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Defining Outsourcing Session 1
Royston E Morga...
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Slide 2More free downloads and templates at: 1stOutsource Research
Today's Agenda
 What is Outsourcing?
 Histor...
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Slide 3More free downloads and templates at: 1stOutsource Research
Outsourcing as example Strategic Change
 I.T....
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Slide 4More free downloads and templates at: 1stOutsource Research
Defining Outsourcing
 ‘Outsourcing’ is an act...
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Slide 5More free downloads and templates at: 1stOutsource Research
Outsourcing Information Systems Functions: Two...
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Slide 6More free downloads and templates at: 1stOutsource Research
Outsourcing is not a passing fad but is main-s...
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Slide 7More free downloads and templates at: 1stOutsource Research
At the start focus was on the mega single sour...
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Slide 8More free downloads and templates at: 1stOutsource Research
Outsourcing Alternatives
 Transitional outsou...
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Slide 9More free downloads and templates at: 1stOutsource Research
Outsourcing Alternatives
 Best-of-breed outso...
Slide: 10
Slide 10More free downloads and templates at: 1stOutsource Research
Early signs of risks in Outsourcing showed c...
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Slide 11More free downloads and templates at: 1stOutsource Research
Other sourcing approaches also emerged
 App...
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Slide 12More free downloads and templates at: 1stOutsource Research
Outsourcing alternatives such as shared serv...
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Slide 13More free downloads and templates at: 1stOutsource Research
A whole new vocabulary sprang up
 Out-sourc...
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Slide 14More free downloads and templates at: 1stOutsource Research
Define what you think is meant by total outs...
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Slide 15More free downloads and templates at: 1stOutsource Research
An active market attracted new entrants
 Co...
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Slide 16More free downloads and templates at: 1stOutsource Research
Suppliers diversify to gain more of the mark...
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Slide 17More free downloads and templates at: 1stOutsource Research
What is important in vendor choice?
 Think ...
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Slide 18More free downloads and templates at: 1stOutsource Research
Important Factors
 Probably the most import...
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Slide 19More free downloads and templates at: 1stOutsource Research
The Myths of Outsourcing
Costs Savings
Provi...
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Slide 20More free downloads and templates at: 1stOutsource Research
More Myths…
Flexibility
Utilises spare capac...
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Slide 21More free downloads and templates at: 1stOutsource Research
Reshoring/near shoring became more attractiv...
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Slide 22More free downloads and templates at: 1stOutsource Research
Assessing the Myths and Issues of Outsourcin...
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Slide 23More free downloads and templates at: 1stOutsource Research
What is happening here?
 What do you think ...
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Slide 24More free downloads and templates at: 1stOutsource Research
Objectives of this afternoons session
 To o...
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Slide 25More free downloads and templates at: 1stOutsource Research
Recap: the outsourcing decision is basically...
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Slide 26More free downloads and templates at: 1stOutsource Research
Outsourcing is about setting the Boundary of...
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Slide 27More free downloads and templates at: 1stOutsource Research
The make or buy decision driven by cost of d...
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Slide 28More free downloads and templates at: 1stOutsource Research
Boundary where the costs internally and the ...
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Slide 29More free downloads and templates at: 1stOutsource Research
These core aspects define the boundary
Hiera...
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Slide 30More free downloads and templates at: 1stOutsource Research
Basic principles of market placement
 Marke...
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Slide 31More free downloads and templates at: 1stOutsource Research
Specialisation and learning drive specificit...
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Slide 32More free downloads and templates at: 1stOutsource Research
Summary
 Value of market sourcing reduces a...
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Slide 33More free downloads and templates at: 1stOutsource Research
Reflection
 Research has shown that clients...
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Slide 34More free downloads and templates at: 1stOutsource Research
Evidence from the field
 Large outsource de...
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Slide 35More free downloads and templates at: 1stOutsource Research
The High Level Make or Buy Choice
Project ty...
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Slide 36More free downloads and templates at: 1stOutsource Research
The High Level Make or Buy Choice
Project ty...
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Slide 37More free downloads and templates at: 1stOutsource Research
Reflection
 Suggest what circumstances migh...
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Slide 38More free downloads and templates at: 1stOutsource Research
What some of these theories tell us about co...
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Slide 39More free downloads and templates at: 1stOutsource Research
Reflection
 Why would an outsource be a con...
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Slide 40More free downloads and templates at: 1stOutsource Research
Just some of the problems with outsourcing
r...
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Slide 41More free downloads and templates at: 1stOutsource Research
“...there's the unmeasurable aspect of what ...
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Slide 42More free downloads and templates at: 1stOutsource Research
We will review over the next sessions why th...
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Sainsbury’s Accenture Outsourcing bare bones...
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Sainsbury’s Accenture Outsourcing contract b...
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Sainsbury’s Accenture Outsourcing the renego...
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Sainsbury’s Accenture Outsourcing the end (e...
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Slide 47More free downloads and templates at: 1stOutsource Research
So what went wrong?
 What are the key lesso...
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Making the Decision to Outsource - Pitfalls and Problems

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Session one slides for Outsourcing Fundamentals Kingston University 2012 - more information and downloads of templates and presentations are available at www.1stoutsource.com

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Making the Decision to Outsource - Pitfalls and Problems

  1. 1. Slide: 1 Slide 1More free downloads and templates at: 1stOutsource Research Defining Outsourcing Session 1 Royston E Morgan roystonmorgan@1stOutsource.com Do
  2. 2. Slide: 2 Slide 2More free downloads and templates at: 1stOutsource Research Today's Agenda  What is Outsourcing?  History and Types  Why Outsource (business driver)  What are the problems
  3. 3. Slide: 3 Slide 3More free downloads and templates at: 1stOutsource Research Outsourcing as example Strategic Change  I.T. Outsourcing  A decision taken to contract-out or sell the organisation’s IT assets, people and/or activities to a third party supplier…over agreed time period  Enabled by Technology, changes structure and culture.  Externalisation of employment – changing world of work  Professional (vs) secondary workers
  4. 4. Slide: 4 Slide 4More free downloads and templates at: 1stOutsource Research Defining Outsourcing  ‘Outsourcing’ is an act of subcontracting a part, or all, of an organization’s work to external vendor(s), to manage on its behalf.  ‘Outsourcing’ is the transfer to an external supplier of the technical, process and human resources of a function that includes the management for the transferred staff.
  5. 5. Slide: 5 Slide 5More free downloads and templates at: 1stOutsource Research Outsourcing Information Systems Functions: Two Driving Forces  Focus on core businesses that adds value to end product or service – Global competition in 1980s-2012 have forced efficiencies.  Shareholder value: Companies ‘priced’ based on shareholder value – With focus on short term profits. – Some tendency for this to be a specific feature of US/UK. This implies management must stress value, they must consider outsourcing for their non-strategic functions.
  6. 6. Slide: 6 Slide 6More free downloads and templates at: 1stOutsource Research Outsourcing is not a passing fad but is main-stream  80% of large companies outsource at least one function or service – 40% outsource two or more functions – 20% annualised growth  Most companies even in these credit crunch times expect to outsource in the next two years – Focus on cost savings may actually receive an extra impetus (especially public sector)  Still many large deals being struck… – … focus on second generation deals and selective sourcing
  7. 7. Slide: 7 Slide 7More free downloads and templates at: 1stOutsource Research At the start focus was on the mega single source  IT outsourcing – Single outsourcer  Big bang (common pre-1990) – Sell IT assets to outsourcer – Move personnel to outsourcer – Get fixed costs off books and change to variable costs – Outsourcers took loss for 2 years and then got economy of scale to keep costs down – Many problems with transition and culture shock of ex-employees being treated like ‘temps’
  8. 8. Slide: 8 Slide 8More free downloads and templates at: 1stOutsource Research Outsourcing Alternatives  Transitional outsourcing (common early to mid 1990s) – Single outsourcer  Stopgap outsourcing for a one-shot specific need – Y2K – Need to transition to new tech frame  Two strategies: – Outsource maintenance of legacy systems to focus on building new systems in new frame (C/S or Internet) – Or outsource development while maintaining legacy and then transition with turnkey system
  9. 9. Slide: 9 Slide 9More free downloads and templates at: 1stOutsource Research Outsourcing Alternatives  Best-of-breed outsourcing (common mid to late 1990s) – Multiple outsourcers – Choose each outsourcer based on their expertise – Alternatively, could be ‘collaborative outsourcing’  Prime contractor and subcontractor system  Business process outsourcing (late 1990s) – Buying radical innovation in processes via IT – Is risky and sometimes risks and rewards are shared in joint ventures (but not common)
  10. 10. Slide: 10 Slide 10More free downloads and templates at: 1stOutsource Research Early signs of risks in Outsourcing showed control a key issue  Risks/Rewards of outsourcing: – IS Management loses an increasing amount of control – Vendors take more risk to win the deal – Vendors’ margins improve by simplifying service – Choosing the right vendor very important – Organizations lose learning and often intellectual property from innovation – Organizations lose management control (cannot demand immediate help, etc.), quality control, and loyalty
  11. 11. Slide: 11 Slide 11More free downloads and templates at: 1stOutsource Research Other sourcing approaches also emerged  Application service providers (ASPs) – Software services for rent in remote location (e.g., no temps working in house) – Primarily with an Internet interface – Pay by the transaction – Can integrate company externally and someone else provides and maintains hardware and software
  12. 12. Slide: 12 Slide 12More free downloads and templates at: 1stOutsource Research Outsourcing alternatives such as shared services also common  Shared services – Insourcing within organization – Across large organization, create centralized service unit that deals with services of all sorts – A spin off company that has its own management and autonomy and in some cases is legal corporate entity – Specialties within types of service (like IT or mailroom or legal) have autonomous subunits within service unit  Shared service group can become prime candidate for outsource
  13. 13. Slide: 13 Slide 13More free downloads and templates at: 1stOutsource Research A whole new vocabulary sprang up  Out-sourcing  In-sourcing  Back-sourcing  Competitive sourcing  Off-shoring  Near-shoring  Right-shoring  In-shore The cheesy term Rightshore ™ is a trademark of Cap Gemini Ernst & Young, with a filing date of May 27, 2003.
  14. 14. Slide: 14 Slide 14More free downloads and templates at: 1stOutsource Research Define what you think is meant by total outsourcing?  Can you suggest advantages/disadvantages?  How would you measure the benefits of an outsourcing decision once it was completed?
  15. 15. Slide: 15 Slide 15More free downloads and templates at: 1stOutsource Research An active market attracted new entrants  Consultants (Accenture, PWC) – FM as entry to high value activities such as Business Process Outsourcing  System Houses (Atos, EDS) – Long term provision of custom/package software – IT & project management  Hardware vendors – Diversifying to avoid margin trap  Ex IT departments – Operational IT (FM focus)
  16. 16. Slide: 16 Slide 16More free downloads and templates at: 1stOutsource Research Suppliers diversify to gain more of the market potential Their different backgrounds mean they have specific competences to offer but the go-to-market position is they can do everything Strategic & tactical Application development Operational IT/IS Hardware Consultancies HWVendors Ex IT Departments System Houses Margin Traditional IT vendors acquiring consultancies to get up the value chain
  17. 17. Slide: 17 Slide 17More free downloads and templates at: 1stOutsource Research What is important in vendor choice?  Think about the vendor decision in an outsource bid  Discuss in your groups what would be the key factors you would use when selecting a vendor  Rank you criteria in order and justify your choice
  18. 18. Slide: 18 Slide 18More free downloads and templates at: 1stOutsource Research Important Factors  Probably the most important is specific expertise in the technology or process being outsourced  Others: – Sector specific competence (demonstrable) – Scale and scope in outsource area – Ability to deliver savings – Culture match (to service delivery people) – Good transition management capabilities – …
  19. 19. Slide: 19 Slide 19More free downloads and templates at: 1stOutsource Research The Myths of Outsourcing Costs Savings Provide scarce IT skills Better quality service Assist cash flow Over what time period? Could do this anyway? At what price? In the contract? Continuity? How measured? Paid for later? Focus on core competence What is core? Reliability of service?
  20. 20. Slide: 20 Slide 20More free downloads and templates at: 1stOutsource Research More Myths… Flexibility Utilises spare capacity Accountability Increases management control In the contract at what price? True availability? Shared services? Switching costs? Clear contracting? Detailed SLA’s Different type of skills required to manage vendor Manage demand variability Over what range and at what price?
  21. 21. Slide: 21 Slide 21More free downloads and templates at: 1stOutsource Research Reshoring/near shoring became more attractive due to labour arbitrage but...  Customers in US rated off- shore call centres 26 points lower than on-shore.  First time call resolution ‘dramatically’ lower offshore.  Evident contextual gap in language use.  Potential risk to customer experience and loyalty – 50% customers ready to change over poor experience. Emphasises the need to do proper due diligence
  22. 22. Slide: 22 Slide 22More free downloads and templates at: 1stOutsource Research Assessing the Myths and Issues of Outsourcing  Cost reduction and control  Focus on core competencies  Access to staff and technology  Performance improvement  Mixed evidence, hidden costs  Problems pinning down a core competence, time invested in managing outsourcing contracts  Complaints that supplier does not staff well and pinches own best  Evidence of serious or difficult service-level problems
  23. 23. Slide: 23 Slide 23More free downloads and templates at: 1stOutsource Research What is happening here?  What do you think that some of these issues are really telling us?  Discuss in your groups what could be the explanation for these problems – Suggest remedial actions
  24. 24. Slide: 24 Slide 24More free downloads and templates at: 1stOutsource Research Objectives of this afternoons session  To outline some of the key economic issues in the make or buy decision to outsource.  To review some of the key risk issues in managing the selection of outsource processes.  To begin the process of identification of services and products that can be placed in the market.
  25. 25. Slide: 25 Slide 25More free downloads and templates at: 1stOutsource Research Recap: the outsourcing decision is basically a make or buy choice Reasons to buy  Cost efficiencies  Technology uncertainty  Non core process (or declining)  Access to expertise Reasons to make  Core competency  Competitive edge  Asset specificity high  Critical process  Dependent on core or critical process  Risk  Difficult to measure
  26. 26. Slide: 26 Slide 26More free downloads and templates at: 1stOutsource Research Outsourcing is about setting the Boundary of the Organisation In House Service Offshore Outsource Internal Governance Vendor Organisationalboundary In source External Division Back source Market Governance
  27. 27. Slide: 27 Slide 27More free downloads and templates at: 1stOutsource Research The make or buy decision driven by cost of doing something externally or internally  Transaction cost economics – (offers an) Explanation of the boundary choice  Model – Hierarchical decomposition (form of governance) – Asset specificity – Externality  Behavioural assumptions – Bounded rationality – Opportunism  Point of departure from classical economics – Economic agents under classical model act to maximise profit – Economic agents from a TC perspective act to minimise cost
  28. 28. Slide: 28 Slide 28More free downloads and templates at: 1stOutsource Research Boundary where the costs internally and the costs of the market just balance  Costs are all aspects of the control and monitoring of the performance of the activity  Make – Training – Management Time – Direct cost – Facilities – Payroll etc.  Buy – Negotiating – Monitoring – Writing agreements Accounting Distribution Customer Service Information Systems Manufacturing $ $ $ Purchasing Quality Assurance Research & Development Warehouse Sales Board of Directors Shipping Organisation Boundary
  29. 29. Slide: 29 Slide 29More free downloads and templates at: 1stOutsource Research These core aspects define the boundary Hierarchical Decom- position Asset Specificity Externality Frequency Uncertainty or risk Specific investments Quality compliance IPR Confidential ity Measurement risk Organisation Structure Bounded Rationality Opportunism Agents act to serve own interests Agents a rationale but in a limited way can’t do everything!
  30. 30. Slide: 30 Slide 30More free downloads and templates at: 1stOutsource Research Basic principles of market placement  Market is favoured if relative demand client is less that of the market – Vendors can aggregate all the clients demands – Offering wider scale… – … and wider scope – Can specialise in the delivered service (competence)  The advantage of the market dissipates if the service becomes specific to the client – The more specific a service is the less a vendor is able to ‘pool’ demand
  31. 31. Slide: 31 Slide 31More free downloads and templates at: 1stOutsource Research Specialisation and learning drive specificity  Specificity arises when specialisation of an asset means it cannot be used outside the context of the service. – Vendor cannot realise scale effects as will need services to be generic and spread across several clients – Can reduce room for cost reduction (or left with labour cost arbitrage) – This process inhibits switching of the client and locks the supplier in  The process of service delivery acts to increase specificity – Implicit knowledge transfer and … – Learning by doing locks out competition
  32. 32. Slide: 32 Slide 32More free downloads and templates at: 1stOutsource Research Summary  Value of market sourcing reduces as human and physical assets become more specialised  Specialism leads to single use (small numbers TC risk) – Which is less transferable to other clients – Can drive re-integration as economies of scale cannot be realised (and client can do just as well)
  33. 33. Slide: 33 Slide 33More free downloads and templates at: 1stOutsource Research Reflection  Research has shown that clients prefer to have service that is customised to their needs.  What is the consequence of this for the outsource deal?  How might a vendor respond to this?
  34. 34. Slide: 34 Slide 34More free downloads and templates at: 1stOutsource Research Evidence from the field  Large outsource deals typically tailored (100% according to Deloitts survey)  Corollary – Vendors find it difficult to standardise services – As need to tailor a solution increases the ability to deliver savings decrease ‘if a project needs customising, it should not be the subject to outsourcing’ (Deloittes (2005) survey quote)
  35. 35. Slide: 35 Slide 35More free downloads and templates at: 1stOutsource Research The High Level Make or Buy Choice Project type services Specific investment transfer difficult Joint governance Partner models Joint ventures Commodity type Services (desktop, payroll, transport) Selective sourcing may be favourable Unified management (highly embedded services) OccasionalFrequent Generic Mixed Highly Specific ServiceFrequency Need to sustain relationship Service Characteristics
  36. 36. Slide: 36 Slide 36More free downloads and templates at: 1stOutsource Research The High Level Make or Buy Choice Project type services Specific investment transfer difficult Joint governance Partner models Joint ventures Commodity type Services (desktop, payroll, transport) Selective sourcing may be favourable Unified management (highly embedded services) OccasionalFrequent Generic Mixed Highly Specific ServiceFrequency Need to sustain relationship Service Characteristics Marketsourcing NormalcontractingRules StandardSLA Relational contracting Continuous interaction and evaluation of value Arbitration extends formal contracting Demands integrated approach supplier/buyer
  37. 37. Slide: 37 Slide 37More free downloads and templates at: 1stOutsource Research Reflection  Suggest what circumstances might lead to insourcing?  Review the advantages and disadvantages of Outsourcing
  38. 38. Slide: 38 Slide 38More free downloads and templates at: 1stOutsource Research What some of these theories tell us about conflict Strategic Orientation Needs Resource Based view Transaction costs Agency Theory Client Focus on core competences Service improvement and reduction in cost Measurement Conflict Area The specificity of service Asset specificity Technological risk Volume risk Degree of investment Alignment of goals Length of contract Contracts Balance outcome verses behaviour Supplier Focus on core competences and use existing services Economies of scale and scope Service bundles Increase profit Measurement
  39. 39. Slide: 39 Slide 39More free downloads and templates at: 1stOutsource Research Reflection  Why would an outsource be a conflict area is this necessarily so?  How might conflict be reduced?
  40. 40. Slide: 40 Slide 40More free downloads and templates at: 1stOutsource Research Just some of the problems with outsourcing relationships  Breakdown of relationships  Failure to meet service levels  Constant contractual wrangles  Unforeseen charges  Poor contracting  Losing control  Selecting the wrong vendor  Overlooking hidden cost  No exit strategy  Forgetting about personnel issues
  41. 41. Slide: 41 Slide 41More free downloads and templates at: 1stOutsource Research “...there's the unmeasurable aspect of what happens when a company is no longer a culture but an amalgamation of outsourcing partners. They may add great efficiency into the business, but they generally add nothing to the long-term vision. As most companies that have been around awhile are aware, great ideas don't always come from the people at the top. Outsourcing can eliminate an entire interaction layer that is impossible to measure with objective tools. Cultures are inextricably linked to innovation and quality, and the less there is of the former the more the latter two will suffer in the long term.”
  42. 42. Slide: 42 Slide 42More free downloads and templates at: 1stOutsource Research We will review over the next sessions why these problems occur and hopefully how we might tackle them! Management Preparation NegotiationTransition Scoping Relationship Formation Relationship Maturity Relationship Engagement The Outsource Lifecycle Definition Interpretation Renegotiation Terminate Selection Reconnaissance
  43. 43. Slide: 43 Slide 43More free downloads and templates at: 1stOutsource Research Sainsbury’s Accenture Outsourcing bare bones…  Outsource of entire IT function to Accenture. – With guarantees to reduce cost of operations by 50% over the contract.  Predicated on legacy replacement (technology refresh). – All systems HR, Logistics, Data Warehousing, Front and Back of shop to be replaced in three years. – Reduction in diversity systems. – Replace all PC’s and Office software.  Standard system COTS and Oracle platform. – Limited customization standard architecture.
  44. 44. Slide: 44 Slide 44More free downloads and templates at: 1stOutsource Research Sainsbury’s Accenture Outsourcing contract basis…  No formal bidding process.  Costs spread over life-time of deal. – Avoided high up front investment. – Contract devised by Accenture/Sainsbury’s. – Business change included in contract but in a limited way.  Some performance measure in place. – Elements of risk/reward. – Measurements of productivity cost performance etc.  Change Management seemed embryonic
  45. 45. Slide: 45 Slide 45More free downloads and templates at: 1stOutsource Research Sainsbury’s Accenture Outsourcing the renegotiations start…  Three years into deal. – Negotiated reduction in costs. – Simplification of IT systems (legacy and pipeline).  Some performance problem... – Limited productivity gains. – IT costs continuing to rise. – Automated warehouses failure to perform.  Large write-downs: – $254 Million IT Assets, $218 Million automation, $54 Million inventory losses.  Rebuilding IT internal staff.
  46. 46. Slide: 46 Slide 46More free downloads and templates at: 1stOutsource Research Sainsbury’s Accenture Outsourcing the end (early 2005)…  Rebuilding IT back in-house. – Sainsbury re-gaining control strategic asset. – Migration IT service and development to in-house service. – Back source IT staff from Accenture to Sainsbury’s.  More write offs... – IT costs higher than before outsourcing.  Termination of contract  The people who presided over the disaster left Sainsbury’s.
  47. 47. Slide: 47 Slide 47More free downloads and templates at: 1stOutsource Research So what went wrong?  What are the key lessons from this case what would you do differently?

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