The Sourcing Of Outsourcing


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The Sourcing of Outsourcing Workshop This workshop is intended for delegates who are developing their sourcing strategies and techniques for outsourcing products and services, as well as those with greater experience, whose companies are in the initial years of planning and rolling out a new Outsourcing Program office. The Sourcing of Outsourcing Workshop, Ben Trowbridge, CEO, Alsbridge and William Peters, Partner, O’Melveny & Myers, sourcing, outsourcing, offshore, category sourcing, BPO

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The Sourcing Of Outsourcing

  1. 1. The Sourcing of Outsourcing Sourcing 2007: May 1
  2. 2. Why is outsourcing happen? Micro Drivers • You have the opportunity to reduce costs by 20% to 40% • Increasing accountability and improving services • Access to World Class capabilities • Shifting from relatively fixed to variable costs Macro Drivers • Shifting focus to strategic business objectives • Transforming your business through innovation • Being agile and ready to respond to market change: M&A , growth, divestitures, etc. 1
  3. 3. Global Trends Global Birth Rates Global Birth Rates ChinaPotential Player – Offshore IT services market in China will continue per 1,000 population: per 1,000 population: Eastern Europe: : China: : Potential Player – Offshore IT services market in China will continue China China 13.25 13.25 Eastern Europe to show aggressive growth over the next few years. BPO is a less mature Regional Player – to show aggressive growth over the next few years. BPO is a less mature India India 22.01 22.01 Regional Player – industry in China. English skills are being developed in government supported Large English- industry in China. English skills are being developed in government supported Philippines Philippines 24.89 24.89 Large English- programs to ensure further growth. Core competencies: low-end PC-based speaking educated programs to ensure further growth. Core competencies: low-end PC-based USA USA 14.14 14.14 speaking educated application development, application maintenance, QA testing, systems labor pool. application development, application maintenance, QA testing, systems labor pool. integration, data processing and product development. Capabilities to handle integration, data processing and product development. Capabilities to handle Size: Over 200,000 FTEs in the IT Outsourcing Industry. other European Size: Over 200,000 FTEs in the IT Outsourcing Industry. other European languages languages requirements. The Hidden requirements. Size: 44,000 FTEs in Multiplier Size: 44,000 FTEs in offshore outsourcing offshore outsourcing industry. industry. India: : No. 1 Player - The dominant leader IndiaNo. 1 Player - The dominant leader in BPO and IT Outsourcing. Core in BPO and IT Outsourcing. Core competencies: application maintenance & competencies: application maintenance & support, application development, contact support, application development, contact centers & financial processing services. centers & financial processing services. NASSCOM claims the outsourcing industry NASSCOM claims the outsourcing industry will employ 2.3 million by 2010. Size: Latin American: : Regional Latin AmericanRegional will employ 2.3 million by 2010. Size: 1,000,000 FTEs supporting a variety of Player – Increasing its 1,000,000 FTEs supporting a variety of Player – Increasing its processes. competitiveness in ITO and processes. PhilippinesNo. 2 Player - competitiveness in ITO and BPO. Labor arbitrage alternative Philippines: : No. 2 Player - BPO. Labor arbitrage alternative Scope: Primarily contact centers, for the U.S. market. Spanish Scope: Primarily contact centers, for the U.S. market. Spanish shared services and specialized BPO Malaysia: : Niche Player in shared Language support with marginal Language support with marginal MalaysiaNiche Player in shared shared services and specialized BPO niches. Surging demand due to cost difference between services and outsourcing. Prime niches. Surging demand due to cost difference between services and outsourcing. Prime excellent US accented English countries. Small English- capabilities: contact center, human excellent US accented English countries. Small English- capabilities: contact center, human language support and cultural affinity speaking educated labor pool. resources and administration support. language support and cultural affinity speaking educated labor pool. resources and administration support. with the U.S.A. Size: 200,000 FTEs Size: 40,000 FTEs in the outsourcing with the U.S.A. Size: 200,000 FTEs Size: 40,000 FTEs in the outsourcing in offshore outsourcing industry. industry. in offshore outsourcing industry. industry. 2
  4. 4. 0 10,000 20,000 $ /p.a 30,000 40,000 50,000 60,000 0 10,000 20,000 $ /p.a 30,000 40,000 50,000 60,000 Brazil Brazil 16,100 16,100 14,800 14,800 Canada Canada 45,300 45,300 33,200 33,200 China China 11,200 11,200 8,400 8,400 Hungary Hungary 27,300 27,300 8,400 8,400 23,500 23,500 Average ITO and BPO Salaries by Location India India 12,500 12,500 Outsourced Labor Costs 3 8,900 8,900 59,100 59,100 Ireland Ireland 8,900 8,900 45,200 45,200 Malaysia Malaysia 23,600 23,600 18,100 18,100 Mexico Mexico 24,100 24,100 19,000 19,000 Philippines Philippines 14,200 14,200 11,500 11,500 Poland Poland 29,900 29,900 25,900 25,900 Source: Alsbridge Market Report 2006. Average Salaries at different levels of experience were analyzed for major cities in key offshore destinations. ITO ITO BPO BPO Average Average Average Average
  5. 5. Labor Pool &Total Costs English-speaking graduates & post-graduates per year Labor Pool India 2,500,000 • The English speaking Indian, Philippine and Philippines 400,000 Chinese graduate pools and high unemployment China 490,000 rates are projected to provide an attractive Malaysia 75,000 environment for offshore operations. Mexico 100,000 • Non-English speaking requirements can be Non-U.S citizens supported from a variety of locations. Ireland 40,000 1,665,000 2,265,000 USA 600,000 Total Cost 90,000 Total cost of typical BPO&ITO functions 81,300 80,000 IT & Telecom • Differentials in direct labor costs and 70,000 overheads are the main drivers of total Facilities 60,000 employment cost savings. Overhead • Careful build-out of the new center and 50,000 Average Salary US $ transition planning can control start up 40,000 34,900 and long term costs. 30,000 • Local labor inflation will not reduce the 18,500 offshore advantage for the foreseeable 20,000 Source: Alsbridge future. 10,000 21,600 8,320 8,280 0 USA Asia Eastern Europe 4
  6. 6. Lessons Learned from a Global 10 CFO Risk Monitoring and Mitigation as part of the process - but accept there are risks The Organization has to be primed/pushed - The Champion Walk before you run - but don’t be afraid to walk Governance is a shield to block progress It’s a Marathon - Not a Sprint e alu ivi ty/V duct High End Pro Knowledge Work iz ing axim Ongoing M Productivity Business Enablement Process Financial Improvement/ Accounting Technology Basic Transaction Skills Upgrade Processes Cost Arbitrage “We Came for Cost…We stayed for Quality/Intellectual Capital” 5
  7. 7. Current Environment Many organizations are experiencing an urgent need to achieve cost savings and competitive equality or advantage by outsourcing Organizations often undertake outsourcing in response to executive directive and adopt outsourcing on a project-specific basis, without a comprehensive strategy for systematic decision-making and management of delivery of services The current trend is to multi-source, with the goal of reducing the organization’s overall costs and improving service levels by maintaining competition among third-party suppliers The goals of multi-sourcing are valid, but having numerous vendors increases the organization’s need for and the value of a comprehensive sourcing strategy 6
  8. 8. Workshop Objectives Develop an understanding of the role and value of a sourcing strategy in the overall sourcing relationship lifecycle Examine the elements of a successful sourcing strategy Discuss how to plan, develop and implement an organization’s sourcing strategy Survey best practices with respect to sourcing strategies, vendor selection and contracting Examine how a sourcing strategy should be maintained and adjusted over time to help the organization achieve its changing business objectives 7
  9. 9. Strategic Considerations Common Reasons to Outsource Tactical Strategic Objectives Considerations • Access management & organization processes Governance Technical Operations • Improve automation • Value lever Scope of Services Product Development • Lower cost Industry Leadership Business Process • Achieve economies of scale Project Management • Reduce balance sheet assets • Alter cash flow structure Product Management • Improve responsiveness to change • Scalable resource pools • Effective resource skill deployment • Access higher skills Risk-Adjusted • Improve effectiveness • Sourcing objectives Financial Impact • Reduce cost • Improve financial structure Net Benefit Striking the Timeline Balance Risk 8
  10. 10. Strategy Elements Process This is the ‘what’: what do you want your processes to look like, what is the required output and what are the required service levels? This is the ‘how’: how will the processes be delivered? How do you organize the Sourcing business to provide those processes, how do they integrate with the other business processes and how should they be organized? Supplier Do you choose niche suppliers, best of breed, one or many suppliers, an established player or a start-up. What relationship do you want with the supplier? How do you want to structure the deal? Should it be a fixed-price contract, or are Commercial you looking to develop a partnering structure – whereby both parties share risk and reward? Are your systems stable or are you looking to implement new systems in the Systems foreseeable future? Do you do this before, as part of, or after the outsourcing/shared services implementation? Transition Are you prepared to handle a ‘big-bang’ transfer of responsibility or do you want to plan a phased implementation? Is this going to be by process or business unit? How is the new operating environment going to be managed and governed? What Operations is the relationship going to be with the service provider – whether in-house or outsourced – and how is the performance going to be monitored and controlled? 9
  11. 11. Role of Sourcing Strategy Pre-Contract Contracting • Sourcing strategy development • Contract development • Business alignment • Due diligence & contract negotiations • Organization assessment • Transition planning • Cost & risk analysis Co • Management organization • RFP development & issues nt ra • Final service provider selection ct ct • Proposal review in • Contract execution tra • Service provider selection g on e-C Pr y er liv De Re -S e ou ic rv rc Re-Sourcing ing Se Service Delivery • Termination / expiration • Transition & transformation • End of term planning • Service delivery • End of term assistance • Ongoing management • Transfer to new service provider • Change control 10
  12. 12. What is a Sourcing Strategy? A strategy (not single-project solution or action plan) that is founded on the organization’s fundamental business objectives and that provides a consistent framework for making sourcing decisions A long-term, conscious plan for decision-making, execution and management of internal and external service providers A framework that helps prepare for, plan and execute sourcing decisions and actions that support the organization’s business objectives. It is not, however, a plan setting forth how to achieve specific business goals Elements of a sourcing strategy include strategic design and management of sourcing, which are continuous functions essential to the organization’s current and future operations, and provider selection, contract negotiation and service transition, which are finite activities for specific IT or business functions A successful sourcing strategy must be founded upon clear, succinct business objectives that are widely understood throughout the organization (e.g., stabilizing and reducing costs of basic operations; continually increasing efficiency, flexibility and cost-reduction; positioning organization for future growth and expansion) A successful sourcing strategy must have buy-in from key stakeholders within the organization A successful sourcing strategy must provide a disciplined approach to consideration and evaluation of available sourcing options and assessment of risks and benefits of each option 11
  13. 13. Strategy Requirements A successful sourcing strategy must be broad in scope, taking into consideration various solutions that may be suitable for any given sourcing decision Possible service delivery solutions include: • Internal delivery • Offshoring • Lift-and-shift outsourcing • Transformational outsourcing • Multi-sourcing • Prime contractor as coordinator of multiple service providers • Joint venture • Captive service provider A successful sourcing strategy must include pre-defined measurement criteria that are both objective (e.g., financial risk/benefit analysis) and subjective (e.g., ability to focus internal resources on core functions; PR; morale) that are applied to determine whether each proposed solution is viable and supportive of the organization’s business objectives A successful sourcing strategy must result in executable action plans and must include management/governance structure A successful sourcing strategy must be flexible to encourage and accommodate innovation and overcome the “instant obsolescence” of contracts A successful sourcing strategy is cyclical and dynamic; it must be designed as repeatable with respect to new sourcing decisions, but must also be updated continuously with respect to internal changes within the organization as well as changes in market offerings and other external circumstances 12
  14. 14. Questions & Answers Why is outsourcing happening? Global trends Outsourced labor costs Labor pool and total costs Lessons learned from a Global 10 CFO Current environment Strategic considerations Strategy elements Role of sourcing strategy What is a sourcing strategy? Strategy requirements 13
  15. 15. Developing a Plan Sourcing Drivers Sourcing Drivers Vision & Plan Vision & Plan • Cost, cost and cost • Cost, cost and cost • Reason for outsourcing • Reason for outsourcing • Revenue • Revenue • Executive Sponsor • Executive Sponsor Scope • Employee upheaval • Employee upheaval • Deal construct • Deal construct Location & Configuration • Customer perception • Customer perception • Business Case • Business Case Deal Structure • Control and flexibility • Control and flexibility • Risk mitigation Plan • Risk mitigation Plan • Product // Service growth plans • Product Service growth plans • Internal & external • Internal & external • Service expectations • Service expectations communications communications Converting Drivers to a Vision & Plan requires: Defining the scope of the project and business case Analyzing location & configuration combinations Structuring deals to support Business Strategy 14
  16. 16. Scope of Sourcing Strategy 15
  17. 17. Deal Structures Retain internal Credible Internal offshore Insufficient control? vendors? experience / scale for management? captive? Ownership Recommendation Activity Yes Captive No Yes Yes Yes Provider Yes No No No Provider / Hybrid (captive option) No No Captive Yes 16
  18. 18. The Sourcing Matrix BPO IT Selective Outsource Total Outsource Joint Venture Shared Services • “Many variations” • Execution responsibility • “Many variations” • Execution responsibility • BTO/Market Facing • • Client execution • • Leverage capabilities Leverage capabilities • BTO/Market Facing Client execution • Shared ownership • No Capx • Shared ownership • • Requires CapX • No Capx • Shared Risk & Reward Requires CapX • Infrastructure established • Shared Risk & Reward • Infrastructure established Access to partner skills • • Complete control • Contract flexibility • • Access to partner skills Complete control • Contract flexibility • Relationship Alignment • • Accountability • • Disciplined execution Disciplined execution • Relationship Alignment Accountability • Cost controls • • HR build-out • Cost controls HR build-out • Competitive Market • Competitive Market • • Minimum transformation • Relationship Alignment Minimum transformation • Relationship Alignment • • Relationship Alignment Relationship Alignment Onshore Offshore Near Shore 17
  19. 19. Strategy Groundwork Team: Creating the organization’s sourcing strategy will require leadership as well as input and buy-in from many different disciplines within the organization • Sourcing champion • Team leader • Critical stakeholders • Subject matter experts Appropriate business unit members Financial expert HR advisors Legal advisors (internal and external) Third party consultants 18
  20. 20. Strategy Groundwork Business Objectives: The sourcing strategy must serve the organization’s business needs. Therefore, the team must evaluate the organization and identify and articulate its broad business goals, which should encompass the organization’s: • Core values • Future vision • Short-term, mid-term and long-term business objectives • Critical competitive considerations • Expected or required near-term results Sourcing Status: The team must understand the organization’s current status regarding strategic sourcing 19
  21. 21. Strategy Groundwork Decision Making: The team must understand how decisions are made within the organization and build and present the sourcing strategy to incorporate that process • Determine how ready the organization is to change. Examine the organization’s business culture, financial considerations, regulatory environment and contractual obligations to help assess the organization’s context for sourcing decisions • Identify key stakeholders and decision makers within the organization • Determine how best to educate and obtain buy-in from these individuals 20
  22. 22. Strategy Groundwork Analysis: Many aspects of the organization’s service environment require analysis in preparation for formulating a sourcing strategy. These include: • Critical functions – core vs. non-core • Current internal capabilities and competencies, relative to market offerings • Current costs of services and projected costs for outsourcing similar services • Timing requirements, including time to market requirements and time benefits available through using established competencies of service providers for certain functions • Investment approach: how much investment is the organization willing to fund? What is its required pay-off horizon? The team needs to develop ROI analysis and parameters to support the sourcing strategy. • The organization’s appetite for risk 21
  23. 23. Strategy Groundwork Market Assessment: Evaluate the services available from third party providers • Identify available services: how well do market offerings match the organization’s requirements? • Consider the maturity, stability and evolutionary trend of available services • Identify suitable suppliers, based upon whether they have the capability and experience to offer services that organization requires • Identify relevant risks and associated costs. Determine the likelihood and consequences of transition or service delivery problems, security and privacy requirements, the organization’s ability to in-source or re-source services subsequently, etc. 22
  24. 24. Strategy Groundwork Analyze gaps • Between organization’s current state and ideal state • Between organization’s current capabilities and requirements • Between organization’s objectives and its capabilities • Between expected business goals and time required to achieve them • Between marketplace offerings and organization’s requirements • Between required services and their availability, maturity, quality and stability 23
  25. 25. Strategy Groundwork Measurement: Develop criteria for determining and measuring the success or failure of sourcing relationships • Examples Cost Quality Speed Skill Improvement Productivity Responsiveness Flexibility Change Management Commitment • Evaluation criteria should all tie back to the organization’s business objectives 24
  26. 26. Strategy Groundwork Sourcing Structures: Identify the types of sourcing relationships most suitable to the services the organization is likely to outsource. Where focus primarily on efficiency and costs identify high-volume repetitive functions that it can obtain from third parties at lower cost for consistent quality of service • Offshoring (primarily for labor arbitrage) • Selective “lift-and-shift” outsourcing Where focus primarily on enhancing level of services/productivity improvements through streamlining processes, automation or other means identify relationships that support and promote such enhancement • Multi-sourcing (selected processes to different providers) • Prime contractor as coordinator of multiple service providers Where focus primarily on business process transformation, long-term service commitments and innovation identify most suitable service delivery options • Investment in transformation of internally provided services • Transformational outsourcing • Joint venture • Captive service provider 25
  27. 27. Strategy Groundwork Contract Structures: Identify legal and other issues pertaining to contractual relationships and choose the contract structure most suitable to those relationships and the organization’s needs • Stand-alone agreement - If the sourcing relationship is fairly simple, involving few services and locations and it is not likely to expand, a stand-alone contract with the service provide may be adequate • Global agreement with separate country agreements - If the organization and the service provider operate in more than one country and have tax, legal compliance and other concerns regarding the provision of services in multiple jurisdictions, they may choose to enter into a master agreement between the two lead entities and separate country agreements between their global affiliates and service provider counterparts. • Incremental awards - If the organization expects to cede additional business to a particular service provider over time, the parties may enter into a master agreement setting forth the general terms and conditions applicable to their relationship Each time a new function or business process is awarded to the service provider, the parties negotiate and execute a separate “services addendum” to the master agreement describing the new services, the related service levels, charges and other specific details An organization may have several such master relationships in place with different services providers, greatly simplifying RFP and contract negotiation for future awards of business 26
  28. 28. Business Case Component: Strategic Fit Options Commercial Affordability Achievability Appraisal Aspects • Description of the • High level cost / • Proposed sourcing • Statement of • High level plan for business needs benefit analysis of option with rationale available funding achieving the • Contribution to at least three for its selection • Broad estimates of desired outcome, business strategy options for meeting • Key features of projected whole-life with key milestones • Objectives the business need proposed cost of project, and major Content: • Why it is needed • Analysis of ‘soft’ commercial including dependencies now benefits that cannot arrangements departmental costs • Key roles with • Key benefits be quantified • Procurement (where applicable) named individual as • Key risks • Identify preferred approach/strategy the project owner • Critical success option and any with supporting • Major risks factors trade-offs rationale identified with • Main stakeholders mitigation plan • How well does it • Has a wide range of • Can value for the • Can the required • Can the project be support the options been money be obtained budget be obtained achieved with organization’s explored? from the proposed to deliver the whole current capability objectives and • Have innovative sources? project? and capacity? current priorities? approaches and/or • If not, can the • If not, can the scope • If not, how can the Questions: • If it is a poor fit, can collaboration with project be made be reduced or required capabilities the scope be others been attractive to a wider delivered over a and capacity be changed? considered? market? longer period? acquired? • Is the project • If not, why not? • Could funding be • Can the risks be needed at all? • Has the optimum sought from other managed? • Are the balance of cost, sources? • Does the scope or stakeholders benefit and risk timescale need to committed? been identified? change? 27
  29. 29. Strategy Development Opportunity Identification Opportunity Identification Solution Evaluation Solution Evaluation Filter 1 Filter 2 Filter 3 Filter 4 Filter 5 Filter 6 Potential opportunity Hypotheses on Hypotheses on areas by high value Indicative Indicative high value • Business opportunity opportunity Strategic business case business case process alternatives areas driven by areas driven by • Infrastructure for executive for executive business business type decision decision objectives objectives Baseline Current state Process Prioritized processes Cost model Adjusted solution costs and process and outsourcing based on risk, simulations alternative and scope opportunity system views suitability opportunity value definition based on SAS areas and dependencies Phase II Phase II SAS 28
  30. 30. Change Management and Communications The underestimation and uncoordinated execution of change management and communications is the most common reason for outsourcing failures OCM & Communications Date/milestone driven communication planning is the key Impact analysis for all affected employees Need to have a defined “leave behind strategy” Data preparation strategy Understand baseline performance metrics around efficiency and effectiveness 29
  31. 31. Change Management and Communications The Alsbridge Change Model focuses on six critical success factors that provide a roadmap of change management activities and deliverables for a transformation program and associated projects. Change Management ModelCHANGE MANAGEMENT MODEL 8Articulation of a compelling, shared Compelling, vision and business imperative for Shared Vision change 8Employees are enabled to learn new behaviors and apply them to their work 8Stakeholders with authority, Training and Stakeholder & Performance Leadership power and/or influence lead Support Alignment and visibly support the Shared Outsourcing Services change Transformation Organization and Resource Communications 8Employees are well- 8Aligned Planning & Engagement informed about and involved systems and organizational models that in the change support the change and Measures, reinforce the new behaviors Milestones & Evaluation Communications activities Project Management activities 8Establishmentof short- and long- Organization & Resource activities term measures of success Training activities 30
  32. 32. Risk Management Since all risks have an impact on cost, morale and Global Risks business survival, it is imperative to develop Risk Management program to mitigate those risks very early in Business Case Economics the process. Overall, risks can be categorized as follows: Consistent Executive Commitment “Accepted” - little attention is needed, if any, to Outsourcer’s Global Business Operations mitigate the risk Political Backlash “Needs Improvement” - some focus and solution is required Terrorism / War / Political Instability “Unacceptable” - full attention is required to mitigate or eliminate the risk Operational Risks Legal, Regulatory &Tax Finance & Ops controls Outsourcer Employees / Competencies Logistics & Travel Knowledge Transfer & Work Migration Security & Facilities Delays / Approvals Administrative Systems Business Continuity Planning IT Systems & Infrastructure Labor Relations & Employee Morale/Turnover Service Level Agreements 31
  33. 33. Creation, Adoption and Implementation Creation: • The sourcing team should formulate the organization’s sourcing strategy based upon the results of the required groundwork • The sourcing strategy should be carefully documented in order to make sure that the strategy is clearly understood, to facilitate its presentation to and approval by management, and to assure its implementation and ongoing application. The sourcing strategy may take the form of internal policies and procedures • The written sourcing strategy should set forth the elements described earlier in detail sufficient to enable the organization’s sourcing management team to apply the strategy and support achievement of the organization’s business objectives Essential elements: • The fundamental business objectives the strategy is intended to serve • The creation and charter of the organization’s sourcing management team, • Executive management responsibility for oversight of sourcing decisions • Procedures and criteria for evaluating services that are the subject of sourcing decisions • Procedures for identifying and evaluating available sourcing options • Checklists and procedures for identifying and assessing risks and benefits of sourcing options • Standards and procedures for vendor selection • Clear articulation of responsibility and authority for sourcing decisions • Requirements for executable action plans for all sourcing decisions • Standards and procedures for contract negotiations • Templates for RFP documents, term sheets and contract provisions, if available • Pre-defined criteria to measure the viability and success of sourcing relationships • Governance and coordination structures and mechanisms • Requirements for ongoing assessment and adjustment of the sourcing strategy 32
  34. 34. Creation, Adoption and Implementation Adoption: The sourcing strategy must be understood and approved by various constituents within the organization • Sourcing team • Executive management • Departments or groups that will participate in sourcing decisions for their service requirements Presentation to executive management should include supporting business analysis The sourcing team should also consider and prepare guidelines for communications with media and with individuals who may be impacted by sourcing decisions Implementation: Initial application of the sourcing strategy may encompass various activities, depending on the organization’s needs • Survey and assessment of internal services to identify opportunities for sourcing decisions • Determination of structure, selection of vendors and contracting for services that the organization has already decided to outsource • Review and assessment of existing sourcing relationships to determine how well they conform to the sourcing strategy 33
  35. 35. Questions & Answers 34
  36. 36. Why Outsourcing Deals Fail Macro Drivers Quarterly financial performance metrics drive short-term negotiating practices by providers Cost reduction goals pressure buyers to negotiate on price at the expense of quality Little attention is paid to culture, uniqueness of client requirements or contingency planning Problems are magnified by cultural and language issues when international solutions are involved “80 percent of Customer Service Outsourcing Projects Aimed to Cut Costs are Destined to Fail” - Gartner 35
  37. 37. Getting the Right Provider Short List Engage the likely providers in structured face-to-face meetings Each provider puts forth both sales and delivery personnel NO PPTs! Each provider is given the opportunity to talk about: • Case studies on similar engagements • Possible solution offerings The buyer is able to judge the provider on: • Qualifications • Differentiating solutions • Cultural fit 36
  38. 38. Provider Evaluation Criteria SAS Workshop Site Assessment 5% 10% Compliance & Fit Provider Selection Delivery Model 10% Criteria 15% Transition Approach Governance 15% 10% Business Case 35% 37
  39. 39. Solution Design and RFP Development Over time, the vendors have grown accustomed to RFPs that clearly define requirements. They expect the outsourcing consultant to define the requirements and manage each party’s expectations. Simply following a previously developed RFP and issuing it to vendors will absolutely sub-optimize your results. The development of an RFP is a collaborative effort between Alsbridge and the client’s personnel. • The Alsbridge members of the team contribute knowledge of the RFP approach and experience gained in developing outsourcing solutions in an accelerated fashion. • The client members of the team contribute an understanding of the strategic business imperatives, current thinking regarding sourcing in the company, and an in-depth knowledge of the internal business opportunities and constraints. 38
  40. 40. Involving the Providers in Solution Development An internally developed RFP (lacking collaborative vendor input) can miss significant savings from vendor capabilities. This dynamic of discussing your needs with a vendor is interrelated to the development of an RFP and continues during negotiations. Approximately two weeks after RFP release, the selected providers will be invited back in for a full day working session to help them better understand your needs and adjust their RFP responses. During these workshops, providers are asked to bring in their primary delivery team thus exposing the client to the resources that will be performing the work. During the day, breakout sessions are conducted to review Goal Alignment, Delivery model, Transition Approach, Governance and Deal Structure. 39
  41. 41. Provider Due Diligence Due Diligence management is designed to ensure that negotiated agreements are consistent with the requirements of the business in broad strategic, as well as specific tactical, terms. The process should include multi-disciplinary representation that ensures that legal, commercial and business risks are taken into consideration and addressed. • Participate in Supplier Site Visits – Develop decision matrix for supplier evaluation • Identify and evaluate critical supplier issues • Evaluate the expected future performance of each supplier • Conduct risk analysis for each supplier and proposal • Provide guidance for the client cost models for each supplier proposal and alternatives • Establish performance metrics and reporting requirements 40
  42. 42. Provider Selection Provider 1 Provider 3 SAS Workshop Performance SAS Workshop Performance 100 100 80 75 Compliance and Fit Delivery Site Assessment Compliance and Fit Delivery Site Assessment 60 50 40 25 20 0 0 Governance Transition Governance Transition Business Case Delivery Model Business Case Delivery Model Provider 2 Provider 4 SAS Workshop Performance SAS Workshop Performance 100 100 75 75 Compliance and Fit Delivery Site Assessment Compliance and Fit Delivery Site Assessment 50 50 25 25 0 0 Governance Transition Governance Transition Business Case Delivery Model Business Case Delivery Model 41
  43. 43. Vendor Selection Assign a dedicated project manager to each sourcing project • Handles day to day management • Identifies and recruits required internal resources • Works with third party consultants and legal advisors. Vendor selection involves a two-step process: • First, determine required vendor capabilities and (perhaps using a fairly simple RFI) identify a limited field of apparently qualified service providers • Second, conduct an RFP, including a detailed SOW, detailed contract term sheet, explicit response requirements and criteria for competitive evaluation 42
  44. 44. Vendor Selection Develop a proper RFP • Purpose: to confirm vendor capabilities and provide a sound basis for the organization to choose the service provider and the solution that best supports the organization’s business objectives • Limited Number of Providers: The RFP should be sent to a limited number of providers whose general capability to deliver the services has been previously confirmed • Minimum RFP Requirements: Provide a complete, accurate and detailed description of the organization’s requirements Propose minimum service levels based upon the organization’s past history, its requirements, or industry precedents Include a detailed contract term sheet that will differentiate the contractual positions of the vendors and define the starting point for negotiation with the selected vendor Specify the scope and content required in each provider’s response Spell out evaluation criteria that will be applied to proposals 43
  45. 45. Vendor Selection Minimize unexpected changes to vendor proposals and maintain negotiating leverage throughout the vendor selection and contracting process by investing the necessary time and closely coordinating the efforts of internal stakeholders and outside experts to produce a high quality, accurate and complete RFP Allow sufficient time for the development of the RFP and vendor selection and include key stakeholders in the process. • RFP preparation: 2 - 4 months • Service Provider responses 1 - 2 months • Service Provider selection 1 - 2 months • Contract negotiation 2 - 4 months Use of experienced, knowledgeable consultants and legal advisers can reduce the time required and improve the quality of the RFP 44
  46. 46. Vendor Selection Define and apply vendor evaluation criteria that tie to the organization’s business goals • Financial strength and stability • Likelihood of acquisition by another provider • Technical/industry/process expertise • References • Service provider personnel • Site visits • Contracting positions • Likelihood of successful contract negotiation in reasonable time period • Cultural fit • Pricing Cost should NOT be the predominant factor in vendor selection and should be considered apart from (and after) all other factors Evaluate all proposals on the same criteria; design the proposal requirements to facilitate apples-to-apples comparisons as much as possible Service provider selection can be a politically-charged decision and process Involve all project team members and business function representatives in the evaluation process in order to achieve consensus in selection decisions 45
  47. 47. Questions & Answers 46
  48. 48. Outsourcing Contracts Myths • Metrics and best practice comparisons for price and service levels are key • Penalties systems will make the provider pay attention to me • Never pay the provider extra for doing their job • If I collect enough data the service will be good • Faster, better and cheaper • Details give the illusion of control • The Danish effect (hands off or simplistic metrics) Facts • Margins of on-shore providers are currently at an all time low • Significant dissatisfaction is expressed by many clients that employ aggressive negotiation tactics Thesis • Behaviors need to change in the way relationships are managed from start to finish 47
  49. 49. The Challenge of Outsourcing Vendor Invovation Declining margins affect service levels, customer satisfaction and innovation. 48
  50. 50. The Vendor Despair Loop Customer “I can’t stop behaving like a “I can’t stop treating you like a vendor until you stop treating me vendor until you stop behaving like one.” like one.” Provider 49
  51. 51. To Understand where you are - requires a new Benchmark - The MRA The Problem: Most clients lack a quantative way to articulate the complex issues and metrics needed to measure success in an outsourcing relationship. The only benchmarks available were purely price related and often misleading. As a result most negotiations and subsequent management focus were around single dimension pricing issues and legal issues not related to true client satisfaction. The Answer: To address the gap Alsbridge has developed over the last 3 years the market leading Market Reality Assessment (MRA). The MRA is comprised of 10 best practice categories linked to over 150+ contract and relationship attributes designed to give a real benchmark for the Outsourcing industry. Categories Scope Flexibility Governance Pricing Service Levels Legal Terms Business Terms Termination Transition Relationship Management 50
  52. 52. SLA Definition An agreement between a provider of services (can be internal or external) and a customer/client Relates to the services to be provided by the Service Provider (both internal or external) to ‘Client’ Identifies the inputs that are required from ‘Client’ to allow SP to provide its services (dependencies – Operating Level Agreements (OLAs) Allocates responsibilities for service delivery between SP and ‘Client’ Defines the appropriate level of service to meet ‘Client’s’ needs Provides a framework for performance measurement and continuous improvement 51
  53. 53. KPI Definition KPI are quantifiable measurements for evaluating progress towards an organization’s goals. KPIs allow an organization to: • Analyze aspects of its past • Challenge its present • Plan its future KPIs should primarily be used to determine the efficiency and effectiveness of the services provided by the SSC. KPIs should focus on a manageable number of the most important measures – often have “Service Credits” attached Key four components: KPI Measurement Goals Accountability Service Credits The Target The Assignment Failure by SP to The Chosen Performance of the Goal Meet Agreed KPI’s Focus Associated with to a Specific will result in a Area For the Measure Individual or discount known as Management Team Service Credits 52
  54. 54. OLA Definition Presents a clear, concise and measurable description of 'Client' and SP relationship Defines the interdependent relationships among 'Client' and SP Describes the responsibilities of 'Client' toward SP, including the process and timeframe for delivery of their services New dynamic: SP cannot be held to account unless 'Client' does what it has to do 53
  55. 55. SLA, KPI and OLA Identification 54
  56. 56. SLA, KPI and OLA Description SLA Description Sets out Trigger for Service Line Allocation of Baseline describes definition of service credits, Sets out what identifies SLA Description Definition of activity individual KPI and current suspension of ‘Client’ has to grouping of within service KPI and current level which service or target service charge, do to enable SP service levels credit regime or target may offered by SP performance etc to reach the within ‘Client’ performance underpin service level process… pricing Service Service Level KPI and current Minimum Service Operating Level Defined OLA Key activity Line Agreement (target) SLA service level credit Agreement performance level Description performance category Description (volumetrics) Pay Pay invoices which 100% invoices in 95% of invoices B2 Raise accurate, Raise % of invoices invoices match with Purchase any month which in any month properly Purchase for inventory Order (and Goods match with PO approved, Orders items with PO Received Note and/or GRN paid properly coded wherever where required) by by invoice due and properly required by invoice due date, if date, if invoice priced Purchase corporate invoice received by received one day Orders as policy SP one day before previously required due date. 55
  57. 57. SLAs – What Works? • Ensure you can monitor your service providers performance and the service measures are those over which the SP has total influence • Determine what is important to 'Client' • Determine measures that will invoke appropriate behaviours • Maintain full visibility, if you can’t measure it, find a measure you can! • Be ‘specific’ - loose wording can be misinterpreted and lead to dissatisfaction • ‘Time’ - use working days, to published timetable • ‘Accurate’ - define what this means to you, and how it can be measured • Build in quality and approval at source (your OLA) • Eliminate double-handling and hand-offs • Understand the service model • Service from 08:30 to 17:30 means your call will be answered between those hours, not that everyone is sitting at their desks 56
  58. 58. SLA Carrots and Sticks: A call center example to consider The Stick – How you deal with Vendors Virtually unlimited data available about every action taken by provider(s) from readily available systems Cost of cut over to new providers is relatively low and short term contracts are the norm Per-minute, seat, talk time, 1st call resolution, etc. are used to incentivize the providers to generate results The Carrot – How you deal with Partners Situation: A large, regional wireless carrier was facing a large volume of customer churn, high customer acquisition cost, and steep customer contact costs Solution: Sustainable Value Management Contracts that allowed the provider to manage to Price/Call Acquisition / meet carrot metrics. Retention Core pricing tied to a series of volume indicators $1.12 12 months or less such as number of calls, customers of record, or talk minutes $2.18 13 - 24 months Value pricing tied to underlying business principle $3.21 25 months or more that a long term client is far more profitable than a new customer. 57
  59. 59. Contract Negotiations Three Rules for Supplier Relations: • Supplier business goals are and always will be different from that of the client. While suppliers can be valued partners with clients, recognize that the client’s priorities and needs will differ, and be prepared to identify and resolve the differences that will arise. Management and responsibility always remains with the client. • Recognize that external suppliers will make money on the outsourcing agreement somewhere, or they would not be willing to sign. Signing an extremely reduced- price contract in haste may lead to having to work with a supplier who is not responsive to client needs and who sticks precisely to the letter of the contract, charging the client for any additional services needed. • The better the requirements and the Statement of Work are, the better the relationship between the client and supplier. 58
  60. 60. Contract Negotiations Scope Plan Conduct Deciding on Deciding on Construct Construct Internal Internal Negotiating Negotiating the Need for the Need for Negotiation Negotiation Negotiation Negotiation Close Out Close Out Implement Follow On Consideration Consideration Environment Environment Negotiation Negotiation Plan Plan Build the Build the External External negotiation negotiation Considerations Considerations team team Style / Behaviour Structure Team Position approach Major tasks • Establish internal negotiating strategy/tactics • Establish and gain commitment on negotiations timeline and milestones • Develop communications strategy – define the relationship management approach • Negotiate Statement of Work/Scope of Services • Agree on service level agreements • Incorporate client terms and conditions • Obtain agreement on Supplier Disentanglement Services Plan (Termination and migration plan to include supplier acquisition) 59
  61. 61. Points to Consider When negotiating crucial deal points regarding statement of work and/or performance issues, it is important to ask (and address) the following questions: • Does this need to be negotiated (why not tell the other party that this is the case)? • What is the value of the negotiation? • What impact will this have on the strategy? • Why negotiate now? List the drawbacks / benefits that result from delaying the negotiations. • Does the aim of the negotiation support the group sourcing and overall business strategy? If not, should the approach or timing be changed? • Who needs to be involved? • What is the main driver of the negotiation? • What must you achieve? What cost are you willing to pay to achieve it? 60
  62. 62. Contracting Groundwork Master Services Agreement Country Country Country Agreement Agreement Agreement Scope of Scope of Scope of Services Services Services Service Service Service Levels Levels Levels Pricing Pricing Pricing Other Other Other Exhibits Exhibits Exhibits 61
  63. 63. Contracting Groundwork 62
  64. 64. Contract Negotiations Best Practices Follow a “competitive” process • Down select to two service providers the competitive selection process can (and should) be extended through contract negotiations The organization can negotiate certain critical aspects of the outsourcing relationship, including specific contract provisions, with two or more service providers, and then contract with the service provider offering the most favorable combination of solution, price and legal protections. • A competitive negotiation can be resource-intensive in the short term, generally requiring a longer and more complicated negotiation process to deal with multiple service providers, but it will substantially enhance the customer’s negotiating leverage throughout the outsourcing process and will help to make possible significant financial savings and higher service level commitments that form the basis for a better outsourcing relationship in the long term • Competitive leverage can be applied to the customer’s advantage with respect to numerous issues, especially if the customer has invested in solid preparation 63
  65. 65. Contract Negotiations Best Practices Documenting business processes • BPO (especially KPO) functions tend to focus on knowledge expertise and advanced technical and analytical skills • Functions tend not to be well documented – relying on ad hoc procedures and close personal management • The organization should spend extra time on internal due diligence and process discovery to understand the scope and nature of the services that will be outsourced • Outsourcing process and contract should be structured in such a manner as to shift certain due diligence risks and process scoping and formalization to the service provider Measuring Internal Service Level Performance • At earliest possible stage – at least during RFP development and (if possible) prior to that – the organization should identify the service levels against which it will require the service provider to perform. • The organization should also collect all historical data relating to internal performance against the service levels. • If historical data does not exist (not uncommon) the organization should begin to measure internal performance against the service levels that will be desired from the service provider. • The organization’s negotiating leverage may be greatly enhanced if it is able to provide several months of performance data to a service provider, and the service provider will likely be more comfortable committing to the organization’s desired service levels if the organization can show that these service levels have been achieved internally. 64