Engaging with the Market to Leverage your Buying Power Walter Adamson Digital Investor Pty Ltd [email_address] Advanced IT Contract Management and Negotiation Conference, November 2003

Contents Strategic Sourcing – what does it mean? What factors influence the decision-making process? Assessing different models for streamlining buying and effectively structuring procurement Effectively managing risk while delivering business value and constructing back-to-back deals Expanding the sourcing options to include offshore in-house.

Strategic Sourcing – what does it mean?

What factors influence the decision-making process?

Assessing different models for streamlining buying and effectively structuring procurement

Effectively managing risk while delivering business value and constructing back-to-back deals

Expanding the sourcing options to include offshore in-house.

Strategic sourcing – what does it mean? Strategic sourcing requires a new question Tactical sourcing is inefficient, and often ineffective A common cause for current disappointments Future sourcing will be more complex 1.1

Strategic sourcing requires a new question

Tactical sourcing is inefficient, and often ineffective

A common cause for current disappointments

Future sourcing will be more complex

Strategic sourcing requires a new question “ What is the best source for every IT service” NOT “What do I have in IT that seems appropriate for outsourcing” 1.2 Gartner - 30% of companies are unprepared

Tactical sourcing is inefficient and often ineffective Bottom-up view of the role of IT Often aided by IT’s reaction: IT efficiency-focused in fear of CEO/CFO Over-segmented and fear of loss of control Often aided by ‘advisors’ who generate work Complicates relationships Hidden management costs 1.3

Bottom-up view of the role of IT

Often aided by IT’s reaction:

IT efficiency-focused in fear of CEO/CFO

Over-segmented and fear of loss of control

Often aided by ‘advisors’ who generate work

Complicates relationships

Hidden management costs

A common cause for current disappointments 1.4 The single most common mistake is that organisations did not identify, and then build and retain, the strategic, management and complementary operational skills needed to create and capture the potential benefits of outsourcing. Walter Adamson

Future strategic sourcing will be more complex Strategic sourcing is a growth industry: US$68.5b business growing to $100b in 2007 More knowledgeable buyers New pressure for growth and innovation BPO a new global growth market Offshore in more complex forms  More complex, cross-functional relationships 1.5

Strategic sourcing is a growth industry:

US$68.5b business growing to $100b in 2007

More knowledgeable buyers

New pressure for growth and innovation

BPO a new global growth market

Offshore in more complex forms

 More complex, cross-functional relationships

Factors Influencing decision-making Three key dimensions: Business-level decision-making New organisational models – outtasking Extended options – going global 2.1

Three key dimensions:

Business-level decision-making

New organisational models – outtasking

Extended options – going global

Business-level decision Benefits from the tactical approach exhausted: Cost , competencies , assets Focusing on contract yields no benefits Future requires holistic strategy: Improve business risk, value chain, EVA More cross functional and “extended enterprise” Deliver value as a strategic management tool 2.2

Benefits from the tactical approach exhausted:

Cost , competencies , assets

Focusing on contract yields no benefits

Future requires holistic strategy:

Improve business risk, value chain, EVA

More cross functional and “extended enterprise”

Deliver value as a strategic management tool

New organisational models Most advanced thinking is Cisco’s ‘outtasking’ : Extending the organisation ‘deeply’ Cisco holds the keys to the overall data architecture and systems interfaces Clear thinking about the customer value chain Clear thinking about core and non-core Sophisticated alliance relationships Clear performance metrics 2.3

Most advanced thinking is Cisco’s ‘outtasking’ :

Extending the organisation ‘deeply’

Cisco holds the keys to the overall data architecture and systems interfaces

Clear thinking about the customer value chain

Clear thinking about core and non-core

Sophisticated alliance relationships

Clear performance metrics

New organisational models - 2 Key concept, mission critical can be outtasked: 2.4 Non-mission-critical Mission-Critical Out-task – Type 2 In-house CORE Contract Sourcing Out-task – Type 1 CONTENT Sourcing and Implementation Strategy

Key concept, mission critical can be outtasked:

Extended options – going global The global options cannot be ignored: Moving from tactical to strategic Moving up the value chain Moving across functions - BPO Rapidly improving offshore capabilities Not restricted to 3rd party outsourcing  More complex, cross-functional relationships 2.5

The global options cannot be ignored:

Moving from tactical to strategic

Moving up the value chain

Moving across functions - BPO

Rapidly improving offshore capabilities

Not restricted to 3rd party outsourcing

 More complex, cross-functional relationships

Assessing different models for structuring procurement 3.1 Management attention should be on ROI But the focus is often the other way around! Management Benefits ROI Contract

Strategic sourcing relationships 3.2 Fee-for-service Contract/Relationship Risk/Gain Sharing (new vision) Transformation (market breakthrough) (value-chain reengineering) Effectiveness (process integration) (service) Efficiency (cost) VALUE REPEAT what they know RE-APPLY what they know RE-INVENT what they know Need more flexibility to cater for uncertainty

Multiple service provider 3.3 (new vision) Transformation (market breakthrough) (value-chain reengineering) Effectiveness (process integration) (service) Efficiency (cost) VALUE Traditional Contractual Relationships Teaming & Preferential Relationships Advisory and Trusted Relationships Boutique Fit for Purpose (No prior contract) Relationship Best of Breed (Panel Contract) Long-term Competitive Contract Fee-for-service Contract/Relationship Risk/Gain Sharing

Contracts reflect relationships 3.4 Multiple relationships are needed: Different relationships suit different purposes and responsibilities and measures and expectations Axiomatically no one IT service firm can provide best of breed at all levels of the value creation and capture hierarchy But not within the one relationship level !!

Multiple relationships are needed:

Different relationships suit different purposes and responsibilities and measures and expectations

Axiomatically no one IT service firm can provide best of breed at all levels of the value creation and capture hierarchy

But not within the one relationship level !!

Managing Risk and Back-to-Back Contract Construction Client Service Provider Contract Terms and SLAs 4.1

A recent lesson in back to back # Effective variations although not “in writing” Contract required variations “in writing” Actions of parties reflected new intentions Subcontractor failed to show that failure to provide “in writing” terminated sub-contract “ Agreement to vary” enforceable contract “ Real intention” prevailed over written #GEC Marconi Systems Pty Ltd v BHP Information Technology Ltd Feb 2003 4.2

Effective variations although not “in writing”

Contract required variations “in writing”

Actions of parties reflected new intentions

Subcontractor failed to show that failure to provide “in writing” terminated sub-contract

“ Agreement to vary” enforceable contract

“ Real intention” prevailed over written

#GEC Marconi Systems Pty Ltd v BHP Information Technology Ltd Feb 2003

Expanding Sourcing Options to include Inhouse-Offshore Benefits of off-shore plus control of inhouse: “ Inhouse Offshore” IHOS Capture economic value directly Smooths integration of offshore process Reduced relationship costs vs outsourcing Knowledge retention IHOS not a panacea but complementary 5.1

Benefits of off-shore plus control of inhouse:

“ Inhouse Offshore” IHOS

Capture economic value directly

Smooths integration of offshore process

Reduced relationship costs vs outsourcing

Knowledge retention

IHOS not a panacea but complementary

Inhouse offshore risks The risks are different to outsourcing: How to set up offshore - government, tax, legal Establishing management, performance goals Training, staff exchange and career management Systems interfaces and data management Finding a reliable local partner & advisor 5.2

The risks are different to outsourcing:

How to set up offshore - government, tax, legal

Establishing management, performance goals

Training, staff exchange and career management

Systems interfaces and data management

Finding a reliable local partner & advisor

Resources for IHOS Manage the risk of setting up offshore: Investment capital Domain expertise Structured deals, risk offsets, and exits Local review and audit of process London-based and other firms e.g. Ariadne Capital 5.3

Manage the risk of setting up offshore:

Investment capital

Domain expertise

Structured deals, risk offsets, and exits

Local review and audit of process

London-based and other firms e.g. Ariadne Capital

Contact: Walter Adamson [email_address] www.digitalinvestor.com.au +61 403 345 632 Level 1, The Innovation Building Docklands, Melbourne 3008