................................................... 6 Processes currently outsourced and future plans .......................... 10 Why organisations outsource and which risks they see ................ 16 Business Case ..................................................................................... 21 Select and prepare for the partnership ............................................. 24 Change management .......................................................................... 30 Demand organisation ......................................................................... 35 List of participants .............................................................................. 38 Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 2
  • 3. Introduction As a consequence of the As a full-service consulting changing business organisation, Capgemini environment, including the key Consulting wants to understand impact of the credit crunch, we what is happening in the market are seeing organisations re- to be able to provide the best evaluate their sourcing possible advice and support to strategies. In some cases, this our clients. Many surveys cover is because of a short term need the specifics of the outsourcing to save additional costs, in or shared service operation, not others, because a more many describe how the favourable deal structure can sourcing strategy was now be negotiated. developed and what made it successful. We are also seeing organisations postponing the That is why we are pleased to sourcing strategy decision and share with you the results of our execution. Sourcing of a survey on sourcing strategy in business or IT process can help different industries. This report operations run more efficiently covers a wide spectrum of and can result in cost savings. perspectives related to the Despite these benefits, many sourcing strategy approach and initiatives have been put on we believe it benefits anyone hold because of economic and every organisation, from uncertainty. sourcing pioneer to sourcing expert. We know that a changing environment delivers complex We would like to thank all the challenges in defining the right executives who contributed to sourcing approach. That is the our survey and provided their main reason why we valuable insights and time. We investigated the incentives for trust that you will find this report sourcing, with a specific focus interesting and useful as you on the sourcing strategy continue on your journey, process. defining the right sourcing Authors: strategy for your organisation. In writing this report, we Joost Aarts combined the outcome of Also I would like to thank Robin Adriaans interviews with our latest Marjorie Powner and Satish Fleur Baarspul insights in trends and issues in Paul from our BPO practice and Erik van Daalen different industries. As this Professor Dr. Ir. Andrzej Marjolein Dijkshoorn survey was executed during the Hajdasinski from Nyenrode Oedger Meijborg credit crunch, we found some Business University for their Stefan Westdijk specific effects on sourcing valuable contributions. strategies. We did not, however, directly investigate Stefan Westdijk these effects. Sourcing Strategy Leader Netherlands Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 3
  • 4. Executive summary This report highlights the The outcome of our survey importance of sourcing strategy suggests the following in the evolution of an recommendations, which organisation‟s development. particularly apply to Capgemini Consulting captured organisations within our target the views and experiences of industries (Financial Services, almost 40 executives from a Energy & Utilities, and number of large national and Manufacturing): multi-national companies, with a view on future decision making o Organisations will benefit and successful development from considering a and implementation of sourcing combination of sourcing strategies for our clients. modes to realise their sourcing strategy. This can Our findings below explore the give insight to the benefits whole cycle of the sourcing and concerns of each strategy and show that success sourcing mode and may is particularly dependent on result in ideas to support risk choosing the right sourcing mitigation. mode. Capgemini‟s Global Sourcing of Services (GSS) o 54% of the participants will © cube has been used to renew the contract with the distinguish the different existing supplier. The main sourcing modes, using three reasons for organisations to dimensions (location, ownership retain their current supplier and management style). are that the costs related to changing supplier could be More information about the prohibitive and the loss of © GSS cube can be found in our knowledge or experience could increase risk or impact Point of View on Sourcing quality. Strategy document. © Outline on the Global Sourcing of Services (GSS) cube Offshore Location Onshore Light Management Tight Style In-house Outsourced Ownership Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 4
  • 5. o Organisations should update and innovation are important their business case drivers. The full added value regularly, this will ensure of innovation by outsourcing decision-making in future is not yet discovered, but phases is based on sound this is just a matter of time. information and also that the benefits of the original o Organisations experience decision are realised. difficulties in defining the relationship with the internal o Organisations will benefit or external supplier. This is from working in real explained by the fact that partnerships with their sourcing is all about the suppliers, introducing, for involvement of people, example, bonuses for high entering a partnership and performance, rather than the transformation of penalties for low processes. In our opinion, it performance, in their requires specific skills to contractual terms. Working formalise these aspects in a in partnership also ensures alignment, coordination and contract. control of both supplier and o Organisations should also business needs. involve vendors from the o Organisations should use early phases to provide benchmarking tools to support with defining assess the performance of requirements, delivering their suppliers and use the accurate market information outcome of that analysis to and managing expectations. decide, for example, whether o Organisations should focus to renew their existing frequently (at least once contracts or find a new every quarter) on the supplier. evaluation of service quality. o Change management and implementation are the most o Organisations should align critical elements of the demand and supply within programme during transition one function to ensure or migration. The control of both aspects of the involvement of senior service. management and stakeholders of the business There was no significant should be high, especially in relationship between specific the early phases. Delaying industries and sourcing employee involvement can strategies. Our analysis of the cause problems later in the results does not show a notable process. preference of any of the o Due to pressure to industries for IT sourcing or differentiate from business process sourcing. The competitors, organisations sourcing maturity level depends are entering into more on the organisation itself and is strategic partnerships, for not primarily related to an which knowledge transfer industry. Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 5
  • 6. Background About Sourcing Selecting the right sourcing mode means finding the right There are many definitions of combination of ownership sourcing. For the purpose of (owned or not owned), location this survey, sourcing can be (onshore or offshore) and defined as delegating business management style / governance functions to a separate model (tight touch or light business unit or third party. A touch). These three elements sourcing strategy is the have been captured in a cube definition of what an of sourcing options or modes. organisation wants to do with This cube is called the Global the tasks, functions or Sourcing of Services (GSS) processes that are not © cube . differentiating that organisation from its competitors. © Outline on the Global Sourcing of Services (GSS) cube Offshore Location Onshore Light Management Tight Style In-house Outsourced Ownership © The GSS cube distinguishes eight different sourcing modes divided over three dimensions: location, ownership and management style. Location describes where the function is executed (onshore or offshore) Ownership demonstrates who executes the function (in-house, e.g. shared service centre, or outsourced) Management style depicts the level of management attention that is required for the process (light or tight management) Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 6
  • 7. Based on the GSS cube‟s three Whilst we focussed on all dimensions, sourcing can take dimensions of the GSS cube in different forms. The sourcing the survey, the dimension strategy with the least impact management style was not from the perspective of explicitly questioned. Aspects ownership, location change and of management style are, intensity of management is a however, covered in the Shared Service Centre (SSC). chapters about partnerships, risk and change management Today companies either choose below. to optimise existing SSC or set up new SSCs in competitive We interviewed chief markets. Evaluating the information officers, chief geographical scope and operation officers, chief location strategy can be financial officers, SSC lucrative, whether this is managers, sourcing strategy outsourcing or cross-border managers and divisional shared services, as potential managers of 38 large national sourcing strategies. This could entities or multinationals, mainly take the organisation in the with a head office located in the direction of the highest impact Netherlands. The interviews sourcing strategy from an were held in Q4 of 2008 and Q1 ownership, location and of 2009. management perspective: outsourcing to an offshored As mentioned above, we were third party where management very interested in the attention is not critical. More differences in approach, information about the GSS sourced processes and © cube can be found in our Point selected sourcing modes of View on Sourcing Strategy between industries. Figure 1 document. shows the distribution of the industries participating in the Why this survey survey. Three organisations participated who could not be Most of the surveys conducted Energy & classified as Energy & Utilities, Utilities by firms like Gartner, Forrester Financial Services or 21% and others focus on IT sourcing Manufacturing. and in general do not describe the differences between Manufacturing Financial 55% industries. In addition to IT, this Services survey deals with business 24% processes, such as Finance & Administration (F&A), Logistics and Procurement. We were also very interested in the differences between industries. Figure 1 : Participating industries Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 7
  • 8. We used the sourcing strategy approach of Capgemini as a guide to structure our questionnaire and our survey. In this five-phase closed loop process, organisations should continuously go through the cycle in order to define and execute the right sourcing strategy. Outline on the Sourcing Strategy Approach Capgemini‟s Sourcing Strategy Approach focuses on the process from defining potential sourcing strategies to implementing the selected strategy and managing the delivery. It comprises 5 phases, in a closed loop, because efficiency and business dynamics may require a change of sourcing mode. 1. Analysis and Definition - 2. Scenario Planning and scoping and evaluating all Business Case - analysing sourcing modes the most beneficial sourcing modes in more detail 3. Selection and Preparation 4. Transition or Migration - - preparing the organisation full implementation of the for change to the preferred right sourcing strategy sourcing mode 5. Delivery or Operations - monitor, control and manage the sourced process Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 8
  • 9. 1. Processes currently outsourced and future plans 1. Functions currently outsourced and future plans 2. Why organisations outsource 2. Why do organisations outsource and risks risks do and which what they see 6. Demand organisation they see 3. Business case 5. Change management 4. Select and prepare for the partnership Figure 2 : Relation between chapters and approach We have clustered our results In this survey we sometimes according to the different use the terminology insourcer phases of the sourcing strategy and outsourcer. The outsourcer process. The first chapter will delegates processes and/or provide an overview of selected tasks to the insourcer. The sourcing modes and strategies insourcer is also referred to as in general, which processes supplier or vendor. With were outsourced, moved into a insourcer we do not mean SSC and what are the sourcing insourcing which refers to strategy plans. companies assigning processes within the company that were The other chapters each link to outsource d before. a different phase of the sourcing strategy: 1. Processes currently outsourced and future plans 2. Why organisations outsource and which risks they see 3. Business case 4. Select and prepare for the partnership 5. Change management 6. Demand organisation Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 9
  • 10. Processes In this chapter we provide an Our results show a difference in overview of the currently time spent between outsourcing currently outsourced processes and and SSC initiatives and the time selected sourcing modes which industries spend on average on outsourced and were revealed by the survey. a sourcing strategy approach. future plans We provide these results per industry: Energy & Utilities, IT processes more sourced Financial Services and than business processes Manufacturing. We also asked IT process outsourcing is more our participants for their future mature than business process plans. All the results are shown outsourcing. IT is perceived as with a distinction between a „commodity‟ which is highly business processes and IT available in the market. The processes. maturity of the supplier market is considered high and because Furthermore, we measured of competition organisations are whether and how the activities convinced pricing is accurate. of Capgemini‟s sourcing IT is also linked to innovation strategy approach were and different IT domains require executed by our participants. specific knowledge. The approach contains generic activities which many of the organisations do carry out. business processes Facilities HR Finance & accounting Logistics Production Procurement Marketing Design 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% IT processes Infrastructure Application development Infrastructure management Desktop management Testing IT processes 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Inf rastructure Outsourced onshore Application development Outsourced of f shore Inf rastructure management Figure 3 : Overview of outsourced processes SSC onshore Desktop management and selected sourcing mode SSC of f shore Testing Not sourced Capgemini Consulting is the strategy and 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 10
  • 11. Innovation is defined as is limited. Given the maturity of invention plus cooperation plus the supplier market these i coordination plus collaboration . processes tend to be All variables are predominantly outsourced more than other present in successful IT business processes. sourcing projects. Logistics is also a business Offshore sourcing modes process which is outsourced in were less selected than a high number of cases. The onshore modes ability of suppliers to offer economies of scale plays an Many organisations select a important role in these combination of sourcing modes decisions. The least sourced for one or more of their IT business processes are design processes. Most common was and marketing activities. The outsourced onshore in low result can be explained by combination with offshore. Over the perceived strategic nature 25% of the organisations of these processes. selected this combination of sourcing modes for application Maturity determines the development and testing. number of sourcing strategies in place Onshore sourcing is preferred to offshore sourcing. Apparently The maturity of the supplier “Setting up a shared organisations prefer the ability market, and of the organisation service centre offshore to control above low labour itself, both impact the number of is a touchy subject costs. In addition, one processes sourced. The more which we want to participant mentioned that mature the supplier market the avoid” offshore sourcing modes also higher the chance a sourcing brought political issues: “setting strategy is already in place for up an SSC offshore is a touchy this process within the subject which we want to organisation. The more mature avoid”. Although costs are the the organisation, the more main reason for sourcing, sourcing strategies it is likely to organisations do not strive for have in place or already the lowest possible costs. replaced with a new strategy. Organisations are aiming for an optimum of lowest costs, Adoption of sourcing political stability and control. strategies per industry There is no relationship Facilities, HR and F&A are the between specific industries and most mature sourced sourcing strategies for certain business processes processes. Our analysis of the Facilities, HR and F&A are non- results does not show a notable differentiating processes. In preference of any one of the general the long term industries for IT sourcing or sustainable competitive business process sourcing. All advantage of these processes industries source all type of Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 11
  • 12. processes. We expected Preferences of the industry differences between industries for a certain sourcing mode to be able to distinguish an Financial Services early adopter. Since no industry organisations did not select shows an evidently higher SSC as sourcing mode either average of sourced processes, for IT nor for business we have to conclude that processes. This can be sourcing maturity level primarily explained by our belief that depends on the organisation Financial Services itself, and is not related to an organisations are more mature industry. and have redefined sourcing However, if we break down strategies, resulting in a shift industries, we can see from SSC to outsourcing. differences. In addition, if there are a number of organisations in an industry which outsource, the number of suppliers increases and further cost to serve decreases, hereby influencing sourcing maturity. IT sourcing Energy & Utilities Financial Services Manuf acturing 0% 20% 40% 60% 80% 100% process sourcing business process sourcing Outsourced Energy & Utilities SSC Financial Services Not sourced Manuf acturing 0% 60% 80% 100% 0% 20% 40% 60% 80% 100% Figure 4 : Selected sourcing mode per industry Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 12
  • 13. 70,0% referring mainly to HR and F&A, 60,0% as IT is already moved to offshore locations in most 50,0% cases. Some other processes 40,0% (e.g. Cleaning Services) can 30,0% SSC only be executed onshore due Outsourced to the nature of the process. 20,0% 10,0% 0,0% Current Future situation situation Figure 5 : Future situation Forecast of the processes to be sourced within the next five years Future sourcing plans indicate that, whilst the number of outsourced processes are likely to increase, the number of SSC processes will remain unchanged. This is not because no new SSCs will be established. Our results show that there will be an increase of new SSC initiatives and simultaneously a decrease of SSCs, due to the shift from SSC to outsource for those more mature organisations. With regard to the selection of the sourcing location, the percentage of plans for moving offshore is less than 10%. Two important remarks should be made about this. Especially for IT, the location might appear onshore to the outsourcer, but the insourcer might balance onshore, nearshore and offshore locations and work with the client as a unified team. Those participants, who mentioned offshore as potential future sourcing mode, were Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 13
  • 14. Sourcing strategy approach All organisations perform activities to define, select, prepare, implement and execute their sourcing strategy. Participants were asked which activities were executed and how much time and attention was spent. Attention was measured by time spent for monitoring and supervising activities. 100% 100% % activities of Sourcing Strategy 90% 90% Strategy approach executred % activities of Sourcing 80% 80% approach executred 70% 70% 60% 60% 50% Energy & Utilities 50% 40% Financial Services 40% 30% Manuf acturing 20% 30% 10% 20% 0% 10% Analysis and definition Preparation and Selection Delivery or Operations Scenario Planning and BusinessTransition or Migration Case 0% Figure 6 : Executed activities per phase Time spent on defining a initiatives (11+ months ). This sourcing strategy seems to be influenced by the involvement of Procurement When we look at the time which leading to long contract is spent to create a sourcing negotiations. Especially during strategy, there is a difference the selection and preparation between outsourcing and SSC. phase, fewer activities are The average time spent on performed as supplier selection outsourcing initiatives (20+ and contract negotiation are not months) is almost twice as necessary for an SSC. much as the time spent on SSC Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 14
  • 15. Conclusion and our perspective IT outsourcing is still more mature than business process outsourcing. Also onshore is more preferred in comparison to offshore. Organisations are aiming for an optimum of lowest costs, political stability and control. The sourcing maturity links to the individual organisation and does not seem to depend on the industry. Facilities, HR and F&A are the most mature sourced business processes. Future sourcing plans indicate the number of outsourced processes to increase. The number of SSC processes will remain unchanged. The average time spent on outsourcing initiatives is almost twice as much as the time spent on establishing an SSC. We expect organisations to use a combination of sourcing modes to realise their sourcing strategy. In a multi-mode sourcing solution, global resources, cost-efficient processes and extensive experience in diverse geographies, disciplines and industries, are bundled to achieve cost reductions, streamlined processes, innovation, competitive advantage and growth. In such a solution most of the operational processes are brought to an offshore location and the more tactical and strategic processes are delivered onshore or nearshore. Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 15
  • 16. Why The long-term impact of the Outsourcing and transforming credit crunch is uncertain for the processes at the same time organisations many organisations, but is the is perceived as high risk. One sudden economic downturn a outsource and good reason to re-evaluate your interviewed manufacturer mentioned “We only outsource which risks they sourcing strategy? Have the a process if stability of the reasons and risks for sourcing process is ensured; don‟t see changed due to current events? outsource your mess for less”. Why do organisations choose outsourcing/SSC? And are Cost reduction remains the there differences between most important reason for industries? sourcing. In line with other surveys this shows that This chapter provides an organisations still associate “Don’t outsource your overview of the reasons and sourcing with cost effectiveness mess for less” risks. It also gives insight into As a result of the current the differences and similarities economic downturn, between industries. organisations feel the pressure to reduce costs and reduce Reasons for sourcing working capital. Many Reasons for outsourcing are organisations are turning to similar to those for setting up an sourcing for achieving short SSC. The differences we found term cost savings or other are related to the readiness to financial benefits. outsource. Outsourcing Reasons Shared service centre Cost reduction Cost reduction Improve quality Improve quality Improve business focus Improve business focus Headcount reduction Headcount reduction Increase flexibility Increase flexibility 35% 30% 25% 20% 15% 10% 5% 0% 0% 5% 10% 15% 20% 25% 30% 35% Figure 7 : Reason (above 5%) for outsourcing and SSC Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 16
  • 17. Outsourcing Reasons Shared service centre Cost reduction Cost reduction Manufacturing Financial Services Improve quality Improve quality E&U Improve businessfocus Improve business focus Headcount reduction Headcount reduction Manufacturing Increase flexibility Increase flexibility Finance Energy & Utilities % 10% 15% 20% 25% 30% Obtain knowledge Obtain knowledge Increase efficiency Increase efficiency Because others outsource / have a SSC 50% 40% 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% Figure 8 : Reasons (above 5%) by industry Reasons - industries Energy & Utilities organisations compared indicated that the most Manufacturers indicate that they important reason for use both sourcing strategies to establishing an SSC is to focus more on their core improve quality. They find this business, which results in cost more important than cost reduction and improved reduction and improved business focus. Products are business focus. The Energy & tangible and the pressure to set Utilities industry also see new product standards is high. outsourcing as a gateway to Some of the Manufacturing knowledge and competence. organisations even mentioned they are driven by customer pressure to improve standards and, therefore, source processes. Financial Services organisations indicate that cost reduction and headcount reduction are important reasons for sourcing. Headcount reduction was mentioned as a reason for an SSC more often in comparison to other industries. Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 17
  • 18. Outsourcing Risks Shared service centre Dependency on Dependency on suppliersupplier / SSC / SSC Loss of quality of quality Loss Loss ofLoss of knowledge knowledge Impact on organisation Impact on organisation Loss of business alignment Loss of business alignment 25% 20% 15% 10% 5% 0% 0% 5% 10% 15% 20% 25% Figure 9 : Risks (above 5%) for outsourcing and SSC Risks of sourcing outsourcing was insignificant compared to the impact of Overall, the perceived risks of not delivering to our outsourcing correspond to customer on time”. those of an SSC. We did, however, find four key o Organisations have a strong differences. focus on quality when setting up an SSC. As mentioned o Organisations choose their before, organisations see an sourcing strategy based on SSC as a vehicle to improve risk mitigation. The quality. At the same time, perceived risks of they perceive loss of quality outsourcing are related to as the highest risk. In the the commercial relationship preparation of an SSC the between the insourcer and key question is - how do the outsourcer. organisations ensure the Organisations anticipate on desired quality level? a possible lock-in with the supplier. The tangible o Loss of business alignment benefits of the outsourcing is only perceived as a risk deal may be outweighed by when establishing an SSC. the costs and perceived We did expect to find that risks associated with loss of business alignment “Cost reduction was outsourcing. was also perceived as a risk insignificant compared of outsourcing. This was not to not delivering to our o By selecting an SSC, the case. Whilst, by customer on time” organisations want to ensure outsourcing a process, the proximity to the business, distance between service avoiding dependency on provider and customer external suppliers and loss increases. It seems that of knowledge. As a organisations do not participant mentioned, perceive this distance to be “Speed and flexibility is a major issue. crucial to us. In this case, the cost reduction created by Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 18
  • 19. Outsourcing Risks Shared service centre Dependency on Dependency on external supplier Manufacturing supplier / SSC Financial Services Loss of quality of quality Loss E&U Loss of Loss of knowledge knowledge Impact on organisation Impact on organisation Loss of business alignment Loss of business alignment 5% 10% 15% 20% 25% 30% Loss ofLoss of confidentiality confidentiality Loss of control of control Loss Increaseof support needed Increase of support needed 30% 25% 20% 15% 10% 5% 0% 0% 5% 10% 15% 20% 25% 30% Figure 10 : Risks (above 5%) by industry Risks - industries compared have to be disentangled which could cause loss of business Manufacturing organisations alignment between the perceive dependency on the organisation and the SSC. supplier and loss of knowledge as high risks of outsourcing. As mentioned before, Energy & Utilities organisations manufacturers have a strong mainly bring in external drive to reduce costs and suppliers to obtain knowledge, improve business focus. Loss of not to improve quality. In knowledge and dependency on comparing the reasons and the supplier are perceived as risks of sourcing in both the road blocks to achieving these SSC and the outsourcing goals. modes, we found a correlation between the reasons for one Financial Services sourcing mode and risks of the organisations perceive the loss other. Improving quality, for of business alignment as a high example, is the most important risk of establishing an SSC, far reason for establishing an SSC higher in comparison to the but the potential for reduced other industries surveyed. quality is perceived as the Financial Services highest risk of outsourcing. organisations are service Gaining knowledge, for providers and see information example, is an important reason and employees as valuable for agreeing to outsource assets. Processes within services but losing knowledge Financial Services is seen to be a high risk when organisations are also highly establishing an SSC. interwoven, in particular HR and IT processes. These processes Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 19
  • 20. Conclusion and our entering into more strategic perspective partnerships, for which knowledge transfer and The reasons and risks innovation are important associated with each sourcing drivers. In our opinion, the full mode have not been changed added value of innovation by by current events. Cost outsourcing is not yet reduction remains the most discovered, but this is just a important reason for matter of time. organisations to (out)source. The survey results show expected quality from outsourcing is lower than moving to an SSC. This might be perception as outsourcing is often managed through performance contracts unlike SSCs. Many differences between organisations are caused by their business strategy. Do they have a „customer intimacy‟, „product leadership‟ or „operational excellence‟ strategy? In our opinion, the right reasons for choosing whether to use the outsourcing or SSC mode are those which best align with your business strategy. It helps to consider several sourcing modes, in the analysis and definition phase, when identifying the right sourcing strategy. Some organisations take multi- sourcing to the extreme leading to complex onshore and offshore multivendor relations. Although only a small number of participants mentioned innovation as a reason for outsourcing, we expect this number to increase in the coming years. Due to pressure to differentiate from competitors, organisations are Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 20
  • 21. Business Case The business case is a crucial Components of the business deliverable and a milestone case document in the scenario planning and business case 90% of the participants phase, when the sourcing mentioned cost reduction as the strategy is translated to a major driver within their tactical level. The most business case, followed by beneficial sourcing modes are headcount reduction (58%) and analysed in more detail both cultural impact (42%). qualitatively and quantitatively. Other components mentioned We asked our participants include: about their business case and the required return on o strategic objective investment. We also questioned o added value of the sourcing the components within their party business case. o customer satisfaction Pay-back period o organisational impact o synergy advantages Overall we see that more than 80% of the organisations o quality surveyed aim for a pay-back period of less than 4 years. The majority of the participants are aiming for a pay-back period of between 2 and 4 years. In the Financial Services industry, we 1 see organisations aiming for 0,9 longer term pay-back period. 0,8 100% 0,7 90% Percentage 0,6 80% 70% Manufacturing 0,5 Percentage 60% Financial Services 0,4 50% Energy & Utilities 0,3 40% 30% Overall 0,2 20% 0,1 10% 0 0% 0<->2 0<->2 2<->4 2<->4 4<->6 4<->6 Pay-back period in years ROI in years Figure 11 : Pay-back period Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 21
  • 22. In the organisations surveyed, manufacturers included cultural impact in the business case more often than organisations in other industries. This is in line with our finding that Manufacturing organisations are more concerned about the risks associated with the impact on the organisation. Energy & Utilities Financial Services Yes Manuf acturing No Overall 0% 20% 40% 60% 80% 100% Figure 12 : Business case update Updating the Business Case It seems that business cases We asked the participants if are mainly used in the decision- they update their business case making process. Few after the decision to source has organisations track the results been taken. On average less to ensure the right decision has than 45% of the organisations been made and that the surveyed updated their estimated benefits are realised. business case regularly. Given the fact that cost reduction is the main driver Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 22
  • 23. behind sourcing this seems inconsistent. Conclusion and our perspective More than 80% of participants expressed their aim for an pay- back period of less than 4 years. Cost reduction is the main driver in the business case, followed by headcount reduction and cultural impact. Few organisations update the business case regularly. In our opinion, maintaining and updating the business case is important, firstly as a guideline for making decisions in later phases (additional requirements during execution, for example), secondly because it is important to measure and compare the benefits after the decision has been made. As a consequence few organisations can tell if they have achieved their pay-back period. We see organisations aiming for faster pay-back period. The economic downturn seems to be contributing to this trend. Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 23
  • 24. Select and This chapter covers our findings Selection process on the selection and prepare for the preparation phase of the While selecting a supplier, sourcing strategy approach. different criteria need to be partnership Selection and preparation is taken into consideration. The essentially the execution of the six most mentioned criteria are „make‟ or „buy‟ decision. outlined in the figure below. In the case of outsourcing, the Price is the most important selection and negotiation with selection criteria for choosing one or multiple service the outsourcing supplier. This is providers needs to be carried an expected outcome because out. In general, this selection the major reason for sourcing is cost reduction. Price was “Price was one of our process takes a lot of time and effort. This is because the followed by quality (15%) and least important outsourcer needs to make sure cultural fit (15%). In addition to selection criteria. We that the insourcer is capable of being one of the key selection were more focussed fulfilling the outsourced process criteria, improving quality is also on the added value of or function with at least the one of the most important the supplier to bring same (but preferably even reasons for sourcing our organisation to the next level.” higher) quality. Organisations have, on When an in-house sourcing average, five potential mode is chosen, the outsourcing suppliers. Many organisation needs to be organisations stated that they prepared for the movement of quickly reduce the long list to a workload. This might involve the short list or only use a short list. transfer of duties from one This reduction is mainly done department to another, or based on market knowledge building a new SSC to take over and experience. the workload in scope. Price 22% Cultural f it 15% Quality 15% Process Experience 9% Proof of concept 8% Reputation 8% 0% 5% 10% 15% 20% 25% Figure 13 : Selection criteria (above 5%) Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 24
  • 25. Overall, the organisations surveyed agreed a contract for four years. Based on earlier surveys we expected the contract time period to be “We know, based on longer. Avoiding lock-in and our experience, which increasing flexibility are reasons suppliers we can for this relatively low average of remove from the short four years. list” Combination f ixed & variable 34% Transaction based f ee 31% Fixed price 21% Gain share 7% 0% 10% 20% 30% 40% Figure 14 : Deal construction (above 5%) Financial arrangement are not able to allocate costs to cost drivers. For organisations Variable financial arrangements that already have a good are more often used than fixed process in place and only focus price arrangements. Most on cost reduction as their main variable arrangements include a priority, fixed price could be an fixed and variable element. 30% optimal solution. of the organisations surveyed agreed upon a fully variable Most organisations mention that arrangement, a transaction they do not use gain share as based fee. The high percentage part of their financial of variable arrangements can arrangements. Gain share is an be explained by the need for optimal approach to create „win- flexibility regarding volumes or win‟ situations for both workload. One participant organisations, which is stated “We chose a variable “When we use less we expected of strategic financial arrangement because want to pay less.” the financial flexibility was partnerships. Due to the need for transparency in strategic important to us. When we use relationships, we expect the less, we want to pay less”. number of organisations using this approach to increase in the 20% of the sourcing deals are coming years. based on fixed price. It seems that these organisations do not strive for financial flexibility or Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 25
  • 26. Construction of the sourcing More than 60% of the deal processes are transformed or reorganised, either before For the purpose of this survey, sourcing the process or after we have identified four main sourcing the process. The sourcing deal types: approach taken depends on the level of maturity of the o Lift: the process is handed processes in scope. Almost over in the current condition 20% of processes are to the supplier or SSC transferred as-is. o Shift & lift: the process is first When outsourcing, our transformed before it is participants preferred the „lift & handed over to the supplier shift‟ approach. Where SSCs or SSC were established, there was a preference for „shift & lift‟. When o Lift & shift: the process is outsourcing was agreed, the first handed over to supplier organisations surveyed or SSC, whereupon preferred to outsource the transformation commences transformation to the supplier. In some cases organisations o Combination: two or three of used an SSC to transform the the above construction processes before outsourcing methods are combined for them to an external supplier. different part of the process Transformation is defined as follows: activities required for aligning and improving the work of the outsourced and retained processes with the goal to Combination improve productivity, reduce 16% costs or improve speed to Lift & shift market. 36% Lift 19% Transformational Outsourcing is the way to add value to the organisation as well as gaining Shift & lift additional domain and 29% technology expertise. It is about making use of skilled labour and technology to create corporate growth, rather than Figure 15 : Sourcing deal viewing outsourcing as merely a construction way to cut costs via, for instance, taking advantages of ii low wages abroad . Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 26
  • 27. Quality of service 27% Rates f or service 17% Budget during transition 12% Legal Conditions and Liability 10% “There were too many sales at the Planning 10% table and too little 0% 5% 10% 15% 20% 25% 30% content” Figure 16 : Top 5 challenges Challenges in sourcing The outcome of negotiations contracts with the supplier, internal or external, will be secured in a During the contracting phase, contract. The contract will organisations face many contain different terms to be challenges, including those discussed and agreed upon by identified by the participants in the insourcer and outsourcer. It our survey. The five most is interesting to see which of the significant challenges are elements in the contract lead to shown in figure 16. the most discussion after signing the contract. The figure During the contracting phase below shows the four most the main discussion points are discussed elements according about defining and agreeing the to our participants. quality and rates for in-scope services. Several participants Processes for dissolution and mentioned that content was non-performance penalties are missing. the subjects discussed most One participant responded: often. Other topics for “there were too many sales at discussion are rate and the table and too little content”. compensation details, service Process f or dissolution and non- 20% perf ormance penalties Rate and compensation details 16% Service standards and perf ormance 13% requirements (KPIs) Key perf ormance indicators (KPIs) 11% to determine compensation 0% 5% 10% 15% 20% 25% Figure 17 : Four most discussed topic Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 27
  • 28. levels, wage inflation, attrition 54% of the participants will and key performance indicators. renew the contract with the All topics are related to the type existing supplier. The main of relationship between the reasons for organisations to insourcer/supplier and the retain their current supplier are outsourcer. that the costs related to changing supplier could be Is the supplier treated as a prohibitive and the loss of contractor or as a business knowledge or experience could partner? In the latter, a bonus increase risk or impact quality. for high performance would probably be a better 16% of the participants have mechanism, than penalties for concrete plans to end the low performance. relationship with their current supplier, either by selecting a Satisfaction with current new supplier (8%) or by supplier insourcing (8%). For the The contract will be in place for remaining percentage (30%) a specific time period. At the other solutions are mentioned, end of the contract period a such as insourcing a part of the decision needs to be taken process, analysing a multi whether to extend the contract vendor construction. or to look for another supplier. We asked the participants what they normally do at the end of a contract. renew the contract using existing vendor other.... insourcing new vendor 0% 10% 20% 30% 40% 50% 60% Figure 18 : What if the contract ends Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 28
  • 29. Conclusion and our is the bonus for high perspective performance, instead of the penalty for low performance. Selection and Preparation is the We still, however, see many execution of the „make‟ or „buy‟ organisations using non- decision as part of the sourcing performance penalties to strategy approach. Price is the manage such a relationship. most important selection criterion, followed by quality and More than half of the cultural fit. participants pointed out that they would renew the contract Organisations identify, on with their current supplier if the average, five potential contract ended today. In our outsourcing suppliers. opinion, organisations should Suppliers are eliminated from benchmark the performance of the list on the basis of market the supplier and use the knowledge and experience. To outcome of that analysis to avoid lock-in and to increase decide whether to renew the flexibility, the organisations contract or to find a new participating in the survey aim supplier. From the for contracts with a lifespan of organisations we have four years. interviewed, very few do use benchmarking tools to It seems that organisations substantiate their decisions. experience difficulties in defining the relationship with the internal or external supplier. This is explained by the fact that sourcing is all about the involvement of people, entering a partnership and the transformation of processes. In our opinion, it requires specific skills to formalise these aspects in a contract. As more than 60% of the processes are transformed or reorganised before outsourcing we are not surprised that processes for dissolution and non-performance are the topics discussed most often. Given the complexity of these outsourcing arrangements, a business partnership is the preferred relationship choice. One of the indicators of such a relationship Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 29
  • 30. Change In this chapter we describe the Change management is a change management aspects critical part of the sourcing management strategy approach which during transition and migration, including those associated with involves skills and knowledge transformation. that will enable people to accept new procedures, technologies, Critical elements of transition systems, structures and values. During the transition and To ensure successful migration phase there are organisational transformation, elements which determine establishment of new policies, success. Change management procedures, systems and is the most mentioned critical processes is not enough. When element to support transition. people are not fully informed, Effective change management they deny or resist change. It is and good communication vital to understand, plan and reduces the risks and potential implement appropriate activities costs, while increasing the to provide assistance to people likelihood of success and through the transition and improving the connection transformation. between outsourcer and insourcer. Change management 45% Project management 21% Planning 10% Continuity of business 10% Quality of service 7% Cultural f it 3% Interf aces 3% 0% 10% 20% 30% 40% 50% Figure 19 : Critical elements Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 30
  • 31. Stakeholder management Limited supplier involvement was found in the analysis and The graph below shows which definition phase and in the stakeholders were involved in scenario planning and business the different phases of the case phase. Participants want sourcing strategy approach. to avoid early influence by, and Senior Management is highly dependency on, suppliers. involved at the start of the sourcing strategy approach. Employees are involved from The stakeholders of the the selection and preparation business (middle management) phase onwards. Very few are also involved from the start organisations involve but seem to be more involved in employees during the scenario the selection and preparation planning and business case phase. phase. The works council starts to be involved from the scenario planning and business case phase up to delivery and operations. There is low involvement of unions across all phases, this may be caused by the limited role of unions in our surveyed organisations. 100,00% 90,00% 80,00% 70,00% 60,00% Senior management 50,00% Works council Unions 40,00% Business 30,00% Employees 20,00% Vendors 10,00% 0,00% Analysis and Scenario Selection and Transition or Delivery or Def inition Planning and Preparation Migration Operations Business Case Figure 20 : Degree of stakeholder involvement Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 31
  • 32. Roadblocks A lack of capability, competency and capacity (13%,) on the During the different phases other hand, points out that . there will be barriers to organisations struggle with success. Roadblocks freeing up resources with the encountered by the participants right competencies or that are shown in the graph below. organisations do not have the Most of these roadblocks relate required capabilities for to the way change management transition and migration. was executed. The lack of commitment and resistance of employees is the most common barrier to success (18%) followed closely by a lack of internal alignment and diversity of interest (16%). These roadblocks relate to change management and involvement of stakeholders. Lack of commitment & resistance of 18% employees Lack of internal alignment & 16% diversity of interest Lack of capability, competency & 13% capactity Lack of vision and strategy 9% How to create an acceptable 7% business case Lack of insight & transparancy 7% 0% 5% 10% 15% 20% Figure 21 : Roadblocks Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 32
  • 33. Involvement consultancy migration. The involvement of senior management and Companies can gain knowledge stakeholders of the business and capacity by hiring external (middle management) is high, consultants. We asked the especially in the early phases. Unknown participants if they hired Very few organisations involve 12% external consultants. employees during the scenario planning and business case Over 50% of the participants phase, as early involvement were supported by consulting might cause unnecessary No Yes firms during at least one of the 34% unrest, and we can understand 54% phases. In general our this approach. From a change participants require more management perspective, support during the first phases however, delaying employee of the sourcing strategy involvement can cause approach. problems later on in the Figure 22 : Involvement process. consultancy The Financial Services industry is less inclined to involve Limited supplier involvement external consulting firms in was found in the early phases. comparison to other industries. Whilst participants wished to It seems that Financial Services avoid early influence by organisations have developed suppliers, we think it can be of the capability and compentence added value to involve suppliers inhouse to execute sourcing earlier. Suppliers can provide strategy programmes. support with defining requirements, delivering accurate market information Conclusion and our and managing expectations. perspective In general we see organisations The success of the struggle with the involvement of implementation of a new different stakeholders during sourcing strategy is highly the sourcing strategy approach. determined by the intensity in This is the case, not only for which change management transition or migration, but also was applied. Subsequently, the for developing the demand success of change organisation as a value added management highly depends on activity in support of frontline clear communication and services. This includes working accurate information. The lack with the business to replace thereof usually creates specific processes (such as HR, uncertainty, confusion and finance, procurement), or resistance within the making changes to the organisation. organisation structure and skills within the retained processes. Change management is indeed mentioned as the most critical element during transition and Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 33
  • 34. In our opinion, three factors play an important role in the change management process: 1. Be clear about the objectives of the sourcing strategy approach; these objectives determine, to a large extent, the change management activities. 2. Involve the right stakeholders, at the right time in line with the objectives; given the objectives there is more clarity about whom to inform when. 3. Effectively measure and track the change management activities; it takes significant time and effort to make things work, track and measure these efforts. Strong governance is key. Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 34
  • 35. Demand The demand organisation is the A virtual team is the most intermediary between the common design. A separate organisation internal business client and the department, which is third party or SSC. The demand responsible for managing the organisation manages the demand and supply aspects, is supply side (internal/external also common. Both have suppliers) as well as the alignment as their main demand side (business). objective. Presence of the demand Most organisations have organisation learned that focussing only on demand or supply results in The vast majority of participants unnecessary escalations in the (91%) have a demand management process. organisation in place before Nevertheless, we did still find starting the transition or designs focussing mainly on migration. Three out of four one or the other aspect of the organisations confirmed that service. they started the preparations for the demand organisation in an even earlier phase. There are, however, differences in the “The linking pin design of the demand between business organisation. and supplier was very important for the success of this Virtual team 30% outsourcing deal” Seperate department 22% Service level / contract manager 22% Business 15% Service delivery manager 11% 0% 5% 10% 15% 20% 25% 30% Figure 23 : Demand organisation Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 35
  • 36. Responsibility demand organisation Responsibility of the demand Means to control the quality SSC organisation of service The outsourcer is, in three out More than 60% of the of four outsourcing deals, Shared participants use an SLA to responsible for the demand responsibility control the quality of service 29% organisation. Few participants levels, 23% have multiple (6%) mentioned that this is a Outsourcer mechanisms in place. The 57% shared responsibility. It seems Insourcer majority of participants (over 14% that organisations do not see a 95%) evaluate the quality on a demand organisation as regular basis with the vendor. In delivering added value to both a changing environment it is Responsibility demand organisation parties in the outsourcing important to evaluate Shared Outsourcing relationship. performance on a regular basis. responsibility 6% This is also true for the In case of an SSC, this number alignment of supply and is much higher (29%). It seems Insourcer demand. 18% that partnerships within SSCs are more common than within Although quality is an important outsourcing. An explanation can Outsourcer reason for sourcing, 12% of the 76% be found in the fact that both organisations evaluate service parties are part of the same quality only once a year. organisation. SLA 39% Figure 24 : Responsibility Multiple mechanisms 23% Measurement 16% Governance 10% Meetings 6% Inf ormation 3% People 3% 0% 10% 20% 30% 40% 50% Figure 25 : Quality control means Monthly 38% Quarterly 27% Daily 12% Weekly 12% Yearly 12% 0% 10% 20% 30% 40% 50% Figure 26 : Update frequency Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 36
  • 37. Conclusion and our perspective In contrast with some other surveys, we found that organisations recognise the importance of a demand organisation and start preparation in time. Organisations do, however, use different designs to align demand and supply. In our opinion the right demand organisation has control of both aspects of the service. The responsibility of the demand organisation lies with the outsourcer. It seems that organisations have a procurement-oriented mindset towards the demand organisation. In our opinion, it is essential to enter a partnership given the size and complexity of the sourcing deal. A demand organisation based on partnership ensures alignment, coordination and control of both supplier and business needs. However it is important that a demand organisation adds value as we often find that they become unnecessary roadblocks between the business and the insourcer. Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 37
  • 38. List of participants o ABN AMRO o AGIS o Air France KLM o Atlas Copco o Ballast Nedam o Blue Water o Corus o Enexis o Fortis Bank Nederland Capgemini Consulting would like to extend its thanks to the o Anheuser-Busch InBev executives who made time to be interviewed for this survey. o Intergamma Besides the organisations o Mexx listed on this page, a further 13 organisations participated in o Nationale Nederlanden this survey but requested that they remain anonymous. o NedCar o Nutreco o Philips o Rabobank Nederland o Ricoh Nederland BV o RWE o Stork o TenneT o Van Lanschot o Vitens o Vodafone o WE Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group Outsourcing Strategy Survey 2009-2010 38
  • 39. i “Transformational Outsourcing – The Highway to Innovation and Measured Improvements”, Nyenrode Business University, Breukelen, Inaugural Lecture of Prof. dr. Ir. Andrzej Hajdasinski, May 2007 ii Neil Davey, www.mycustomer.com About Capgemini Capgemini, one of the world's foremost providers of consulting, technology and outsourcing services, enables its clients to transform and perform through technologies. Capgemini provides its clients with insights and capabilities that boost their freedom to achieve superior results through a unique way of working – the Collaborative Business Experience™ – and through a global delivery model called Rightshore®, which aims to offer the right resources in the right location at competitive cost. Present in 36 countries, Capgemini reported 2007 global revenues of EUR 8.7 billion and employs over 88,000 people worldwide. www.capgemini.com Capgemini Consulting is the strategy and transformation consulting division of the Capgemini Group, with a team of over 4,000 consultants worldwide. Leveraging its deep sector and business expertise, Capgemini Consulting advises and supports organisations in transforming their business, from strategy through to execution. Working side by side with its clients, Capgemini Consulting crafts innovative strategies and transformation roadmaps to deliver sustainable performance improvement. For more information: www.capgemini.com/consulting Capgemini Netherlands Papendorpseweg 100 · 3528 BJ Utrecht Postbus 2575 · 3500 GN Utrecht Tel: +31 30 689 89 89 www.cc.capgemini.com Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group