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Outsourcing Business - Is it right for you?

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Outsourcing Business - Is it right for you? By Sridhar Ramanathan at SVPMA Monthly Event October 2004 …

Outsourcing Business - Is it right for you? By Sridhar Ramanathan at SVPMA Monthly Event October 2004

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  • 1. The Outsourcing Business Is it Right for You? SVPMA Wednesday, October 6, 2004 Sridhar Ramanathan Pacifica Group Pacifica Group © 2004
  • 2. AgendaOutsourcing definitionTypes of outsourcingCustomer/Vendor perspectivesBusiness ConsiderationsProduct Management ImplicationsResources
  • 3. Defining Outsourcing“Outsourcing, a contractual relationship between two or more parties for the ongoing management (and in many cases the improvement) of infrastructure or business processes”--ITSMASource: ITSMA paper “Buyer Views on Outsourcing and Offshoring”
  • 4. Types of Outsourcing Type ExampleApplications Outsourcing ERP Outsourcing (e.g. mySAP)Business Process Outsourcing EDS’ HR Services (payroll, benefits)Infrastructure Outsourcing HP Desktop Management ServicesApplication Service Providers Salesforce.com, CRM on DemandIT Utility Services Critical Path’s Managed MessagingInternet Service Providers Savvis hosting servicesNote: onshore/offshore is a separate decision from insource/outsource
  • 5. Why Outsource? Access to expertise; focus on core competency gain time-to-market increase operational efficiency Manage risk/change over time Reduce/contain cost
  • 6. Pros– The Customer PerspectiveMore reasons... Competition is doing it Move big ticket asset purchases off the balance sheet to expense Scale; grow the business without scaling costs commensurately
  • 7. Cons-The Customer Perspective Cost savings may not meet expectations; expensive change orders arising from service levels can account for a huge fraction of the bill Service levels might not meet expectations Switching outsourcers is painful; divorces can be ugly
  • 8. Pros- The Vendor Perspective Recurring/predictable revenue and reduced selling costs due to 2-10 year contract terms Add more value to customers and command a bigger share of your customer’s wallet Keep competition at bay High switching costs could yield higher margins
  • 9. Cons- The Vendor Perspective Can become a big diversion from current business model Balancing operational efficiency with customer relationship can be tough; most software businesses emphasize volume not maximizing customer value Potentially large capital and human resources to build up capability Exiting bad business is painful
  • 10. Vendor Example – Toolwire
  • 11. Evaluation Criteria1. Can we make money?2. Can we deliver?3. Is the risk/reward acceptable?4. Does it fit with our strategy?
  • 12. 1. Can we make money? Leading IT outsourcers make over 40% gross margin on multi-year contracts. Will you have operational efficiencies, cost advantages, process maturity, and scale? Can you drive down costs (labor, capital, software, etc.) while delivering flawlessly against service levels for annuity revenue?
  • 13. 2. Can we deliver? Emphasis on value more than volume It’s a trusted relationship. Customers will escalate to CEO fast if something breaks. How well can your team can deliver against tightly specified service level agreements. Do you have enough instrumentation to proactively avoid disasters?
  • 14. 3. Is the risk/reward acceptable? Outsourcing relationships are all about managing risk. Leaders quantify risk and pricing it into the contract directly. For example, are you getting paid enough to deliver five 9’s availability globally? Has your legal team reviewed the liabilities? Do you have mutual responsibilities/ accountabilities built into the contract?
  • 15. Does it fit with our strategy? You will need new roles: sales specialists, pursuit teams, delivery/operations, finance, pricing analysts, contracts, and HR. Are you willing to institute rigorous processes and metrics to reward behaviors? It’s a big cultural shift from maximizing volume to maximizing value with a few.
  • 16. Vendor Example – GlassHouse Technologies
  • 17. Outsourcing is a deeper relationship Software Hosted/ Outsource Support OnDemand OptionService level agreementIncident management7x24 coverageUpdates/upgradesProactive ongoing changemanagementDesign, build and run aspecific IT/BusinessProcessTransfer of assets/people
  • 18. Pricing & Terms Software Business Outsourcing Business 1 year 2-10 years EULA SLA Right-to-use license & Contracted monthly fee support as % plus change orders Pricing on seats Pricing on servicing # servers, users, messages, or CPU/storage capacity… Customer bears all risk Shared Risk
  • 19. Product Management Implications Software Business Outsourcing Business Product definition Service description Development & launch Change management process process Team is Marketing, PM, Team incl HR, Legal, Engineering & Support Finance, Pricing Analyst Customer acquisition Customer retention/ expansion Innovate Copy/leverage
  • 20. Resources CIO magazine articles (excellent one on quantifying risk/return) BPO-Forum ITSMA – Buyer Views on Outsourcing Morgan-Chambers whitepapers (dated but good) Whitepapers at vendor sites (e.g. CSC, EDS, CapGemini, HP and IBM) Gartner and Forrester research notes
  • 21. Thank you! Sridhar Ramanathan Pacifica Group (925) 371-8400sridhar@pacifica-group.com

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