Sourcing relationships are evolving and taking new shape. What are the new deal constructs – outcome based relationships, shared services monetization/commercialization, business volume based partnering et al? Are we achieving the benefits of standardized solutions, while managing the complexity of new service delivery models? What are the new risks and deal factors in play?

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Dinesh Goel & Kapil Puri
08 Oct 2014
SIC 2014
Emerging Deal Constructs – Why, How and What?

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Content
Emerging Deal Constructs – Why, How and What?
1.Deal characteristics witnessing emerging constructs
2.“Established” Deal Constructs
3. “Emerging” Deal Constructs
4.Rationale behind Emerging Constructs
5.Critical Success Factors
6.Evolution in Near Future
7.Implications for
►Clients
►Service Providers
►Sourcing Advisors
8.Case Studies

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Emerging Constructs

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Changing Customer Expectations
Rather than prescribing the service delivery parameters and benchmarks, Clients have started expecting the Service Providers to propose avenues and mechanisms for value creation.
Deliver to the specifications
… Plus, Bring Ideas
… Plus, Innovate
… Plus, Deliver Business Impact
First Generation
Second Generation
Third Generation
Emerging Expectations
Customer Expectations
Time
Reduce Operating Costs
Improve Productivity
Transform Business Operations
Redefine the Enterprise
True Strategic
Partnership
The Broader Domain of Innovation
2014
2005
1990

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Emerging Deal Constructs – Evolving Key Elements
Key elements of sourcing deals are evolving to next maturity level in an increasingly dynamic sourcing industry.
Desired pricing and commercial models
Commitment to Service delivery
Risk management
Contract and Commercial Construct
Solution and Services sourced
Span of control for Service Provider
Desired end to end accountability
Scope of Work
Process methodology
Descriptiveness/Level of detail
Speed of execution
Key stakeholders
Transaction Process

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Price
Access to talent
Driven by Service Provider economics Service levels – measures for direct “in scope” work
Contractual constructs
Control
Flexibility
Governance
‘Established’ Deal Constructs
Established Constructs’ of these characteristics have been around for years.
Established
Contract and Commercial Construct
Typically non-core and frequently fragmented
Natural candidates - economies of scale/non customer facing
Relatively low-value (bottom of the value pyramid)
Scope of Work
Prescriptive and tactical (RFP driven)
Cost and compliance focused
Individual function driven (IT, Procurement, Finance, etc.)
Time consuming
Transaction Process

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Evolving Pricing Models
Output and Outcome based
Measurable Business Outcomes
Sourcing Maturity
Selective Outcome Based
Largely input based with selective outcome based pricing
Pricing linked to input with some outcome based incentives
Higher risk/tighter governance
Extended team models
E.g.: R&D outsourcing
Outcome Based
Bundled Scope (Infra, Apps, BPO)
Transformation led
Business Outcome Linked Fees
Gain Sharing (Revenue / Cost Savings)
E.g. Reduced customer churn rate (Telco)
Input Based
Piece meal and flexible
Resourcing / Staffing centric
Headcount linked Fees
Client Managed
E.g. No. of FTEs by skills, Resource Rate Cards
Output Based
Modular or Bundled scope
Managed Services
SLA linked fees
Service Credits/Earn backs
E.g. Server Downtime, Support TAT, FPs, Test Cases
Low
High
Low
High

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‘Emerging’ Deal Constructs
Emerging constructs to the key deal attributes are slowly but surely gaining ground
Emerging
Price
Driven by potential for value creation
Promote
Innovation
Agility (capacity and tech shift)
Leveraging capability (provider/market solutions/expertise)
Complex construct
Investments expected (exit more complex)
Contract and Commercial Construct
Scope of Work
Transaction Process
•Pricing model linked with Business Projections
•Truly scalable model with least minimum commitment – supplier carries the risk and rewards of low and high volumes respectively
•Supplier measured/rewarded on supporting
•Business growth or de-growth
•Scope/function Transformation
•Resource Units not linked to underlying infrastructure or technology units (consumption of IT resources or efficiency not the driver)
•Ability to assume exposure
•Rebadged staff
•Novated vendor contracts/solutions
•Significant investments
•Unpredictability of business volumes/revenue

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‘Emerging’ Deal Constructs
Emerging constructs to the key deal attributes are slowly but surely gaining ground
Emerging
Price
Driven by potential for value creation
Promote
Innovation
Agility (capacity and tech shift)
Leveraging capability (provider/market solutions/expertise)
Complex construct
Investments expected (exit more complex)
Contract and Commercial Construct
Not always non-core
Not always just high-volume (blend of work for better control)
Moving up the value pyramid
Scope of Work
Transaction Process
•Entire function or process
•Complex R&D / Engineering
•Analytics (DW/BI/new age tools)
•Cloud based migrations/solutions
•Industry specific solutions
•Service Integration (SIAM)

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‘Emerging’ Deal Constructs
Emerging constructs to the key deal attributes are slowly but surely gaining ground
Emerging
Price
Driven by potential for value creation
Promote
Innovation
Agility (capacity and tech shift)
Leveraging capability (provider/market solutions/expertise)
Complex construct
Investments expected (exit more complex)
Contract and Commercial Construct
Not always non-core
Not always just high-volume (blend of work for better control)
Moving up the value pyramid
Scope of Work
Objectives and not specs driven
Strategic as opposed to tactical (Significant CEOs involvement)
Solution and capability focused, not just the lowest cost and max compliant
Allows solution diversity showcase
Partners cultural and ethos match of greater relevance (CEO to CEO handshake must)
Transaction Process
Request for Solutions approach to align the objective of finding the partner with the best solution and capability that fits the cultural ethos

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‘Established’ vs ‘Emerging’
Slow but sure shift occurring with the next gen of sourcing.
Established
Emerging
•Price
•Access to talent
•Driven by Service Provider economics
•Service levels – measures for direct “in scope” work
•Contractual constructs
•Control
•Flexibility
•Governance
•Price
•Driven by potential for value creation
•Promote
•Innovation
•Agility (capacity and tech shift)
•Leveraging capability (provider/market solutions/expertise)
•Complex construct
•Investments expected (exit more complex)
Contract and Commercial Construct
•Not always non-core
•Not always just high-volume (blend of work for better control)
•Moving up the value pyramid
•Typically non-core and frequently fragmented
•Natural candidates - economies of scale/non customer facing
•Relatively low-value (bottom of the value pyramid))
Scope of Work
•Prescriptive and tactical (RFP driven)
•Cost and compliance focused
•Individual function driven (IT, Procurement, Finance, etc.)
•Time consuming
•Objectives and not specs driven
•Strategic as opposed to tactical (Significant CEO involvement)
•Solution and capability focused, not just the lowest cost and max compliant
•Allows solution diversity showcase
•Partners cultural and ethos match of greater relevance (CEO to CEO handshake must)
Transaction Process

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Drivers and Critical Success Factors

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Rationale for ‘Emerging Constructs’
Dynamic business environment, rapid pace of change in technology and supplier capabilities apart from industry maturity amongst key drivers.
►Enhanced supplier capabilities – domain and tech
►Fueled by M&A/Alliances
►Much greater competitive intensity to win
Supplier Capabilities
►Helping re-define the new ways of sourcing:
Cloud
Mobility
Analytics
Technology evolution
►New markets
►Faster time to market
►Uncertainty
New Business Imperatives
►Higher level of maturity to move the dial forward
►Greater willingness to try new constructs
Industry Maturity
►Potential for significant impact leveraging suppliers –more than ever
►Increasing dependence on suppliers as Partners for business success
Supplier Dependence

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Critical Success Factors
Relatively easy to define but difficult to sustain these relationships without the attention to following critical success factors.
►High level of trust in relationship
►Transparency - Pro-active sharing of information
►Joint discussion/ownership of issues/change
Utmost Trust & Transparency
►Strong Governance structure that allows
Focus on innovation
Measurement of progress/value creation
Direction and decisions
Enable Strong Governance
►Ensure Service Providers have ownership and control over
Scope of work they are expected to manage to maximize value creation
Required to manage risks
Enable Control and Ownership
►All parties must keep their focus on potential for value creation in true spirit
►Focus not on just the costs, though cost has to be reasonable
Focus on Value

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Innovation In Outsourcing: Unmet Expectations
“Innovation”
►Has been a gray concept in most outsourced relationships
►Generally has not clearly defined or understood by the parties
►Has been something most Clients believe they should receive through the relationship
►Has been promised by most Service Providers as part of the sales process
The Innovation Gap – Missed Expectations
►Misalignment upfront
In general, outsourcing Clients have been disappointed at the level of Innovation delivered through their relationships.
Client
Although Service Provider proposals make claims of Innovation and best practices, we have not seen anything — or benefited from anything.
We always seem to have to force the discussion with our Service Provider.
It seems as if we have to give more scope to get Innovation.
It is not fair or smart to begin gainsharing from our starting point — it should be based on true exceptional performance.
Service Providers
Companies say they want Innovation, but their actions and behaviors indicate cost reduction, cost reduction and cost reduction.
Our solution brought a tremendous amount of transformation from their current state.
Companies do not want to pay for Innovation; they only want the benefits.
Companies reject all of our ideas for Innovation.
Common Perceptions

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Approach to Achieving Innovation through Outsourcing
Business drivers, investment, organizational alignment and disciplined execution must all exist for Innovation to occur.
New ISG Recommended Approach
Expectations
Governance
Investments
►Educate Client on Innovation in Context of Outsourcing Service Delivery
►Innovation MVD; Executive Alignment
►Evaluation Criteria - Innovation
►Define Empirical Measures of Value; Structured Review Process
►Innovation Team as Part of Governance Operating Model; Jointly Funded
►Service Provider Quantifies Innovation As Part of Solution
►When Applicable – Innovation Fund With Spectrum of Investment Models, Transparency, Business Case Process
►The Value Added Schedule
►Disputes whether innovation initiatives were in the price
►Largely Oriented Towards Idea Sharing, Networking Forums, Access To Service Provider R&D Labs
►No Formalized Governance
►Episodic Topic Of Discussion; Highly Subjective
►Constrained To The Domain Of The Services “In Scope” Rather Than Focused On Core Business Operations
►Joint Venture / Go-To- Market Arrangements With Client Platform Or Industry Expertise

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Implications for Outsourcing Community and Look ahead

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Implications for Buyers
Here are the key implications for Buyers/Clients in this new paradigm.
►Significant on the Client side for implementing such a strategy
►Well planned and thought out measures required
Change and Communication
►Implement structured governance and risk management processes
►CXOs representation in governance structure
►High level of trust and transparency required with the Service Provider as a partner
Governance
and Risk Management
►Right sponsor and team members to handle the sourcing process cross functional – Finance, IT, HR etc.
►Representation and alignment with senior business leadership
Sourcing Process
►Ensure solid sourcing strategy vis-à-vis business objectives/plans
►Clarity on strategy and market validation required
Sourcing Strategy

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Implications for Service Providers
Here are the key implications for Service Providers in this new paradigm.
►Track record of delivering in similar deals
►Ability to “walk the talk”
Track Record
►Matured discipline around governance structure/processes
►Ability to pro-actively develop business case/recommendations for decisions
►Manage risks actively as a true partner
Governance and Risk Management
►Pick your battles – avoid “everything to everyone”
►Solution and capability focused
►Willingness to assume risk with reasonable reward
Selection of deals
►Nuances of Sourcing process are different
►Re-align teams and skills to succeed in winning deals
Sourcing Process
►True to end to end capabilities in select areas
Engineering Services
Services

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Implications for Sourcing Advisors
Here are the key implications from our vantage point…
Bring greater level of domain (industry and function) expertise to bear while advising Clients.
1
Ability to help establish link between business outcomes, metrics and capabilities/solutions – develop strong IP in this area that can be leveraged.
2
Ability to construct appropriate risk-reward pricing models considering multiple alternatives and “what if” scenarios.
3
Craft governance models sophisticated enough and suitable for such true partnerships than traditional sourcing deals.
4
Much more interactive, iterative and collaborative approach to the sourcing process.
5
Work towards the expectation of crashing timeframes in the contracting process, without postponing critical issues to post deal governance.
6

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‘Emerging Constructs’ – Crystal Ball
We expect this trend to gather steam in the coming 24-36 months.
Increased Prevalence of RFS Approach
►Collaboration in developing mutually acceptable end state, will continue to rise. Expect an increase in trend for RFS
►More and more Clients will look to shorten their sourcing timelines
Service Integration, End-End Sourcing
►Need for Service Integration and Governance services will grow significantly
►Greater sourcing of end-to-end scope with the partners
►Technology led innovation will become increasingly important
►Contract constructs and metrics for new age deals will mature
Transformation led Sourcing Deals
►Transformation led sourcing deals will show growth (especially in new age industries/business models)
►Greater reliance on partner(s) for implementing contemporary IT solutions and providing agility
►Businesses with hyper growth potential or rapid technology shift more amenable
Next 24-36 months

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Case Studies discussion

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Thank you!

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Information Services Group is a leading technology insights, market intelligence and advisory services company, serving more than 500 Clients around the world to help them achieve operational excellence. ISG supports private and public sector organizations to transform and optimize their operational environments through research, benchmarking, consulting and managed services, with a focus on information technology, business process transformation, program management services and enterprise resource planning. Clients look to ISG for unique insights and innovative solutions for leveraging technology, the deepest data source in the industry, and more than five decades of experience of global leadership in information and advisory services. Based in Stamford, Conn., the company has more than 800 employees and operates in 21 countries.
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