The Sourcing of Outsourcing Workshop This workshop is intended for delegates who are developing their sourcing strategies and techniques for outsourcing products and services, as well as those with greater experience, whose companies are in the initial years of planning and rolling out a new Outsourcing Program office. The Sourcing of Outsourcing Workshop, Ben Trowbridge, CEO, Alsbridge and William Peters, Partner, O’Melveny & Myers, sourcing, outsourcing, offshore, category sourcing, BPO

1. The Sourcing of Outsourcing
Sourcing 2007: May 1

2. Why is outsourcing happen?
Micro Drivers
• You have the opportunity to reduce costs by 20% to 40%
• Increasing accountability and improving services
• Access to World Class capabilities
• Shifting from relatively fixed to variable costs
Macro Drivers
• Shifting focus to strategic business objectives
• Transforming your business through innovation
• Being agile and ready to respond to market change: M&A , growth, divestitures, etc.
1

3. Global Trends
Global Birth Rates
Global Birth Rates
ChinaPotential Player – Offshore IT services market in China will continue
per 1,000 population:
per 1,000 population: Eastern Europe: : China: : Potential Player – Offshore IT services market in China will continue
China
China 13.25
13.25 Eastern Europe to show aggressive growth over the next few years. BPO is a less mature
Regional Player – to show aggressive growth over the next few years. BPO is a less mature
India
India 22.01
22.01 Regional Player – industry in China. English skills are being developed in government supported
Large English- industry in China. English skills are being developed in government supported
Philippines
Philippines 24.89
24.89 Large English- programs to ensure further growth. Core competencies: low-end PC-based
speaking educated programs to ensure further growth. Core competencies: low-end PC-based
USA
USA 14.14
14.14 speaking educated application development, application maintenance, QA testing, systems
labor pool. application development, application maintenance, QA testing, systems
labor pool. integration, data processing and product development.
Capabilities to handle integration, data processing and product development.
Capabilities to handle Size: Over 200,000 FTEs in the IT Outsourcing Industry.
other European Size: Over 200,000 FTEs in the IT Outsourcing Industry.
other European
languages
languages
requirements.
The Hidden requirements.
Size: 44,000 FTEs in
Multiplier Size: 44,000 FTEs in
offshore outsourcing
offshore outsourcing
industry.
industry.
India: : No. 1 Player - The dominant leader
IndiaNo. 1 Player - The dominant leader
in BPO and IT Outsourcing. Core
in BPO and IT Outsourcing. Core
competencies: application maintenance &
competencies: application maintenance &
support, application development, contact
support, application development, contact
centers & financial processing services.
centers & financial processing services.
NASSCOM claims the outsourcing industry
NASSCOM claims the outsourcing industry
will employ 2.3 million by 2010. Size:
Latin American: : Regional
Latin AmericanRegional will employ 2.3 million by 2010. Size:
1,000,000 FTEs supporting a variety of
Player – Increasing its 1,000,000 FTEs supporting a variety of
Player – Increasing its processes.
competitiveness in ITO and processes.
PhilippinesNo. 2 Player -
competitiveness in ITO and
BPO. Labor arbitrage alternative Philippines: : No. 2 Player -
BPO. Labor arbitrage alternative Scope: Primarily contact centers,
for the U.S. market. Spanish Scope: Primarily contact centers,
for the U.S. market. Spanish shared services and specialized BPO
Malaysia: : Niche Player in shared
Language support with marginal
Language support with marginal MalaysiaNiche Player in shared shared services and specialized BPO
niches. Surging demand due to
cost difference between services and outsourcing. Prime niches. Surging demand due to
cost difference between services and outsourcing. Prime excellent US accented English
countries. Small English- capabilities: contact center, human excellent US accented English
countries. Small English- capabilities: contact center, human language support and cultural affinity
speaking educated labor pool. resources and administration support. language support and cultural affinity
speaking educated labor pool. resources and administration support. with the U.S.A. Size: 200,000 FTEs
Size: 40,000 FTEs in the outsourcing with the U.S.A. Size: 200,000 FTEs
Size: 40,000 FTEs in the outsourcing in offshore outsourcing industry.
industry. in offshore outsourcing industry.
industry.
2

4. 0
10,000
20,000
$ /p.a 30,000
40,000
50,000
60,000
0
10,000
20,000
$ /p.a 30,000
40,000
50,000
60,000
Brazil
Brazil 16,100
16,100
14,800
14,800
Canada
Canada 45,300
45,300
33,200
33,200
China
China 11,200
11,200
8,400
8,400
Hungary
Hungary 27,300
27,300
8,400
8,400 23,500
23,500
Average ITO and BPO Salaries by Location
India
India 12,500
12,500
Outsourced Labor Costs
3
8,900
8,900
59,100
59,100
Ireland
Ireland
8,900
8,900 45,200
45,200
Malaysia
Malaysia 23,600
23,600
18,100
18,100
Mexico
Mexico 24,100
24,100
19,000
19,000
Philippines
Philippines 14,200
14,200
11,500
11,500
Poland
Poland 29,900
29,900
25,900
25,900
Source: Alsbridge Market Report 2006. Average Salaries at different levels of experience were analyzed for major cities in key offshore destinations.
ITO
ITO
BPO
BPO
Average
Average
Average
Average

5. Labor Pool &Total Costs
English-speaking graduates & post-graduates per year
Labor Pool
India
2,500,000 • The English speaking Indian, Philippine and
Philippines 400,000
Chinese graduate pools and high unemployment
China 490,000
rates are projected to provide an attractive
Malaysia 75,000 environment for offshore operations.
Mexico 100,000 • Non-English speaking requirements can be
Non-U.S citizens supported from a variety of locations.
Ireland 40,000
1,665,000 2,265,000
USA 600,000
Total Cost 90,000 Total cost of typical BPO&ITO functions
81,300
80,000
IT & Telecom
• Differentials in direct labor costs and 70,000
overheads are the main drivers of total Facilities
60,000
employment cost savings. Overhead
• Careful build-out of the new center and 50,000 Average Salary
US $
transition planning can control start up 40,000 34,900
and long term costs. 30,000
• Local labor inflation will not reduce the 18,500
offshore advantage for the foreseeable 20,000
Source: Alsbridge
future. 10,000 21,600
8,320 8,280
0
USA Asia Eastern Europe
4

6. Lessons Learned from a Global 10 CFO
Risk Monitoring and Mitigation as part of the process - but accept there are risks
The Organization has to be primed/pushed - The Champion
Walk before you run - but don’t be afraid to walk
Governance is a shield to block progress
It’s a Marathon - Not a Sprint
e
alu
ivi ty/V
duct High End
Pro Knowledge Work
iz ing
axim
Ongoing
M Productivity
Business Enablement
Process
Financial Improvement/
Accounting Technology
Basic Transaction Skills Upgrade
Processes
Cost Arbitrage
“We Came for Cost…We stayed for Quality/Intellectual Capital”
5

7. Current Environment
Many organizations are experiencing an urgent need to
achieve cost savings and competitive equality or advantage by
outsourcing
Organizations often undertake outsourcing in response to
executive directive and adopt outsourcing on a project-specific
basis, without a comprehensive strategy for systematic
decision-making and management of delivery of services
The current trend is to multi-source, with the goal of reducing
the organization’s overall costs and improving service levels
by maintaining competition among third-party suppliers
The goals of multi-sourcing are valid, but having numerous
vendors increases the organization’s need for and the value of
a comprehensive sourcing strategy
6

8. Workshop Objectives
Develop an understanding of the role and value of a sourcing
strategy in the overall sourcing relationship lifecycle
Examine the elements of a successful sourcing strategy
Discuss how to plan, develop and implement an organization’s
sourcing strategy
Survey best practices with respect to sourcing strategies, vendor
selection and contracting
Examine how a sourcing strategy should be maintained and
adjusted over time to help the organization achieve its changing
business objectives
7

9. Strategic Considerations
Common Reasons to Outsource
Tactical
Strategic Objectives Considerations • Access management &
organization processes
Governance Technical Operations • Improve automation
• Value lever
Scope of Services Product Development • Lower cost
Industry Leadership Business Process • Achieve economies of scale
Project Management • Reduce balance sheet assets
• Alter cash flow structure
Product Management • Improve responsiveness to
change
• Scalable resource pools
• Effective resource skill
deployment
• Access higher skills
Risk-Adjusted • Improve effectiveness
• Sourcing objectives
Financial Impact • Reduce cost
• Improve financial structure
Net Benefit Striking the
Timeline Balance
Risk
8

10. Strategy Elements
Process This is the ‘what’: what do you want your processes to look like, what is the required
output and what are the required service levels?
This is the ‘how’: how will the processes be delivered? How do you organize the
Sourcing business to provide those processes, how do they integrate with the other business
processes and how should they be organized?
Supplier Do you choose niche suppliers, best of breed, one or many suppliers, an
established player or a start-up. What relationship do you want with the supplier?
How do you want to structure the deal? Should it be a fixed-price contract, or are
Commercial you looking to develop a partnering structure – whereby both parties share risk and
reward?
Are your systems stable or are you looking to implement new systems in the
Systems foreseeable future? Do you do this before, as part of, or after the
outsourcing/shared services implementation?
Transition Are you prepared to handle a ‘big-bang’ transfer of responsibility or do you want to
plan a phased implementation? Is this going to be by process or business unit?
How is the new operating environment going to be managed and governed? What
Operations is the relationship going to be with the service provider – whether in-house or
outsourced – and how is the performance going to be monitored and controlled?
9

11. Role of Sourcing Strategy
Pre-Contract
Contracting
• Sourcing strategy development
• Contract development
• Business alignment
• Due diligence & contract negotiations
• Organization assessment
• Transition planning
• Cost & risk analysis
Co • Management organization
• RFP development & issues nt
ra • Final service provider selection
ct
ct
• Proposal review in • Contract execution
tra
• Service provider selection g
on
e-C
Pr
y
er
liv
De
Re
-S
e
ou
ic
rv
rc
Re-Sourcing ing Se Service Delivery
• Termination / expiration • Transition & transformation
• End of term planning • Service delivery
• End of term assistance • Ongoing management
• Transfer to new service provider • Change control
10

12. What is a Sourcing Strategy?
A strategy (not single-project solution or action plan) that is founded on the
organization’s fundamental business objectives and that provides a consistent
framework for making sourcing decisions
A long-term, conscious plan for decision-making, execution and management of
internal and external service providers
A framework that helps prepare for, plan and execute sourcing decisions and
actions that support the organization’s business objectives. It is not, however, a
plan setting forth how to achieve specific business goals
Elements of a sourcing strategy include strategic design and management of
sourcing, which are continuous functions essential to the organization’s current
and future operations, and provider selection, contract negotiation and service
transition, which are finite activities for specific IT or business functions
A successful sourcing strategy must be founded upon clear, succinct business
objectives that are widely understood throughout the organization (e.g., stabilizing
and reducing costs of basic operations; continually increasing efficiency, flexibility
and cost-reduction; positioning organization for future growth and expansion)
A successful sourcing strategy must have buy-in from key stakeholders within the
organization
A successful sourcing strategy must provide a disciplined approach to
consideration and evaluation of available sourcing options and assessment of
risks and benefits of each option
11

13. Strategy Requirements
A successful sourcing strategy must be broad in scope, taking into consideration various solutions
that may be suitable for any given sourcing decision
Possible service delivery solutions include:
• Internal delivery
• Offshoring
• Lift-and-shift outsourcing
• Transformational outsourcing
• Multi-sourcing
• Prime contractor as coordinator of multiple service providers
• Joint venture
• Captive service provider
A successful sourcing strategy must include pre-defined measurement criteria that are both
objective (e.g., financial risk/benefit analysis) and subjective (e.g., ability to focus internal
resources on core functions; PR; morale) that are applied to determine whether each proposed
solution is viable and supportive of the organization’s business objectives
A successful sourcing strategy must result in executable action plans and must include
management/governance structure
A successful sourcing strategy must be flexible to encourage and accommodate innovation and
overcome the “instant obsolescence” of contracts
A successful sourcing strategy is cyclical and dynamic; it must be designed as repeatable with
respect to new sourcing decisions, but must also be updated continuously with respect to internal
changes within the organization as well as changes in market offerings and other external
circumstances
12

14. Questions & Answers
Why is outsourcing happening?
Global trends
Outsourced labor costs
Labor pool and total costs
Lessons learned from a Global 10 CFO
Current environment
Strategic considerations
Strategy elements
Role of sourcing strategy
What is a sourcing strategy?
Strategy requirements
13

15. Developing a Plan
Sourcing Drivers
Sourcing Drivers Vision & Plan
Vision & Plan
• Cost, cost and cost
• Cost, cost and cost • Reason for outsourcing
• Reason for outsourcing
• Revenue
• Revenue • Executive Sponsor
• Executive Sponsor
Scope
• Employee upheaval
• Employee upheaval • Deal construct
• Deal construct
Location & Configuration
• Customer perception
• Customer perception • Business Case
• Business Case
Deal Structure
• Control and flexibility
• Control and flexibility • Risk mitigation Plan
• Risk mitigation Plan
• Product // Service growth plans
• Product Service growth plans • Internal & external
• Internal & external
• Service expectations
• Service expectations communications
communications
Converting Drivers to a Vision & Plan requires:
Defining the scope of the project and business case
Analyzing location & configuration combinations
Structuring deals to support Business Strategy
14

16. Scope of Sourcing Strategy
15

17. Deal Structures
Retain internal Credible Internal offshore Insufficient
control? vendors? experience / scale for
management? captive? Ownership
Recommendation
Activity Yes
Captive
No
Yes
Yes
Yes Provider
Yes
No
No No Provider / Hybrid
(captive option)
No
No
Captive
Yes
16

18. The Sourcing Matrix
BPO IT
Selective Outsource Total Outsource Joint Venture Shared Services
• “Many variations”
• Execution responsibility • “Many variations”
• Execution responsibility • BTO/Market Facing
• • Client execution
•
• Leverage capabilities
Leverage capabilities
• BTO/Market Facing Client execution
• Shared ownership
• No Capx • Shared ownership
• • Requires CapX
• No Capx • Shared Risk & Reward Requires CapX
• Infrastructure established • Shared Risk & Reward
• Infrastructure established Access to partner skills
• • Complete control
• Contract flexibility •
•
Access to partner skills Complete control
• Contract flexibility • Relationship Alignment
• • Accountability
•
• Disciplined execution
Disciplined execution
• Relationship Alignment Accountability
• Cost controls
• • HR build-out
• Cost controls HR build-out
• Competitive Market
• Competitive Market
• • Minimum transformation
• Relationship Alignment Minimum transformation
• Relationship Alignment
• • Relationship Alignment
Relationship Alignment
Onshore
Offshore
Near Shore
17

19. Strategy Groundwork
Team: Creating the organization’s sourcing strategy will
require leadership as well as input and buy-in from many
different disciplines within the organization
• Sourcing champion
• Team leader
• Critical stakeholders
• Subject matter experts
Appropriate business unit members
Financial expert
HR advisors
Legal advisors (internal and external)
Third party consultants
18

20. Strategy Groundwork
Business Objectives: The sourcing strategy must serve the
organization’s business needs. Therefore, the team must evaluate
the organization and identify and articulate its broad business goals,
which should encompass the organization’s:
• Core values
• Future vision
• Short-term, mid-term and long-term business objectives
• Critical competitive considerations
• Expected or required near-term results
Sourcing Status: The team must understand the organization’s
current status regarding strategic sourcing
19

21. Strategy Groundwork
Decision Making: The team must understand how decisions are
made within the organization and build and present the sourcing
strategy to incorporate that process
• Determine how ready the organization is to change. Examine
the organization’s business culture, financial considerations,
regulatory environment and contractual obligations to help
assess the organization’s context for sourcing decisions
• Identify key stakeholders and decision makers within the
organization
• Determine how best to educate and obtain buy-in from these
individuals
20

22. Strategy Groundwork
Analysis: Many aspects of the organization’s service environment
require analysis in preparation for formulating a sourcing strategy.
These include:
• Critical functions – core vs. non-core
• Current internal capabilities and competencies, relative to
market offerings
• Current costs of services and projected costs for outsourcing
similar services
• Timing requirements, including time to market requirements
and time benefits available through using established
competencies of service providers for certain functions
• Investment approach: how much investment is the organization
willing to fund? What is its required pay-off horizon? The team
needs to develop ROI analysis and parameters to support the
sourcing strategy.
• The organization’s appetite for risk
21

23. Strategy Groundwork
Market Assessment: Evaluate the services available from third
party providers
• Identify available services: how well do market offerings match
the organization’s requirements?
• Consider the maturity, stability and evolutionary trend of
available services
• Identify suitable suppliers, based upon whether they have the
capability and experience to offer services that organization
requires
• Identify relevant risks and associated costs. Determine the
likelihood and consequences of transition or service delivery
problems, security and privacy requirements, the organization’s
ability to in-source or re-source services subsequently, etc.
22

24. Strategy Groundwork
Analyze gaps
• Between organization’s current state and ideal state
• Between organization’s current capabilities and requirements
• Between organization’s objectives and its capabilities
• Between expected business goals and time required to achieve
them
• Between marketplace offerings and organization’s requirements
• Between required services and their availability, maturity, quality
and stability
23

25. Strategy Groundwork
Measurement: Develop criteria for determining and measuring the
success or failure of sourcing relationships
• Examples
Cost
Quality
Speed
Skill Improvement
Productivity
Responsiveness
Flexibility
Change Management
Commitment
• Evaluation criteria should all tie back to the organization’s
business objectives
24

26. Strategy Groundwork
Sourcing Structures: Identify the types of sourcing relationships most suitable to the services
the organization is likely to outsource.
Where focus primarily on efficiency and costs identify high-volume repetitive functions that it
can obtain from third parties at lower cost for consistent quality of service
• Offshoring (primarily for labor arbitrage)
• Selective “lift-and-shift” outsourcing
Where focus primarily on enhancing level of services/productivity improvements through
streamlining processes, automation or other means identify relationships that support and
promote such enhancement
• Multi-sourcing (selected processes to different providers)
• Prime contractor as coordinator of multiple service providers
Where focus primarily on business process transformation, long-term service commitments and
innovation identify most suitable service delivery options
• Investment in transformation of internally provided services
• Transformational outsourcing
• Joint venture
• Captive service provider
25

27. Strategy Groundwork
Contract Structures: Identify legal and other issues pertaining to contractual
relationships and choose the contract structure most suitable to those
relationships and the organization’s needs
• Stand-alone agreement - If the sourcing relationship is fairly simple, involving
few services and locations and it is not likely to expand, a stand-alone
contract with the service provide may be adequate
• Global agreement with separate country agreements - If the organization and
the service provider operate in more than one country and have tax, legal
compliance and other concerns regarding the provision of services in multiple
jurisdictions, they may choose to enter into a master agreement between the
two lead entities and separate country agreements between their global
affiliates and service provider counterparts.
• Incremental awards - If the organization expects to cede additional business
to a particular service provider over time, the parties may enter into a master
agreement setting forth the general terms and conditions applicable to their
relationship
Each time a new function or business process is awarded to the service
provider, the parties negotiate and execute a separate “services
addendum” to the master agreement describing the new services, the
related service levels, charges and other specific details
An organization may have several such master relationships in place with
different services providers, greatly simplifying RFP and contract
negotiation for future awards of business
26

28. Business Case
Component: Strategic Fit Options Commercial
Affordability Achievability
Appraisal Aspects
• Description of the • High level cost / • Proposed sourcing • Statement of • High level plan for
business needs benefit analysis of option with rationale available funding achieving the
• Contribution to at least three for its selection • Broad estimates of desired outcome,
business strategy options for meeting • Key features of projected whole-life with key milestones
• Objectives the business need proposed cost of project, and major
Content: • Why it is needed • Analysis of ‘soft’ commercial including dependencies
now benefits that cannot arrangements departmental costs • Key roles with
• Key benefits be quantified • Procurement (where applicable) named individual as
• Key risks • Identify preferred approach/strategy the project owner
• Critical success option and any with supporting • Major risks
factors trade-offs rationale identified with
• Main stakeholders mitigation plan
• How well does it • Has a wide range of • Can value for the • Can the required • Can the project be
support the options been money be obtained budget be obtained achieved with
organization’s explored? from the proposed to deliver the whole current capability
objectives and • Have innovative sources? project? and capacity?
current priorities? approaches and/or • If not, can the • If not, can the scope • If not, how can the
Questions: • If it is a poor fit, can collaboration with project be made be reduced or required capabilities
the scope be others been attractive to a wider delivered over a and capacity be
changed? considered? market? longer period? acquired?
• Is the project • If not, why not? • Could funding be • Can the risks be
needed at all? • Has the optimum sought from other managed?
• Are the balance of cost, sources? • Does the scope or
stakeholders benefit and risk timescale need to
committed? been identified? change?
27

29. Strategy Development
Opportunity Identification
Opportunity Identification Solution Evaluation
Solution Evaluation
Filter 1 Filter 2 Filter 3 Filter 4 Filter 5 Filter 6
Potential
opportunity
Hypotheses on
Hypotheses on areas by
high value
Indicative
Indicative
high value • Business
opportunity
opportunity
Strategic business case
business case
process alternatives
areas driven by
areas driven by • Infrastructure for executive
for executive
business
business type decision
decision
objectives
objectives
Baseline Current state Process Prioritized processes Cost model Adjusted solution
costs and process and outsourcing based on risk, simulations alternative and scope
opportunity system views suitability opportunity value definition based on SAS
areas and dependencies
Phase II
Phase II
SAS
28

30. Change Management and Communications
The underestimation and uncoordinated execution of change management and
communications is the most common reason for outsourcing failures
OCM & Communications
Date/milestone driven communication
planning is the key
Impact analysis for all affected employees
Need to have a defined “leave behind
strategy”
Data preparation strategy
Understand baseline performance metrics
around efficiency and effectiveness
29

31. Change Management and Communications
The Alsbridge Change Model focuses on six critical success factors that provide a roadmap of change management
activities and deliverables for a transformation program and associated projects.
Change Management ModelCHANGE MANAGEMENT MODEL
8Articulation of a compelling, shared
Compelling, vision and business imperative for
Shared Vision change
8Employees are enabled to
learn new behaviors and apply
them to their work 8Stakeholders with authority,
Training and Stakeholder &
Performance Leadership power and/or influence lead
Support Alignment and visibly support the
Shared
Outsourcing
Services
change
Transformation
Organization
and Resource Communications 8Employees are well-
8Aligned Planning & Engagement informed about and involved
systems and
organizational models that in the change
support the change and Measures,
reinforce the new behaviors Milestones
& Evaluation Communications activities
Project Management activities
8Establishmentof short- and long- Organization & Resource activities
term measures of success Training activities
30

32. Risk Management
Since all risks have an impact on cost, morale and Global Risks
business survival, it is imperative to develop Risk
Management program to mitigate those risks very early in Business Case Economics
the process. Overall, risks can be categorized as follows:
Consistent Executive Commitment
“Accepted” - little attention is needed, if any, to Outsourcer’s Global Business Operations
mitigate the risk
Political Backlash
“Needs Improvement” - some focus and solution is
required Terrorism / War / Political Instability
“Unacceptable” - full attention is required to mitigate or
eliminate the risk Operational Risks
Legal, Regulatory &Tax
Finance & Ops controls
Outsourcer Employees / Competencies
Logistics & Travel
Knowledge Transfer & Work Migration
Security & Facilities
Delays / Approvals
Administrative Systems
Business Continuity Planning
IT Systems & Infrastructure
Labor Relations & Employee Morale/Turnover
Service Level Agreements
31

33. Creation, Adoption and Implementation
Creation:
• The sourcing team should formulate the organization’s sourcing strategy based upon the results of
the required groundwork
• The sourcing strategy should be carefully documented in order to make sure that the strategy is
clearly understood, to facilitate its presentation to and approval by management, and to assure its
implementation and ongoing application. The sourcing strategy may take the form of internal policies
and procedures
• The written sourcing strategy should set forth the elements described earlier in detail sufficient to
enable the organization’s sourcing management team to apply the strategy and support achievement
of the organization’s business objectives
Essential elements:
• The fundamental business objectives the strategy is intended to serve
• The creation and charter of the organization’s sourcing management team,
• Executive management responsibility for oversight of sourcing decisions
• Procedures and criteria for evaluating services that are the subject of sourcing decisions
• Procedures for identifying and evaluating available sourcing options
• Checklists and procedures for identifying and assessing risks and benefits of sourcing options
• Standards and procedures for vendor selection
• Clear articulation of responsibility and authority for sourcing decisions
• Requirements for executable action plans for all sourcing decisions
• Standards and procedures for contract negotiations
• Templates for RFP documents, term sheets and contract provisions, if available
• Pre-defined criteria to measure the viability and success of sourcing relationships
• Governance and coordination structures and mechanisms
• Requirements for ongoing assessment and adjustment of the sourcing strategy
32

34. Creation, Adoption and Implementation
Adoption: The sourcing strategy must be understood and approved by various constituents within the
organization
• Sourcing team
• Executive management
• Departments or groups that will participate in sourcing decisions for their service requirements
Presentation to executive management should include supporting business analysis
The sourcing team should also consider and prepare guidelines for communications with media and with
individuals who may be impacted by sourcing decisions
Implementation: Initial application of the sourcing strategy may encompass various activities, depending
on the organization’s needs
• Survey and assessment of internal services to identify opportunities for sourcing decisions
• Determination of structure, selection of vendors and contracting for services that the organization has
already decided to outsource
• Review and assessment of existing sourcing relationships to determine how well they conform to the
sourcing strategy
33

35. Questions & Answers
34

36. Why Outsourcing Deals Fail
Macro Drivers
Quarterly financial performance metrics
drive short-term negotiating practices by
providers
Cost reduction goals pressure buyers to
negotiate on price at the expense of quality
Little attention is paid to culture,
uniqueness of client requirements or
contingency planning
Problems are magnified by cultural and
language issues when international
solutions are involved
“80 percent of Customer Service
Outsourcing Projects Aimed to Cut
Costs are Destined to Fail”
- Gartner
35

37. Getting the Right Provider Short List
Engage the likely providers in structured face-to-face meetings
Each provider puts forth both sales and delivery personnel
NO PPTs!
Each provider is given the opportunity to talk about:
• Case studies on similar engagements
• Possible solution offerings
The buyer is able to judge the provider on:
• Qualifications
• Differentiating solutions
• Cultural fit
36

38. Provider Evaluation Criteria
SAS Workshop Site Assessment
5% 10%
Compliance & Fit Provider Selection Delivery Model
10% Criteria 15%
Transition Approach Governance
15% 10%
Business Case
35%
37

39. Solution Design and RFP Development
Over time, the vendors have grown accustomed to RFPs that clearly
define requirements. They expect the outsourcing consultant to
define the requirements and manage each party’s expectations.
Simply following a previously developed RFP and issuing it to
vendors will absolutely sub-optimize your results.
The development of an RFP is a collaborative effort between
Alsbridge and the client’s personnel.
• The Alsbridge members of the team contribute knowledge of the
RFP approach and experience gained in developing outsourcing
solutions in an accelerated fashion.
• The client members of the team contribute an understanding of
the strategic business imperatives, current thinking regarding
sourcing in the company, and an in-depth knowledge of the
internal business opportunities and constraints.
38

40. Involving the Providers in Solution Development
An internally developed RFP (lacking collaborative vendor input) can
miss significant savings from vendor capabilities. This dynamic of
discussing your needs with a vendor is interrelated to the
development of an RFP and continues during negotiations.
Approximately two weeks after RFP release, the selected providers
will be invited back in for a full day working session to help them
better understand your needs and adjust their RFP responses.
During these workshops, providers are asked to bring in their primary
delivery team thus exposing the client to the resources that will be
performing the work. During the day, breakout sessions are
conducted to review Goal Alignment, Delivery model, Transition
Approach, Governance and Deal Structure.
39

41. Provider Due Diligence
Due Diligence management is designed to ensure that negotiated agreements are
consistent with the requirements of the business in broad strategic, as well as specific
tactical, terms. The process should include multi-disciplinary representation that
ensures that legal, commercial and business risks are taken into consideration and
addressed.
• Participate in Supplier Site Visits – Develop decision matrix for supplier evaluation
• Identify and evaluate critical supplier issues
• Evaluate the expected future performance of each supplier
• Conduct risk analysis for each supplier and proposal
• Provide guidance for the client cost models for each supplier proposal and
alternatives
• Establish performance metrics and reporting requirements
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42. Provider Selection
Provider 1 Provider 3
SAS Workshop Performance SAS Workshop Performance
100 100
80
75
Compliance and Fit Delivery Site Assessment Compliance and Fit Delivery Site Assessment
60
50
40
25
20
0 0
Governance Transition Governance Transition
Business Case Delivery Model Business Case Delivery Model
Provider 2 Provider 4
SAS Workshop Performance SAS Workshop Performance
100 100
75 75
Compliance and Fit Delivery Site Assessment Compliance and Fit Delivery Site Assessment
50 50
25 25
0 0
Governance Transition Governance Transition
Business Case Delivery Model Business Case Delivery Model
41

43. Vendor Selection
Assign a dedicated project manager to each sourcing project
• Handles day to day management
• Identifies and recruits required internal resources
• Works with third party consultants and legal advisors.
Vendor selection involves a two-step process:
• First, determine required vendor capabilities and (perhaps using a fairly simple
RFI) identify a limited field of apparently qualified service providers
• Second, conduct an RFP, including a detailed SOW, detailed contract term sheet,
explicit response requirements and criteria for competitive evaluation
42

44. Vendor Selection
Develop a proper RFP
• Purpose: to confirm vendor capabilities and provide a sound basis for the
organization to choose the service provider and the solution that best supports the
organization’s business objectives
• Limited Number of Providers: The RFP should be sent to a limited number of
providers whose general capability to deliver the services has been previously
confirmed
• Minimum RFP Requirements:
Provide a complete, accurate and detailed description of the organization’s
requirements
Propose minimum service levels based upon the organization’s past history, its
requirements, or industry precedents
Include a detailed contract term sheet that will differentiate the contractual
positions of the vendors and define the starting point for negotiation with the
selected vendor
Specify the scope and content required in each provider’s response
Spell out evaluation criteria that will be applied to proposals
43

45. Vendor Selection
Minimize unexpected changes to vendor proposals and maintain negotiating leverage
throughout the vendor selection and contracting process by investing the necessary
time and closely coordinating the efforts of internal stakeholders and outside experts to
produce a high quality, accurate and complete RFP
Allow sufficient time for the development of the RFP and vendor selection and include
key stakeholders in the process.
• RFP preparation: 2 - 4 months
• Service Provider responses 1 - 2 months
• Service Provider selection 1 - 2 months
• Contract negotiation 2 - 4 months
Use of experienced, knowledgeable consultants and legal advisers can reduce the
time required and improve the quality of the RFP
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46. Vendor Selection
Define and apply vendor evaluation criteria that tie to the organization’s business goals
• Financial strength and stability
• Likelihood of acquisition by another provider
• Technical/industry/process expertise
• References
• Service provider personnel
• Site visits
• Contracting positions
• Likelihood of successful contract negotiation in reasonable time period
• Cultural fit
• Pricing
Cost should NOT be the predominant factor in vendor selection and should be
considered apart from (and after) all other factors
Evaluate all proposals on the same criteria; design the proposal requirements to
facilitate apples-to-apples comparisons as much as possible
Service provider selection can be a politically-charged decision and process
Involve all project team members and business function representatives in the
evaluation process in order to achieve consensus in selection decisions
45

47. Questions & Answers
46

48. Outsourcing Contracts
Myths
• Metrics and best practice comparisons for price and service levels are key
• Penalties systems will make the provider pay attention to me
• Never pay the provider extra for doing their job
• If I collect enough data the service will be good
• Faster, better and cheaper
• Details give the illusion of control
• The Danish effect (hands off or simplistic metrics)
Facts
• Margins of on-shore providers are currently at an all time low
• Significant dissatisfaction is expressed by many clients that employ aggressive
negotiation tactics
Thesis
• Behaviors need to change in the way relationships are managed from start to finish
47

49. The Challenge of Outsourcing Vendor Invovation
Declining margins affect service levels, customer satisfaction and innovation.
48

50. The Vendor Despair Loop
Customer
“I can’t stop behaving like a “I can’t stop treating you like a
vendor until you stop treating me vendor until you stop behaving
like one.” like one.”
Provider
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51. To Understand where you are - requires a new Benchmark - The MRA
The Problem: Most clients lack a quantative way to articulate the complex issues and metrics needed to
measure success in an outsourcing relationship. The only benchmarks available were purely price related
and often misleading. As a result most negotiations and subsequent management focus were around single
dimension pricing issues and legal issues not related to true client satisfaction.
The Answer: To address the gap Alsbridge has developed over the last 3 years the market leading
Market Reality Assessment (MRA). The MRA is comprised of 10 best practice categories linked to over
150+ contract and relationship attributes designed to give a real benchmark for the Outsourcing industry.
Categories
Scope
Flexibility
Governance
Pricing
Service Levels
Legal Terms
Business Terms
Termination
Transition
Relationship Management
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52. SLA Definition
An agreement between a provider of services (can be internal or external) and
a customer/client
Relates to the services to be provided by the Service Provider (both internal
or external) to ‘Client’
Identifies the inputs that are required from ‘Client’ to allow SP to provide its
services (dependencies – Operating Level Agreements (OLAs)
Allocates responsibilities for service delivery between SP and ‘Client’
Defines the appropriate level of service to meet ‘Client’s’ needs
Provides a framework for performance measurement and continuous
improvement
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53. KPI Definition
KPI are quantifiable measurements for evaluating progress towards an organization’s
goals.
KPIs allow an organization to:
• Analyze aspects of its past
• Challenge its present
• Plan its future
KPIs should primarily be used to determine the efficiency and effectiveness of the
services provided by the SSC.
KPIs should focus on a manageable number of the most important measures – often
have “Service Credits” attached
Key four components:
KPI
Measurement Goals Accountability Service Credits
The Target The Assignment Failure by SP to
The Chosen
Performance of the Goal Meet Agreed KPI’s
Focus
Associated with to a Specific will result in a
Area For
the Measure Individual or discount known as
Management
Team Service Credits
52

54. OLA Definition
Presents a clear, concise and measurable description of 'Client' and SP relationship
Defines the interdependent relationships among 'Client' and SP
Describes the responsibilities of 'Client' toward SP, including the process and timeframe for
delivery of their services
New dynamic: SP cannot be held to account unless 'Client' does what it has to do
53

55. SLA, KPI and OLA Identification
54

56. SLA, KPI and OLA Description
SLA Description Sets out Trigger for
Service Line Allocation of Baseline
describes definition of service credits, Sets out what
identifies SLA Description Definition of activity
individual KPI and current suspension of ‘Client’ has to
grouping of within service KPI and current level which
service or target service charge, do to enable SP
service levels credit regime or target may
offered by SP performance etc to reach the
within ‘Client’ performance underpin
service level
process… pricing
Service Service Level KPI and current Minimum Service Operating Level Defined OLA Key activity
Line Agreement (target) SLA service level credit Agreement performance level
Description performance category Description (volumetrics)
Pay Pay invoices which 100% invoices in 95% of invoices B2 Raise accurate, Raise % of invoices
invoices match with Purchase any month which in any month properly Purchase for inventory
Order (and Goods match with PO approved, Orders items with PO
Received Note and/or GRN paid properly coded wherever
where required) by by invoice due and properly required by
invoice due date, if date, if invoice priced Purchase corporate
invoice received by received one day Orders as policy
SP one day before previously required
due date.
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57. SLAs – What Works?
• Ensure you can monitor your service providers performance and the service
measures are those over which the SP has total influence
• Determine what is important to 'Client'
• Determine measures that will invoke appropriate behaviours
• Maintain full visibility, if you can’t measure it, find a measure you can!
• Be ‘specific’ - loose wording can be misinterpreted and lead to dissatisfaction
• ‘Time’ - use working days, to published timetable
• ‘Accurate’ - define what this means to you, and how it can be measured
• Build in quality and approval at source (your OLA)
• Eliminate double-handling and hand-offs
• Understand the service model
• Service from 08:30 to 17:30 means your call will be answered between those
hours, not that everyone is sitting at their desks
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58. SLA Carrots and Sticks: A call center example to consider
The Stick – How you deal with Vendors
Virtually unlimited data available about every action taken by provider(s) from readily available
systems
Cost of cut over to new providers is relatively low and short term contracts are the norm
Per-minute, seat, talk time, 1st call resolution, etc. are used to incentivize the providers to generate
results
The Carrot – How you deal with Partners
Situation: A large, regional wireless carrier was facing a large volume of customer churn, high
customer acquisition cost, and steep customer contact costs
Solution: Sustainable Value Management
Contracts that allowed the provider to manage to Price/Call Acquisition /
meet carrot metrics. Retention
Core pricing tied to a series of volume indicators $1.12 12 months or less
such as number of calls, customers of record, or
talk minutes $2.18 13 - 24 months
Value pricing tied to underlying business principle
$3.21 25 months or more
that a long term client is far more profitable than a
new customer.
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59. Contract Negotiations
Three Rules for Supplier Relations:
• Supplier business goals are and always will be different from that of the client.
While suppliers can be valued partners with clients, recognize that the client’s
priorities and needs will differ, and be prepared to identify and resolve the
differences that will arise. Management and responsibility always remains with the
client.
• Recognize that external suppliers will make money on the outsourcing agreement
somewhere, or they would not be willing to sign. Signing an extremely reduced-
price contract in haste may lead to having to work with a supplier who is not
responsive to client needs and who sticks precisely to the letter of the contract,
charging the client for any additional services needed.
• The better the requirements and the Statement of Work are, the better the
relationship between the client and supplier.
58

60. Contract Negotiations
Scope Plan Conduct
Deciding on
Deciding on Construct
Construct
Internal
Internal Negotiating
Negotiating
the Need for
the Need for Negotiation
Negotiation Negotiation
Negotiation Close Out
Close Out Implement
Follow On
Consideration
Consideration Environment
Environment
Negotiation
Negotiation Plan
Plan
Build the
Build the External
External
negotiation
negotiation Considerations
Considerations
team
team
Style / Behaviour Structure
Team Position
approach
Major tasks
• Establish internal negotiating strategy/tactics
• Establish and gain commitment on negotiations timeline and milestones
• Develop communications strategy – define the relationship management approach
• Negotiate Statement of Work/Scope of Services
• Agree on service level agreements
• Incorporate client terms and conditions
• Obtain agreement on Supplier Disentanglement Services Plan (Termination and
migration plan to include supplier acquisition)
59

61. Points to Consider
When negotiating crucial deal points regarding statement of work and/or performance
issues, it is important to ask (and address) the following questions:
• Does this need to be negotiated (why not tell the other party that this is the case)?
• What is the value of the negotiation?
• What impact will this have on the strategy?
• Why negotiate now? List the drawbacks / benefits that result from delaying the
negotiations.
• Does the aim of the negotiation support the group sourcing and overall business
strategy? If not, should the approach or timing be changed?
• Who needs to be involved?
• What is the main driver of the negotiation?
• What must you achieve? What cost are you willing to pay to achieve it?
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62. Contracting Groundwork
Master
Services
Agreement
Country Country Country
Agreement Agreement Agreement
Scope of Scope of Scope of
Services Services Services
Service Service Service
Levels Levels Levels
Pricing Pricing Pricing
Other Other Other
Exhibits Exhibits Exhibits
61

63. Contracting Groundwork
62

64. Contract Negotiations Best Practices
Follow a “competitive” process
• Down select to two service providers
the competitive selection process can (and should) be extended through contract
negotiations
The organization can negotiate certain critical aspects of the outsourcing relationship,
including specific contract provisions, with two or more service providers, and then
contract with the service provider offering the most favorable combination of solution,
price and legal protections.
• A competitive negotiation can be resource-intensive in the short term, generally requiring a
longer and more complicated negotiation process to deal with multiple service providers,
but it will substantially enhance the customer’s negotiating leverage throughout the
outsourcing process and will help to make possible significant financial savings and higher
service level commitments that form the basis for a better outsourcing relationship in the
long term
• Competitive leverage can be applied to the customer’s advantage with respect to
numerous issues, especially if the customer has invested in solid preparation
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65. Contract Negotiations Best Practices
Documenting business processes
• BPO (especially KPO) functions tend to focus on knowledge expertise and advanced
technical and analytical skills
• Functions tend not to be well documented – relying on ad hoc procedures and close
personal management
• The organization should spend extra time on internal due diligence and process discovery
to understand the scope and nature of the services that will be outsourced
• Outsourcing process and contract should be structured in such a manner as to shift certain
due diligence risks and process scoping and formalization to the service provider
Measuring Internal Service Level Performance
• At earliest possible stage – at least during RFP development and (if possible) prior to that
– the organization should identify the service levels against which it will require the service
provider to perform.
• The organization should also collect all historical data relating to internal performance
against the service levels.
• If historical data does not exist (not uncommon) the organization should begin to measure
internal performance against the service levels that will be desired from the service
provider.
• The organization’s negotiating leverage may be greatly enhanced if it is able to provide
several months of performance data to a service provider, and the service provider will
likely be more comfortable committing to the organization’s desired service levels if the
organization can show that these service levels have been achieved internally.
64