The document discusses trends in outsourcing models moving from cost-focused to collaborative models that aim to provide business value and competitive advantage. It argues that traditional ticket-based pricing models do not incentivize quality, and that outsourcing providers should be responsible for ensuring defect-free applications and business outcomes rather than just fixing tickets. The document advocates for an outcome-based model where providers are paid based on achieving business metrics and key results rather than activities.

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Trends in Outsourcing for a win-win scenario for the Customer and the Service provider
By Sunil Nair – Capgemini India
2014

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Collaborative Model
Global firms are looking for Value integrators and not just System integrators or Service providers that can help change the buyer's environment to be more flexible and able to respond to change through better visibility into the linkages between business strategy and IT. They want assurance that in three to five years when it's time to renew the applications or infrastructure contract, they will be better off than they are today.
We are now entering a new phase of application outsourcing – what can be called the third wave – in which it is increasingly viewed by global companies as a springboard to help them achieve competitive advantage and high performance.
In the first wave of application outsourcing deals, the industries viewed application outsourcing primarily as a means of cutting costs through labor arbitrage.
In the second wave, they looked for productivity improvements and greater flexibility for technology projects.
Today, in the third wave, leading firms are looking to application outsourcing to support an increasingly aggressive growth agenda as well as cutting costs and improving productivity, transformational outsourcing will enable these firms to make their research and development efforts a reality by supporting the building of new, differentiated products and services.
Service providers still seem to have the old ways of managing a contract, the conventional way is to follow either of the two methods of pricing 1) FTE based 2) Ticket based, the services model is limited to fixing tickets and doing technical operations, while large firms still claim that they have started providing multi integrated services and have changed the contract model but in reality the old model still seems to be the easy way to manage a contract. Ticket based pricing might appear attractive at first because of the variability of the price – but it might not encourage the right behavior in a provider who is paid based on the number of tickets they solve. One would want to avoid a constantly increasing number of tickets – the first sign of a dissatisfied customer. The whole theory of Application management seems to be focused on managing tickets(managing garbage) rather than managing applications, it is really surprising that service providers charge for fixing tickets and the clients tend to agree for this model but times have changed, providers cannot charge for application defects, once they have taken over the application then it is their duty to ensure defect free applications,

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scalable applications , application reliability, process optimization and maximum uptime of applications. Rolls-Royce PLC is generally regarded as the first company to use an outcome-based business model, and its innovative "Power by the Hour" outcome-based agreements with airlines changed the way the company and its airline customers conduct business together. The model is beneficial for each party: The airlines want planes that fly continuously something that translates into a steady revenue stream. Any unexpected maintenance downtime disrupts the system and results in high levels of unplanned expenditures. Within a conventional arrangement, airlines would pay Rolls-Royce a transaction fee for every single engine maintenance event and service request on a spare-parts and labor basis to restore equipment to a serviceable condition. Simple guarantees were offered for replacement parts, and these evolved into maintenance guarantees for labor as well as parts for single aircraft or entire fleets, based on the total anticipated cost per flight hour (time in flight) and flight cycle (wheels up and wheels down). The result was a perverse incentive: Under the transaction-based model, aircraft downtime for maintenance, whether it was planned or unplanned, would generate revenue for Rolls- Royce—but, obviously, no revenue for the airline. The Rolls-Royce “TotalCare” program, flipped the conventional transaction-based approach on its head, the premise was to build a long-term relationship with customers by aligning the engine-service provider’s goals with the airlines’ goals of keeping the aircraft flying. Under this outcome-based approach, Rolls-Royce would be paid for “continuous uptime,” rather than derive revenue from turning wrenches during aircraft downtime. Rolls-Royce now guarantees serviceable equipment availability and takes care of all maintenance in the chosen service plan.
IT Service providers while focusing on Quality initiatives like Six Sigma, Lean , CMMi tend to overlook TCO-Total cost of ownership while building the application or when managing the applications, once the application is transitioned then it is the responsibility of the Service provider to ensure a smooth running application. Customer IT departments have to spend huge amount of time to co-ordinate with the providers which they should have used for calculating ROI, measuring outcomes, thinking of new design and delighting their end customers. Service level agreements, also known as outcome-based measures, describe the delivery of information systems functionality using performance metrics that both IT and

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the customer acknowledge but it is limited to operational metrics like measures for time taken to acknowledge tickets, time taken to fix tickets, defect density, RCA time, aging ticket trends……and all of these does not relate to business outcomes, for e.g. service providers do not follow SLA’s like “process 80% of invoices within 48 hours”, it is not to say the current operational model should not be followed but the idea is to complement the operational model with a business outcome model, Under the Vested model's purest form, the outsourcing company pays only for results, i.e., orders shipped complete, end to end ERP and CRM operations completion. Customers should use a benchmarking model to create a table of what they expect as business outcomes for e.g. out of 1000 orders entered daily only 1% is considered as erroneous transaction, failure of a daily running interface can happen only once a month and no compromise on a interface failure which would result in monetary loss. Defect management for Service providers should be integral, it cannot be a commodity for charging the customer, they should charge the customer for ensuring successful business outcomes, focus on understanding the application thoroughly from a functional and technical perspective so that it leaves no chance for defects, proactively do regression testing and solve the defects because ensuring running of a defect free application is Service providers responsibility, let us be clear that Outsourcing of an application does not mean waste management rather it means no wastage. Collaborative Vested Outsourcing business model is used when a company and provider want to move beyond commodity thinking and “bean-counting” to an environment where the service provider has a vested interest to achieve results and value for the outsourcing company.

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The Vested model operates under an outcome-based model in which the provider aligns its interests to what the company really wants: an efficient, low-cost total solution. I have seen Application management leaders swearing by the quality management mechanisms they use for controlling defects, the stringent SLA’s they have in place and a stack of operations process flow diagrams to depict how defects are managed, how does the customer care for what you do with application defects, customer is not concerned about how you manage your internal operation all they want is an application which operates smoothly under all parameters, they do not want O2C, P2P or other business transactions to fail and do not care how many people do you put in for managing defects. With all these quality management philosophies most of the core applications like ERP’s ,CRM, Custom build all have hundreds of defects every month and then providers depict how they have used the latest quality mechanisms to categorize defects, to do RCA’s, to reduce 2% defects. Balanced score card have been in use for many years, the framework formulated by Kaplan and Norton has been put to use by successfully running enterprises, it used as a method for managing business unit performance, balanced scorecard provided an operational view of an organization from four perspectives: financial, customer, internal business process, and learning and growth. BSC can be also leveraged for measuring outcomes in an outsourcing model, effective management of the outsourcing contract requires a flexible system. Outcome-based controls like service level agreements have limited flexibility (e.g., there is little that can be varied in a measure like 99.9% network uptime). Behavior-based measures can incorporate outcome-based components, but focus on incentivizing desired behaviors. IT executives faced with the challenge of demonstrating the value of IT initiatives to the business, IT managers, and financial managers must work together to measure and communicate information technology's contribution , using conventional OS models there is no way to understand the value IT brings for the business, benefit of using balanced scorecard to manage outsourcing arrangements is that Kaplan and Norton’s framework enables a straightforward value chain analysis of the contract. It is not to imply that ROI of IT investments should be the responsibility of the service provider, for e.g. reducing inventory by 20%, accelerating shipment by 15%, increasing cash flows, faster order processing, increasing customer retention are all the primary score cards which should be monitored and improved by the Customer however the Service provider and Customer could reach to a service agreement of another set of performance measures which could lead to fulfilling the primary score card .

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Some of the sample measures recommended is listed below and if a Service provider can design a methodology to respond to these indicators then it would be way ahead in the OS competition. The new contracts will also see service providers offering multi-integrated services in areas like suggesting clients in the benefits of SMAC(Social media, Mobility, Cloud and Analytics), working with clients in evaluating business processes efficiency, providing architecture guidance, thought leadership, infrastructure management(this does not mean full scale management which is normally done through a separate contract , however even with an application management contract service providers can provide proactive suggestion of optimizations or pointing out pain points or undertaking small project initiatives like windows migration, DB tuning…) These multi-integrated services can be clubbed with the applications management cost, of course service providers need to think of a detailed pricing mechanisms which can accommodate the gold plated offers and such an offer can easily be industrialized and shared across multiple clients thereby covering up the cost for these services.

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The combination of measurable business Outcomes and clubbing of multi-integrated services will pave way to the winners, only those who will be able to master this will win the deals and hearts of the CIO’s.

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Sunil Nair has been with Capgemini India for more than 15 years, he is a Certified TOGAF 9 architect. He is a technology leader and has handled the responsibility of driving Oracle+ CoE and developed business and technology offers related to Telecom, Consumer Goods and Life Sciences.