Today’s Webinar is brought to you by Everest GroupToday’s WebinarOutsourcing Portfolio Rationalization: Getting the Most o...
Outsourcing Portfolio Rationalization:Getting the Most out of OutsourcingSeptember 22, 2011
Introductions                                       Sarthak Brahma                                       Practice Director...
Agenda   Portfolio misalignment in large outsourcing contracts   Methodology for resolving portfolio misalignment   Cas...
Buyers focus on aligning their contracted pricing but tend toignore portfolio misalignment issues that bleed away precious...
Fragmented service provider portfolio    1Large buyers frequently have fragmented portfolios with more than 15service prov...
2  Multiple rates for similar resourcesPrice variations for similar resources can be as high as 60%Procurement of similar ...
3  Excessive use of specialized resourcesResources are often tagged as “specialized” based on buyers’ perceptions,not on w...
Inverted pyramids    4Complex outsourcing portfolios often exhibit inverted pyramids as opposed tothe typical bottom-heavy...
5  Redundancies in location mixBuyers are extremely selective while deciding the right portfolio of providersbut tend to n...
Agenda   Portfolio misalignment in large outsourcing mandates   Methodology for resolving portfolio misalignment   Case...
Comprehensive portfolio rationalization comprises of aninternal assessment to target sourcing design and scopeissues and a...
Sourcing DesignAssess client’s sourcing/procurement functions and standard operatingprocedures to eliminate root causes be...
Portfolio OptimizationBuyer demand analysis to finalize a MECE portfolio that eliminates anyredundancies in service provid...
BenchmarkingConducting benchmarking of FTE rates, contractual T&Cs and operationalmetrics to identify high impact levers o...
Agenda   Portfolio misalignment in large outsourcing mandates   Methodology for resolving portfolio misalignment   Case...
Masked case study: Portfolio rationalization for a leadinginformation services company (page 1 of 3)Sourcing environmentTh...
Masked case study: Portfolio rationalization for leadinginformation services and publishing company (page 2 of 3)Skill por...
Masked case study: Portfolio rationalization for leadinginformation services and publishing company (page 3 of 3)Price ben...
Q&A   Attendees will receive an email to download today’s webinar presentation as well as access a recorded    version  ...
Related Content                                       Complimentary Viewpoints   Outsourced Portfolio Rationalization   ...
Everest Group leads clients from insight to actionContact us for more information about our consulting, research, and indu...
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Outsourcing Portfolio Rationalization: Getting the Most out of Outsourcing

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The complexities associated with large outsourcing portfolios can take a toll on outsourcing gains. Analysis has revealed that even in competitively benchmarked outsourcing arrangements, buyers with unwieldy portfolios may lose up to 20 percent on the sourcing spend. This webinar will explain the complexities that might be impacting your outsourcing gains and how to realize incremental sourcing gains by addressing these complexities at the grassroot level, using Everest Group’s proprietary Outsourcing Portfolio Rationalization

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Outsourcing Portfolio Rationalization: Getting the Most out of Outsourcing

  1. 1. Today’s Webinar is brought to you by Everest GroupToday’s WebinarOutsourcing Portfolio Rationalization: Getting the Most out of OutsourcingSynopsis:The complexities associated with large outsourcing portfolios can take a toll on outsourcing gains. Analysis has revealed thateven in competitively benchmarked outsourcing arrangements, buyers with unwieldy portfolios may lose up to 20 percent on thesourcing spend. This webinar will explain: The complexities that might be impacting your outsourcing gains How to realize incremental sourcing gains by addressing these complexities at the grassroot level, using Everest Group’s proprietary Outsourcing Portfolio RationalizationAbout Everest GroupEverest Group is an advisor to business leaders on the next generation of global services with a worldwide reputation forhelping Global 1000 firms dramatically improve their performance by optimizing their back- and middle-office business services.With a fact-based approach driving outcomes, Everest Group counsels organizations with complex challenges related to theuse and delivery of global services in their pursuits to balance short-term needs with long-term goals. Through its practicalconsulting, original research and industry resource services, Everest Group helps clients maximize value from deliverystrategies, talent and sourcing models, technologies and management approaches. Established in 1991, Everest Group servesusers of global services, providers of services, country organizations and private equity firms, in six continents across allindustry categories. For more information, please visit www.everestgrp.com and research.everestgrp.com.For more information, contact Mark Williamson at mark.williamson@everestgrp.com Proprietary & Confidential. © 2011, Everest Global, Inc. 1
  2. 2. Outsourcing Portfolio Rationalization:Getting the Most out of OutsourcingSeptember 22, 2011
  3. 3. Introductions Sarthak Brahma Practice Director Everest Group sarthak.brahma@everestgrp.com Rahul Gehani Research Director Everest Group rahul.gehani@everestgrp.com Proprietary & Confidential. © 2011, Everest Global, Inc. 3
  4. 4. Agenda Portfolio misalignment in large outsourcing contracts Methodology for resolving portfolio misalignment Case Study Proprietary & Confidential. © 2011, Everest Global, Inc. 4
  5. 5. Buyers focus on aligning their contracted pricing but tend toignore portfolio misalignment issues that bleed away preciousdollarsIssue Potential impact 1  4-5% increase in spend due to high governance cost for buyers Fragmented service provider portfolio 2  8-11% increase in spend on account of procurement of resources at higher rates Multiple rates for similar resources 3  5-10% increase in spend on account of premium pricing for specialized resources Excessive use of specialized resources 4  Excessive usage of senior resources leading to 5-10% increase in spend Inverted pyramids 5  Increased exposure to location-specific disruptions Redundancies in location mixMisaligned portfolios, which do not have a MECE set of resources, service providers, and locations aligned withbusiness imperatives, can inflate outsourced spend by upto 20% Proprietary & Confidential. © 2011, Everest Global, Inc. 5
  6. 6. Fragmented service provider portfolio 1Large buyers frequently have fragmented portfolios with more than 15service providersAdvantages of a wide portfolio of providers Hidden costs Access to complementary service providers capabilities  Excessive vendor management expenses for buyer Introducing competitive dynamics within service providers  Reduced economies of scale and scope for service providerBy limiting the portfolio to 3-5 key service providers, buyers can enjoy the benefits of a multi-vendor sourcing arrangement whilereducing the ‘hidden’ costs Savings from service provider consolidation Buyer’s costs Percentage Service provider’s costs 4-5% Buyer’s and service provider’s costs 22-28% 4-5% savings driven by reduced internal buyer costs in 18-23% savings from reduced service setting up and managing provider fees relationships  Driven by increased offshore leverage and synergies in onsite TCO savings of relationships  Ability to realize benefit depends on up to 28% the extent of current leverage TCO of a One-time2 Ongoing TCO of One-time2 Ongoing TCO of a consolidated fragmented consolidated portfolio3 after service service provider portfolio (buyer’s provider’s savings portfolio1 Buyer savings savings only) service provider savings 1 Characterized by multiple service providers (20-30) in the ADM portfolio; 2-3 key service providers and the rest being small scale 2 Annualized one-time costs considering average term of a deal as 4 years 3 Characterized by fewer service providers (3-5) in the ADM portfolio, with each having significant scaleNote: Scenario assumed is an organization with large outsourced ADM spend (>US$300 million ACV) Proprietary & Confidential. © 2011, Everest Global, Inc. 6
  7. 7. 2 Multiple rates for similar resourcesPrice variations for similar resources can be as high as 60%Procurement of similar resources with widely varying prices can be attributed to: Lack of checks and balances to prevent procurement outside of MSA by business units Lack of standardized skill definition for procured roles Buyer-provider alliances at the line functions Onsite rates for Project Manager for a leading communications company Median rate, base index=100 60% Benchmark price range May lead to ~10% higher outsourced spendPricing  Resource up-skilling  Resource ‘force-fit’misalignment  Irrelevant ‘value-add’root causes Proprietary & Confidential. © 2011, Everest Global, Inc. 7
  8. 8. 3 Excessive use of specialized resourcesResources are often tagged as “specialized” based on buyers’ perceptions,not on what they cost to the service providerBuyers frequently carry as much as 25-30% of their volumes in “specialized” skills, due to: Evolving IT resource requirements, as a result of which buyers end up paying “specialized “ skill premiums even for common skills procured on an ad-hoc basis Service providers continue to charge past-contracted premiums for erstwhile specialized skills Usage of specialized and standard skills for a leading healthcare provider Specialized skill premium US$1.25 X US$1.16 X Specialized skills Over leverage of Standard skills “specialized” resources can inflate spend by 5-10%Excessive specializedskill usage; high skillpremium Proprietary & Confidential. © 2011, Everest Global, Inc. 8
  9. 9. Inverted pyramids 4Complex outsourcing portfolios often exhibit inverted pyramids as opposed tothe typical bottom-heavy pyramidsApparent reasons Unstated reasons Experience requirement on mission-critical projects  Career advancement in service providers is quicker than in Need for deep domain knowhow even at entry-level buyers. Providers tend charge higher billing rates for promoted roles resources even without a change in responsibilities  Providers up-skill their resources while staffing project teamsAssessment of staffing pyramid for a leading energy company Managerial Managerial Roles Roles (3-5%) (8%) ~10% increase in Middle level roles Middle level roles outsourced spend (40-45%) (52%) Junior roles Junior roles (50-55%) (40%) Typical staffing pyramid Inverted staffing pyramid Proprietary & Confidential. © 2011, Everest Global, Inc. 9
  10. 10. 5 Redundancies in location mixBuyers are extremely selective while deciding the right portfolio of providersbut tend to neglect efficiencies in location mixAttributes of Enable buyers to:an efficient  Leverage complementary skills in each locationlocation mix  Plan for risk and continuity by not having all similar resources in the same location  Monitor cost arbitrage, risk, and skill availability periodically to shuffle the location mix as and when needed  Manage multiple sourcing models such as captive and third-party to serve complementary agendas in multiple locations  Buyers frequently source similar skills from same delivery locations without significant value-addIssue  Increased exposure to location-specific risks e.g. environmental or geo-political disturbances in one location can severely disrupt operations Assessment of service provider-skill-location mix for a leading information services company Significant exposure to location-specific disruptions Proprietary & Confidential. © 2011, Everest Global, Inc. 10
  11. 11. Agenda Portfolio misalignment in large outsourcing mandates Methodology for resolving portfolio misalignment Case Study Proprietary & Confidential. © 2011, Everest Global, Inc. 11
  12. 12. Comprehensive portfolio rationalization comprises of aninternal assessment to target sourcing design and scopeissues and an external market comparables assessment Outsourced Portfolio Rationalization Internal assessment External assessmentSourcing design Portfolio optimization BenchmarkingObjective Objective Objective Recommend exhaustive  Create a MECE portfolio of  Optimize sourcing spend by process and controls to help service providers and assessing resource unit pricing sustain sourcing benefits in the resources for current and future and pricing drivers present and future sourcing needsScope Scope Scope Service provider selection and  Service provider portfolio to  Price benchmarking negotiation process map competency, arbitrage,  Operational metrics Contracts (pricing) database location, risk coverage etc. benchmarking (skill pyramids, management  Resource/skill portfolio to map offshore leverage etc.) Reconciliation of actual all generic, specialized, ad-hoc  Contract benchmarking usage/service levels, sourcing requirements and variations (service levels, T&Cs etc.) contracts, and invoice payments Proprietary & Confidential. © 2011, Everest Global, Inc. 12
  13. 13. Sourcing DesignAssess client’s sourcing/procurement functions and standard operatingprocedures to eliminate root causes behind unmanageable portfoliosTypical design issues Focus areas Irreconcilable outsourcing spend/savings across  Sourcing risk map highlighting process user, sourcing, and finance functions redundancies, control gaps, and recommendations Control lapses leading to procurement outside of MSA (non-contracted providers or resources)  Provider and contracts (pricing) database due- diligence Redundancies in procurement between core team and business units  Impact assessment based on reconciliation of actual usage/service levels, contracts, invoices, Loss of negotiating leverage due to payments disaggregated procurement across multiple user functions Sample risk maps Difficulty in assessing service provider performance across multiple user functions Problem in deploying a common consumption/pricing model due to disaggregated demand and preferences Proprietary & Confidential. © 2011, Everest Global, Inc. 13
  14. 14. Portfolio OptimizationBuyer demand analysis to finalize a MECE portfolio that eliminates anyredundancies in service providers, locations, price or skills being sourcedTypical portfolio issues Focus areas Multiple service providers for similar resources in a  Priority map to reconcile all sourcing location stakeholder requirements (BU, Finance, HR, Procurement) Multiple rates for similar resources  Standardized resource nomenclatures Inadequate location mix (over leverage/under leverage)  Redundancies and recommendations in the Inverted-skill pyramid (more senior to junior resources) sourcing portfolio (providers, skills, price, and locations) Excessive use of “specialized” or ad-hoc resources at high premiums Resource up-skillingSample OutputsStandardized Resource Nomenclature Assessment of Sourcing Portfolio Redundancies Proprietary & Confidential. © 2011, Everest Global, Inc. 14
  15. 15. BenchmarkingConducting benchmarking of FTE rates, contractual T&Cs and operationalmetrics to identify high impact levers of optimization BenchmarkingPricing of FTE Roles Contractual Term and Conditions Operational Metrics Determination of benchmark rates  Evaluation of contracted terms &  Benchmarking of supply-side Comparison of existing service conditions affecting pricing e.g., operational levers affecting pricing provider rates with benchmarks payment terms, volume-based e.g., Span of Control (SPOC), rates to assess savings potential clauses, inflation adjustment delivery-mix etc. clauses etc.Sample OutputsEstimating opportunity for rate Benchmarking volume and inflationrenegotiation adjustment clauses Benchmarking Span of Control Proprietary & Confidential. © 2011, Everest Global, Inc. 15
  16. 16. Agenda Portfolio misalignment in large outsourcing mandates Methodology for resolving portfolio misalignment Case Study Proprietary & Confidential. © 2011, Everest Global, Inc. 16
  17. 17. Masked case study: Portfolio rationalization for a leadinginformation services company (page 1 of 3)Sourcing environmentThe client had a complex portfolio of IT services comprising: More than 1100 FTEs mapped to 91 roles across 20 ADM and Infrastructure functions 12 service providers in 3 broad categories i.e. Tier-1 Indian (35%), Tier-2 Indian (46%) and Nearshore(19%) 8 delivery locations across India, US, and nearshore locations Procurement at the centre and business unit levelKey findings from diagnostic assessment Levers for portfolio rationalization Cluttered skill portfolio (ambiguous role definitions,  Skill portfolio rationalization proliferation of roles, and role redundancies)  Service provider mix optimization Sub-optimal service provider mix  Staffing pyramid optimization Irregular staffing structures  Price benchmarking Non-competitive service provider pricingEverest proprietary “Resource / Job Group” methodologyInputs into the Resource Group exercise: ILLUSTRATIVE Client’s existing job structure Current service providers’ rates Map of service providers’ rates into client job structure 1 2 3 4 Break down Refine resource Rationalize Map all existing existing rates into groups after resource groups by roles into Resource Groups to completion of combining/splitting standardized roles accommodate benchmarking groups whole portfolio exercise Proprietary & Confidential. © 2011, Everest Global, Inc. 17
  18. 18. Masked case study: Portfolio rationalization for leadinginformation services and publishing company (page 2 of 3)Skill portfolio rationalization Service provider consolidation Comprehensive analysis of the client’s IT skill demand Snapshot of skills procured from service providers profile Creation of a role portfolio fitted to present requirements as well as future demand (e.g. roles in Scrum and IT Security) Rationalized portfolio consisted of 62 roles across 14 IT functionsExtract from rationalized skill portfolio Two-pronged approach for sourcing commoditized skills:  Increased leverage of Tier-1 and Tier-2 Indian providers  Consolidated set of Tier-1 and Tier-2 Indian providers Proprietary & Confidential. © 2011, Everest Global, Inc. 18
  19. 19. Masked case study: Portfolio rationalization for leadinginformation services and publishing company (page 3 of 3)Price benchmarking Staffing pyramid optimization Proliferation of roles and large service provider portfolio  Presence of an “inverted” pyramid with the senior and compounded by a wide range of prices at offshore and lead levels comprising ~60% of the total headcount onshore locations  No perceptible difference between value being delivered More than 20 instances of cross-subsidization by providers by junior and senior resources Comprehensive price benchmarking conducted to ascertain “Inverted” client pyramid Optimized pyramid market pricing for the rationalized skill portfolio Indexed hourly rate for offshore programmer 42% Manager Manager (7%) (3%) Benchmark Lead Lead median (21%) (17%) Senior Senior (38%) (30%) Junior Junior (34%) (50%)ImpactStakeholder workshops revealed practical constraints limiting the Annual sourcing gains US$ millionprojected gains Strategic relationships with select service providers, restricting the service provider consolidation Deviations from typical pyramids due to limited availability of skilled resources for legacy technologiesAnnual sustainable sourcing gains estimated to be $7.4 million(~10.9% of annual spend) Proprietary & Confidential. © 2011, Everest Global, Inc. 19
  20. 20. Q&A Attendees will receive an email to download today’s webinar presentation as well as access a recorded version For scheduling a diagnostic assessment of your portfolio or consultation on pricing alignment, contact: – Sarthak Brahma, sarthak.brahma@everestgrp.com – Rahul Gehani, rahul.gehani@everestgrp.com For background information on Everest Group, please visit: – www.everestgrp.com – research.everestgrp.com Thank you for attending todayTo ask a question during the Q&A session Click the question mark (Q&A) button located on the floating tool bar in the bottom right of your screen. This will open the Q&A Panel Be sure to keep the default set to “send to a Panelist” Then, type your question in the rectangular field at the bottom of the Q&A box and click the send button to submit Proprietary & Confidential. © 2011, Everest Global, Inc. 20
  21. 21. Related Content Complimentary Viewpoints Outsourced Portfolio Rationalization Managing Large Outsourcing Portfolios – Typical Issues and Implications of a Complex Portfolio Upcoming WebinarsEmerging Locations in the FAO Delivery Landscape – The New Frontiers Tuesday, September 27, 9:00 a.m. CDT RegisterSAP & Everest Group: Architecting for Success Wednesday, October 5, 9:00 a.m. CDT RegisterBenefits Administration Outsourcing Market: Mature yet Dynamic Tuesday, October 11, 9:00 a.m. CDT RegisterThe Nielsen Company, TCS & Everest Group: Future-Proofing Your Organization via FP&A Thursday, October 13, 9:00 a.m. CDT Register Proprietary & Confidential. © 2011, Everest Global, Inc. 21
  22. 22. Everest Group leads clients from insight to actionContact us for more information about our consulting, research, and industry resources. Dallas (Corporate Headquarters) Canada info@everestgrp.com canada@everestgrp.com +1-214-451-3000 +1-416-865-2033 +1-214-451-3110 New York India/Middle East info@everestgrp.com india@everestgrp.com +1-646-805-4000 +91-124-496-1000 +91-124-496-1100 United Kingdom Netherlands & Continental Europe unitedkingdom@everestgrp.com benelux@everestgrp.com +44-870-770-0270 +31-20-301-2138 www.everestgrp.com | research.everestgrp.com | www.sherpasinblueshirts.com Proprietary & Confidential. © 2011, Everest Global, Inc. 22

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