TechNexxus Outsourcing Fundamentals

Fundamentals of Outsourcing
and Strategic Sourcing:
Opportunities and Challenges
David Baumann
TechNexxus, LLC

Overview
• Background
• What’s in a name?
– Outsourcing vs Managed Services vs Procurement
– Co-sourcing vs Farm Sourcing vs Partnerships
• Why Outsource / Insource / Offshore / Onshore?
• Potential Advantages and Disadvantages
• Techniques for Success
– Governance Models
– Performance Criteria
– Financial Modeling
– Key Terms and Conditions
– Process, Approach and Standards
• Case Studies
• Prepare for Success
2Copyright TechNexxus, LLC

What is Procurement?
• Procurement is the
– Acquisition of
– standardized goods and/or services
– at the best possible total cost of ownership,
– in the right quantity and quality,
– at the right time,
– in the right place and
– from the right source

What is outsourcing?
• Outsourcing is a:
– Long term
– Results – oriented
– Relationship
– For all or part of a business activity
– Where the provider has substantial control
over the means for achieving desired
results
Based in part on the International Association of Outsourcing Professionals definition.

Is Outsourcing an Admission of Defeat?
Outsourcing doesn’t accomplish anything
an organization couldn’t accomplish
internally if given sufficient:
• Time,
• Money,
• Resources and
• Management buy-in
Copyright TechNexxus, LLC 5

Classic Outsourcing Value Proposition
Internal spend
Vendor Pricing

Differences / Similarities
Procurement
• Priced by the Widget
– Standardized definition in the
marketplace
– RFx and reverse auctions
• Volume based price reductions
• Scope is defined by technical
details and tasks
• Tend to be shorter contracts
• Labor tends to be priced by rate
or fixed price
• Focus on Total Cost of
Ownership including retained
costs
• No employee transition
Outsourcing
• Priced by “resource units”
– bundles whose price and
performance act similarly
over time
• Pricing based on resource
baselines, ARCs and RRCs
• Scope defined by process, tasks,
people and budget
• Tend to be longer contracts
• Labor tends to be priced by FTE
or embedded in Resource Units
• Focus on Total Cost of
Ownership including retained
costs and costs shed by
outsourcing
• Personnel can be eligible for transition
Avoid the “Your mess for less” syndrome 8

Why Outsource?
Why You Should Consider Outsourcing
• Reduce and control operating costs
– (leverage scale, economies and efficiencies)
• Gain access to necessary skills and capabilities
• Implement new technologies (like virtualization) faster
• Transformation to Adapt to Changes in:
– Size / Scale, Scope, Technologies / Business Processes
• Improve processes
• Access resources (including specialized skills) on demand
• Improve focus on strategic initiatives
• Manage difficult or out-of-control functions
• Free internal resources for other purposes
• Improve disaster recovery, business continuity, security and recovery
• Improve cost accountability and more predictable spend (OpEx vs CapEx)
• Labor / Time Zone arbitrage
• Off-balance-sheet financing
• Enhanced ability to implement cultural, business and technological change

What Should You Outsource
You Can Outsource Any Business Process or Function, e.g.
– Information Technology
• Mainframe, Midrange, Desktop, Apps, Call Center, Help Desk, SaaS/Cloud
Services
– Telecommunications / Network
– Human Resources
– A/R, A/P and Procurement
– Finance and Accounting
– Legal Services
– Manufacturing
– Transportation
– Research
– License and Claim processing / records
10
BUT YOU CAN’T / SHOULDN’T OUTSOURCE MANAGEMENT
OF THE RELATIONSHIP OR DECISION - MAKING

When Should You Consider Outsourcing?
• Need to reduce costs dramatically
– Need to reduce labor costs, or change personnel skills
• Dramatic change(s) in needs
– Volume
– Type
– Nature
– Quality
• Client wants to focus more on core competencies
– Costs, time or attention spent on a non-core business process are out-of-
line with industry averages
• Substantial change in technology (e.g., cloud computing,
Open Source)
• Client wants to “smooth” costs (e.g., convert CapEx to
OpEx)

Potential Outsourcing Disadvantages
• Loss of Knowledge Capital, Expertise, Experience
– Need to manage retention and churn
– Need to avoid “Unqualified Employees and Incompetent Vendors”
• Potential for:
– Loss of control over costs or resource utilization
– Focusing too much on cost-savings instead of enhancement of overall
value
– HR issues
• Lack of necessary negotiation and governance skills
• Alignment of interests (private vs public sector goals)
• Outsourcing vs offshoring
• Security and data protection concerns
• Loss of ability to innovate and flexibility to adapt
– Especially if there is “Financial Engineering”

Critical Success Factors
• Preparation
– Understand your people, processes and performance
– Listen and Communicate (Early, Often and Effectively)
– Understand Your TCO Financial Model
• Focus
– Retain Core Competencies
– Implement “Ruthless” Standardization
• Repeatable and Consistent Processes
– Active Governance
– Selective and Competitive Sourcing
• Manage
– Performance Management
– Process Management
– Contract Management
– Escalation and Dispute Resolution Process
13
Copyright TechNexxus, LLC

Outsourcing Errors to Avoid
• Outsourcing The Wrong Stuff
• Selecting the Wrong Vendor
• Writing a Poor Contract
• Overlooking Personnel Issues
– Not communicating sufficiently early, often or clearly
– Failure to retain key personnel
• Losing Control over the Outsourced Functions
• Overlooking Hidden Costs of Outsourcing
– E.g., costs for governance, required consents, travel, change orders, costs
that can’t be shed, etc.
• Insufficient Service Levels or Credits/Bonuses
– Avoid “dilution” of metrics, and the wrong metrics
• Failure to Plan an Exit Strategy

Risk Mitigation Strategies to Consider
• Personnel Transfer and Retention
Strategies
– Amount of Personnel Transfer and
Retention
– “Seconded” Personnel
– Outplacement Opportunities
• Alignment of Interests
• Selective Sourcing
• Shorter Terms, More Options
• Phased Transition / Implementation
• Build-operate-transfer (“BOT”) and
Build-operate-own-transfer (“BOOT”)
models
• Public Private Partnerships
15
“The Advantages of Outsourcing and Co-Sourcing”
CDS Global

The TechNexxus Approach
Contract Management
Scope Price Performance
Terms and
Conditions
Time People
Communications Management Processes
Documentation
Terms and
Conditions
Time People
Negotiation
Terms and
Conditions
Time People
RFP and Proposal
Terms and
Conditions
Time People
Data Collection and Evaluation
Terms and
Conditions
Time People
Goals and Objectives
Terms and
Conditions
Time People
ConceptsStages
16

Approach and Process
• Identify Goals, Objectives and Limitations
• Understand the Political, Legislative,
Regulatory and Labor Landscape
• Collect Necessary Information (Baseline
and Benchmark)
• Development TCO Financial Model
• Develop RFx and Evaluation Criteria
• Negotiate and Draft Agreements
• Implement Contract Management
** Standardized, repeatable processes – e.g.,
ITIL, CobiT, ISO, TMF/eTom and eSCM
17

ProjectPhase
Process
Communications (360o)
People / HR
Management
Contract Management
RFP and Proposal Analysis
Negotiation
Documentation

• How do you define “success” in sourcing?
– Lowest price / total cost of ownership?
– Broadest scope?
– Value – adds?
– Transformation
– Cultural change or fit?
– Access to specialized resources “on demand”
– Opportunities for current staff?
– Off-balance sheet financing?
– Best overall value?
• Balancing “all – of – the – above”
• Make sure you understand why you want to consider
outsourcing vs in-sourcing
• Total Cost Modeling vs Total Value Modeling

Due Diligence
• “Most companies don’t know what they’ve got
‘til its gone…”
• Inventories: In-Scope vs Out-of-Scope
– Personnel – base pay + G&A factor
– Agreements (e.g., licenses)
– Software (CapEx, OpEx and maintenance)
– Hardware (CapEx, OpEx, Amortization, residual,
disposition)
– Third-party Services (e.g., Cloud Services)
– General and Administrative (e.g., training, real
estate, educational materials)
– Market analysis / Benchmarking

Financial Modeling
• Total Cost of Ownership
– In – Scope + Out-of-Scope Analysis
• Base Case Model
– Past two (2) years actual costs
– Current Year – to – Date + Budget
– Projected Costs for Next 2 – 5 years
• Costs Affected by Outsourcing - can you shed the cost?
• Retained Expenses
• Remember
– Transition and Sourcing Costs
– Smooth CapEx!!
• Beware of Financial Engineering
– Suppliers are an expensive source of capital

Requests for Proposals (RFPs)
• Sole Source vs Competitive Bids
– “Without competition, you can only beg…”
– Competition against internal, “do nothing” and benchmark alternatives
– HOWEVER, sourcing costs and value must be factored into Total Cost
– Sometimes optimal solutions can be built for less than sourcing costs
• No more than three (3) – five (5) vendors
• Assure ability to rely on proposals
• Specificity in RFP vs Vagueness in Responses
• Structure
– Process
– Scope
– Financial Model and Pricing
– Performance
– T&Cs
• Optimal time for response
• Include the financial model and evaluation criteria?

Evaluating Vendor Responses
• Compare “apples – to – apples” on a Level Playing Field
• Don’t just declare victory after – the – fact
• Create your vendor evaluation criteria before issuing your RFP
• Consider including your evaluation criteria with the RFP (with or without
weights)
• Be Realistic – Don’t make the suppliers lie to you
• Down – Selection
• BAFO vs BARFO
• Competitive tension, speed and efficiency
• Remember that the sourcing process can cost you and the suppliers up to
$100k / month (or even more)
• There really isn’t a “free lunch”
• You get what you negotiate
• Poor correlation between size of organization / spend and deal quality

Contracts vs Agreements
• Contracts get put into a drawer
• Agreements are used to manage the relationship
and the value you receive
• Participants change
• Stuff happens
• Litigation and arbitration don’t produce solutions
to outsourcing challenges
• Make sure your attorneys
– Participate in all phases of the process
– Understand the scope, price and performance
– Understand the relative importance of the 10 legal
issues that arise in every outsourcing transaction

Develop Key Metrics
2.2.1
Identify Existing
Metrics
Performance
Criteria
2.2.2
Determine
Requirements
2.2.4
Finalize Key
Metrics
2.2.3
Perform Gap
Analysis
ImpactsService Levels
26

Performance Criteria
• Amount at Risk
• Allocation Percentage
• What is the purpose of SLAs?
• Reduce Vendor Risk
• Provide Incentives for Performance
• Expedited Process for Handling Minor Performance Failures
27

Build Financial Model
2.3.1
Analyze
Historic Costs
Out of
Scope
Costs
2.3.2
Build Internal
Base Case
Optimized
Internal Base
Case Model
In Scope
Costs
2.3.4
Build Full
Model
NPV
Analysis
Model
Pricing
Workbook
2.3.3
Determine
Resource
Utilization
Outputs of
Resource
Analyses
28

Resource Utilization and Baselines
2.3.3.1
Define
Resource Units
2.3.3.2
Analyze
Resource
Utilization
2.3.3.3
Project Future
Resource Needs
Resource
Baseline
Workbook
2.3.3.4
Evaluate
Confidence in
Projections
2.3.3.5
Analyze Fixed
and Variable
Costs
29

TECHNEXXUS
SOURCING PROCESS
30

Goals and Objectives (Phase 1)
1.1
TechNexxus
Engagement
1.3
Business
Objectives
Begin Data
Collection and
Evaluation
Project
Success
Criteria
Project
Scope
Definition
Initial
Project Plan
1.2
Preliminary
Documentation
Request
Management
Checkpoint 1
31

Data Collection and Evaluation (Phase
2)
Begin RFP and
Proposal Analysis
2.1
Data Gathering
2.2
Develop Key
Metrics
2.3
Build Financial
Model
Begin
Documentation
2.4
Identify Risk
Factors
32

Data Gathering (Phase 2.1)
Data
Gathering
Questionnaire
s
Data
Gathering
Questionnaire
s
2.1.1
Process
Customization
Data Gathering
Questionnaires
Updated Project
Plan
Kickoff Meeting
2.1.2
Meet with Client
Representatives
Project Team
Roles &
Responsibilities

Develop Key Metrics (Phase 2.2)
2.2.1
Identify Existing
Metrics
Performance
Criteria
2.2.2
Determine
Business
Requirements
2.2.4
Finalize Key
Metrics
2.2.3
Perform Gap
Analysis
Business ImpactsService Levels
34

Build Financial Model (Phase 2.3)
2.3.1
Analyze
Historic Costs
Out of
Scope
Costs
2.3.2
Build Internal
Base Case
Optimized
Internal Base
Case Model
In Scope
Costs
2.3.4
Build Full
Model
NPV
Analysis
Model
Pricing
Workbook
2.3.3
Determine
Resource
Utilization
Outputs of
Resource
Analyses
35

Determine Resource Utilization
(Phase 2.3.3)
2.3.3.1
Define
Resource
Units
2.3.3.2
Analyze
Resource
Utilization
2.3.3.3
Project Future
Resource Needs
Resource
Baseline
Workbook
2.3.3.4
Evaluate
Confidence in
Projections
2.3.3.5
Analyze Fixed
and Variable
Costs

RFP and Proposal Analysis (Phase 3)
Vendor
Finalists
Selected
Begin
Negotiation
3.3
Manage RFP
Process
3.2
Identify Vendors
and Issue RFP
3.1
Develop RFP Management
Checkpoint 2

Develop RFP (Phase 3.1)
3.1.1
Develop
Custom RFP
Custom RFP
Performance
Criteria
MSA / Legal
RFP
Pricing
Workbook
RFP Framework, Process and Rules
Technical
Requirements

Manage RFP Process (Phase 3.3)
3.3.1
Conduct
Clarification
Meetings
3.3.2
Conduct
Yellow Pad
Meetings
3.3.3
Review
Responses
Vendor RFP
Responses
3.3.4
Response
Clarification
Meetings
3.3.5
Select Vendor
Finalists
Vendor
Evaluation
Matrix
Vendor
Response
Letter

Copyright 2010 TechNexxus, LLC
Negotiation (Phase 4)
4.1
Develop
BAFO
Request
4.2
Conduct BAFO
Clarification
Meetings
4.4
Final Grading
RFPBest and
Final Offers
(BAFO)
4.5
Select Final
Vendor
Begin Contract
Management
Negotiation
BAFO
Request
4.3
Negotiate
40

Documentation (Phase 5)
5.1
Master
Service
Agreement
5.2
Statement of
Work
5.3
Performance
5.4
Pricing
MSA
Simultaneously Develop Contract Documents
SOW Pricing
Other
Documents
SLA
41
Documentation

Contract Management (Phase 6)
6.2
Develop
Monitoring Tools
6.3
Engagement
Review
6.1
Track
Transition Plan
Monitoring
Tools
Action
Calendar
Contract Management
42

SUCCESSFUL SOURCING
Tips & Techniques for Success

You Get What You Negotiate
• Not “what you deserve”
• Little correlation between rates and spend

Sourcing Techniques
• BAFO vs BARFO
• “Outside – In-sourcing”
• Sensitivity Analyses – Account for potential
changes in:
– Business Strategy
– Growth
– Demand
– Technologies (e.g., Clouds, Solid-State Storage, SaaS)
• On-Shore vs Off – Shore
• Management Checkpoints
• Long –Term Accountability and Responsibility

Sourcing Tips
• Make realistic projections
• Don’t lie to yourself (or others)
• Make sure you don’t start believing your own……
• You can accomplish anything you want, if you just
think and try hard enough
• Sourcing is about people and value
– Caring about people doesn’t cost anything
• You can outsource almost anything except for
contract and program management
• If you don’t measure, you can’t manage

Prepare for Outsourcing
• Define your goals and objectives
• Create objective evaluation criteria
• Collect necessary data in the same format it will be used in the Agreement
– FTE, Resource and Performance Baselines
– Isolate hardware, software, 3rd party and out-of-scope performance issues
– Financial Cost Model
– Third Party Agreements
– Document Processes
• Understand your limitations!
• Develop and implement an effective:
– Documentation Strategy
– Communications Plan
• Complete Due Diligence
– Internal
– External
• Governance Model

Legal Issues
• Processes and Schedules for Scope, Pricing and Performance
• Transition of Assets, Contracts, Services and Personnel
• Governance, Human Resources and Employment Issues
• Intellectual Property and Data Protection
• Quality, Warranties and Risk of Loss
• Compliance with Standards and Laws
• Damages and Indemnities
• Insurance and Limitations of Liability
• Environmental Issues
• Bankruptcy and Transfer of Control
• Minimum Commitments and Shortfall
• Tax, Duties and International Issues
• Service Level Credits and Incentives

Serenity Prayer
“grant me the serenity to:
• accept the things I cannot change;
• courage to change the things I can;
• and wisdom to know the
difference.”
-- Reinhold Niebuhr

Summary
• Questions?
• Thank You!
David Baumann
http://www.DavidBaumann.info
TechNexxus, LLC
(202) 329 – 5588 (m)
dbaumann@technexxus.com
www.TechNexxus.com
51

TechNexxus Outsourcing Fundamentals

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (20)

Similar to TechNexxus Outsourcing Fundamentals

Similar to TechNexxus Outsourcing Fundamentals (20)

Recently uploaded

Recently uploaded (20)

TechNexxus Outsourcing Fundamentals