To assure that the intended benefits of an outsourcing project will be achieved, a solid negotiation and governance process will have to be implemented, along with a tight risk management process during all phases of the project

1. IT OUTSOURCING CONTRACTS :
NEGOTIATION AND GOVERNANCE TO ASSURE THE
EFFECTIVENESS OF BENEFITS
Alfredo Saad
20/06/2014 1

2. AGENDA
 Outsourcing : Historical Background
 Outsourcing : Macroeconomic Foundation
 Outsourcing 2013 Market Profile
 Outsourcing Market Growth until 2017
 Business Drivers of the Outsourcing Decision
 Achieved Effectiveness of Outsourcing Benefits
 Benefits (In)effectiveness: Typical Profile of Extreme Scenarios
 Outsourcing : Two Real and Opposed Cases in Brazil
 Outsourcing : How to Assure an Effective Benefit ?
20/06/2014
2

3. OUTSOURCING : HISTORICAL BACKGROUND
 Rigidly verticalized organization models which prevailed until the beginning
of 2nd half of the 20th Century ...
 They had the ownership and control of all human and material resources
needed by its operation
 Such self-sufficiency was understood as a pre-requisite for the success
 This model brought the need for big and continuous capital investments to
keep the leadership of their market
 ... had to be reexamined because new factors emerged
 Continuous intensification of competition among companies
 Technological advances increasingly accelerated
 Mutant and volatile demands from the customers
 Competitivity, flexibility, agility and capacity to innovate became key
requirements
 Permanent efforts aiming at resource utilization efficiency and cost
reduction
20/06/2014
3

4. OUTSOURCING : MACROECONOMIC FOUNDATION
 Causes-effects chain observed in the economic scenario in the 80’s
 Growing inflation in US
 Increasing interest rate as determined by Federal Reserve
 Recession aggravation
 Increasing of external investment resources
 Increasing of dollar quotation
 Diminishing of exportation goods flow
 Increasing of importation goods flow
 Growing impact over industry profitability and competitivity
 Shareholder’s pressure asking for cost reduction and efficiency and productivity
increase
 Two of the market responses to this causes-effects chain were
 Globalization
 Outsourcing
20/06/2014
4

5. OUTSOURCING MARKET PROFILE IN 2013
20/06/2014
5
 Total ITO & BPO  952 B US$
 Segmented by area
 IT Outsourcing (ITO)  68 % 648 B
 Business Process Outsourcing (BPO)  32 % 304 B
 Segmented by geography
 North America  42 % 398 B
 EMEA  34 % 319 B
 Japan  10 % 101 B
 Asia-Pacific except Japan  9 % 88 B
 Latin America  5 % 44 B
Source :
Fersht, Phil & Snowdon, Jamie - State of the Outsourcing Industry 2013 – Executive Findings, HfS Research

6. 20/06/2014
6
 Total ITO & BPO  952 B US$
 Segmented by area 2013 % a.a.
 IT Outsourcing (ITO)  68 % 648 B 4,7 %
 Business Process Outsourcing (BPO)  32 % 304 B 6,0 %
 Segmented by geography 2013 ITO % a.a. BPO % a.a.
 North America  42 % 398 B 5,3 % 5,3 %
 EMEA  34 % 319 B 3,3 % 6,3 %
 Japan  10 % 101 B 2,9 % 4,4 %
 Asia-Pacific except Japan  9 % 88 B 7,0 % 8,1 %
 Latin America  5 % 44 B 8,7 % 7,4 %
Source :
Fersht, Phil & Snowdon, Jamie - State of the Outsourcing Industry 2013 – Executive Findings, HfS Research
OUTSOURCING MARKET GROWTH UNTIL 2017

7. 20/06/2014
7
Source :
Fersht, Phil & Snowdon, Jamie - State of the Outsourcing Industry 2013 – Executive Findings, HfS Research
OPERATIONAL BUSINESS DRIVERS
Reduce operating costs
Standardize processes
Meet compliance / regulatory requirements
More effective operations at a global level
Transform / reengineer processes
BUSINESS DRIVERS OF THE OUTSOURCING DECISION
STRATEGIC BUSINESS DRIVERS
Gain access to talent
Gain access to new technology
Improve analytical capabilities
Proven / mature offerings from service providers
Force change into business operations

8. 20/06/2014
8
ACHIEVED BENEFITS OF OUTSOURCING BENEFITS
OPERATIONAL BUSINESS DRIVERS
% of companies
which responded
Very
effective
Somewhat
effective
Reduce operating costs 35 % 52 %
Standardize processes 29 % 56 %
Meet compliance / regulatory requirements 23 % 63 %
More effective operations at a global level 29 % 53 %
Transform / reengineer processes 15 % 63 %
Source :
Fersht, Phil & Snowdon, Jamie - State of the Outsourcing Industry 2013 – Executive Findings, HfS Research

9. 20/06/2014
9
STRATEGIC BUSINESS DRIVERS
% of companies
which responded
Very
effective
Somewhat
effective
Gain access to talent 20 % 61 %
Gain access to new technology 18 % 55 %
Improve analytical capabilities 13 % 56 %
Proven / mature offerings from service providers 9 % 53 %
Force change into business operations 17 % 61 %
Source :
Fersht, Phil & Snowdon, Jamie - State of the Outsourcing Industry 2013 – Executive Findings, HfS Research
ACHIEVED BENEFITS OF OUTSOURCING BENEFITS

10. BENEFITS (IN)EFFECTIVENESS: TYPICAL PROFILE OF EXTREME SCENARIOS
 Latent conflict generated by :
 Contractual obligations of both parties
defined ambiguously
 Metrics of services quality defined
ambiguously
 Customer expectations badly or simply non
administered
 Ineffective communication to the end users
about the actual contractual obligations
 Growing and mutual mistrust feeling that
the other party is obtaining an unjustified
advantage concerning :
 The prices charged
 The defined deadlines for projects
 The amount and skill of allocated resources
 Growing demotivation of both teams due to:
 Difficulties to evidence benefits
 Difficulties to propose and close new deals
20/06/2014
10
 Solid contract governance by both parties
resulting in :
 Administering permanently the expectations
and taking immediate corrective actions to
adjust issues identified
 Involving the adequate hierarchical levels
depending on the nature of the issues
 Growing and mutual confidence feeling
brought by the perception that both parties
pursue common objectives concerning :
 Services quality
 Customer satisfaction
 Services delivery stability
 Innovation in future solutions
 Growing motivation of both teams due to:
 Nurtured partnership mindset
 Permanent ideas for new projects
 Mutual perception about the effectiveness
of benefits achieved

11. OUTSOURCING : TWO REAL AND OPPOSED CASES IN BRAZIL
 Customer : Telecommunications Operator
 Contract operations in conflict since the
initial stages
 Unstable delivery environment
 Mutual contractual obligatons defined
ambiguously
 Conflict resolution discussed at the wrong
management level
 After contract signature the equity control
changed on the customer side
 The new owner had a radically diverse vision
about outsourcing relatively to the old
controller
 New corporate strategy made unfeasible the
continuity of the contract
 A long renegotiation resulted in contract
cancellation and consequent re-insourcing
of the IT functions
20/06/2014
11
 Customer : Manufacture Company
 Customer global strategy defined that a
global IT partner would be selected
 IT outsourcing is part of the broader strategy
to create a unique global image of the
customer organization
 Relationship between the customer and
provider organizations is led by their top
global executives
 Progressive geographical implementation
with solid governance by both parties
 Provider is part of the customer strategic
planning and so is able to evaluate impact
and create new solutions for the IT
environment
 New projects in permanent discussion
 Two contractual renegotiations resulted in
additional cost reduction to the customer
and contractual term extension

12. OUTSOURCING : HOW TO ASSURE AN EFFECTIVE BENEFIT ?
 Adequately implement each phase of the project, tightly managing their inherent
risks to avoid or at least minimize to acceptable levels the impact of their
materialization over the potential benefits to be achieved :
20/06/2014
12
Identification and priorization
of applicable business drivers
Definition of the sourcing
strategy
Definition of the
outsourcing model
Provider(s) selection
Negotiation of contractual
terms and conditions
Services transition
Contract governance