outsourcing strategies challenges
TRANSCRIPT
Linda Cohen
Outsourcing Strategiesand Challenges
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Copyright © 2003
Outsourcing Happens… Take Control or Be Left Behind
Key Issues
1. What are the current trends in outsourcing?2. What should be externally sourced, and what is
the risk?3. How will IT organizations skill up to multisourcing
in the future? 4. How can you assure quality service in a
multisourced enterprise?
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Speed & Scale
IT Access
Cost Reduction
IT Reduction
Business Value
IT Expansion
ERP
MainframeMainframe
Web Services
Internet
1970 1980 1990 2000 2010
Time Sharing
Infrastructure Outsourcing
FacilitiesManagement
Applications Outsourcing
Process Outsourcing
ASP
Transformation
PCClient/Server
Disruptive TechnologiesCopyright © 2003
Outsourcing Generations: Historical Overview
Future Prospects: The Bottom Line
8 102
40
20
4
Gro
s s M
a rg
in (
%)
Relative Growth: CAGR (%) 2000-2005
Business Process and Transaction Management9.1% CAGR
IT Management Services
8.4% CAGR
Development and Integration
5.4% CAGR
Consulting 4.1% CAGR
Education/Training
5.6% CAGR
Software Maintenance7.1% CAGR
Hardware Maintenance1.7% CAGR
6
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Service provider must continuously reduce
cost per unit of service
LaborTechnology
and Processes
Start
YES
Is the Deal Profitable?
InvestmentMoney
$$ $ $$$$
$$
To reduce costs requires investment $
Ensuring long-term investment requires
adequate profitability
Profit$
$$$$
Margins
• No incentive for SP to invest
• Investment stops• SP’s margins
shrink further• Service quality
deteriorates over time
• Enterprise client suffers
• SP must either raise prices or terminate deal
NO
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To Reduce Costs, SPs Must Invest: To Invest, SPs Must Be Profitable
Mass Customization Rules
Level of Customization
Applications
Process
Infrastructure
Yesterday Today Tomorrow
Custom Codeand
Integration
Custom Infrastructure
CustomizedSingle-
Company Processes
Semi-Custom Infrastructure
Semi-Custom Code and Custom
Integration
Semi-Custom Process by Company
Common Infrastructure
Noncustom Code and Integration
Standard Horizontal Process by
Vertical
Future
High Medium Low
Mass- Customized Code and Integration
CommonInfrastructure
Standard Horizontal
Processes by Vertical
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Sourcing Strategy Identification Criteria development Organization fit Selection process Partnership
opportunities
Governance model Metrics Payment models Terms and conditions Provision
for changes
Relationship Performance
assessment Goals: reach business
objectives, efficiency,quality, innovation
Transition
Evaluation and Selection
ContractDevelopment
SourcingManagement
Alignment Organization assessment Core competencies Market scan Make-or-buy decisions Risk analysis
Phase
1
Phase 4 Phase
3
Phase 2
Strategic Tactical
Gartner’s Sourcing Life Cycle
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A sourcing strategyis the starting
point for mapping disruptive business
change into effective changes to the
operational environment.
The strategy should be
revisited frequentlyto ensure that
no misalignmentis allowed to develop.
How is a Sourcing Strategy built?
ImplementationPlan
Assessment ofChange Capability
Stage 1—Discovery and Identification
Strategy and Performance Review
Skill & Knowledge Capital Review
Business Alignment Assessment
Risk Identificationand Review
High-Level Market and Pricing Review
StrategicGap Analysis
Stage 2 —Analysis and Conclusions
Sourcing Scenario Establishment
Identification of MostViable Alternatives
Selection of Risk- Optimal Scenario
Develop Sourcing Principles
High-LevelSourcing Strategy
BusinessCase
Stage 3 —-Implementation
Planning
DetailedSourcing Strategy
Retained Function Improvement and Development Plan
Retained Function Improvement and Development Plan
OutsourcingAction Plan
OutsourcingAction Plan
Sourcing Governance Plan
Sourcing Governance Plan
Org. Restructure and Skill Acquisition PlanOrg. Restructure and Skill Acquisition Plan
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CIO
ESP PrimeContractor(s)
RetainedInternal ISCompetencies
Best-of-BreedSubcontractors
IT Managementand Governance
IT Core Value
Outsourcing or Insourcing or Joint Venture
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New Realities: IT as Broker
Business (B)B1 Understanding business
practices and approachesB2 Understanding business
organization, politics and culture
B3 Behaving commercially
B4 Understanding and analyzing the competitive situation
B5 Managing projectsB6 Managing change in
the business resulting from IT applications
B7 Planning, prioritizing and administering work
B8 Communicating/listening and gathering information
B9 Focusing on customers
Behavioral (H)H1 Leading, inspiring and
building trustH2 Thinking creatively and
innovatingH3 Focusing on resultsH4 Thinking strategicallyH5 Coaching, delegating
and developingH6 Building relationships/
team-workingH7 Influencing and
persuadingH8 Principled negotiatingH9 Resolving conflicts and
problemsH10Being adaptable
Technical (T)T1 Understanding existing
systems and technologyT2 Designing and
developing applicationsT3 Applying procedures,
tools and methodsT4 Integrating systemsT5 Designing technical
architectureT6 Understanding emerging
technologies
Six Nine 10
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Use Gartner’s Checklist of 25 IS Competencies
Share of skills of IS staff (%)
0
10
20
30
4050
60
70
80
90
100
2000 2001 2002 2003 2004
Product and technical skills
Business management skills
IT management skills
The Business“IT Partner”and SourcingGovernance
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The Skills (R)Evolution
Effectiveness-Focused
Efficiency-Focused
Competitive Advantage
Relationship Complexity
80%
15%–17%
3%–5%
Where the service volumes
are now
BusinessValue Enhancement
Utility
Transformation
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Three Types of Service Expectation
Time
Go
als
Key:= Planning/Negotiation and Vendor Evaluation
Utility
Enhancement
= Peak Performance
Co
mp
lexi
ty
= Inflection Points = New/Revised Contract
Stage 1Enhancement
Transformation Stage 2Enhancement
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Partnerships Change Over Time: Know When It’s Time to Change
Transformation
Enhancement
Utility
Service Recipient Service Provider
• Efficiency and continuous improvement• Optimum value at a competitive price• Preferential partner status
• Competitive advantage• Enhanced revenue• Premier or exclusive partner status
• Continuous optimization• Competitive parity or advantage• Preferred partner status
• Predictable, recurring revenue• Predictable profits• Extend relationship
• Brand enhancement • Business expansion and revenue growth• Profits commensurate with value delivered
• Revenue and profit enhancement• Referenceable engagement• Repeatable knowledge• Extend relationship
Establish Mutual Agreement on the Benefits for Each Partner
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Contractual Management Dominates
Relationship Management Dominates
Utility
Relationship Impact
BusinessValue
Key:
= Relationship Management
= Contractual Management
= The Partnership
TheContract
Enhancement
TheContract
Transformation
TheContract
Importance of ‘the Contract’ vs.‘the Relationship’ in Partnering
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BusinessValue-Add
Relationship
Cost Efficiency
Utility
Straightforward
Contract Management
Different Contract Arrangements Stress Different Competencies
Technology
Competencies
Business
Competencies
Behavioral
Competencies
Transformation
Enhancement
Complex
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BusinessValue-Add
Relationship
Cost Efficiency
Utility
Transformation
Straightforward
Contract Management
Enhancement
Different Contract Arrangements Stress Different Competencies
TechnologyCompetencies
BusinessCompetencies
BehavioralCompetencies
Complex
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BusinessValue-Add
Relationship
Cost Efficiency
Utility
ComplexStraightforward
Contract Management
Different Contract Arrangements Stress Different Competencies
TechnologyCompetenciesBusinessCompetencies
BehavioralCompetencies
Transformation
Enhancement
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One or Many ESPs? Look Within
Strong supplier management and integration capacity
Needs top performance from selected suppliers
Cannot attract a single large vendor
Best-of-Breed
Adequate supplier management
Lacks the resources and infrastructures for multisupplier integration
Wants flexibility for supplier selection
GeneralContractor
Understands supplier management
Lacks the resources and infrastructures for multisupplier integration
Wants to select key suppliers
PrimeContractor
Inexperienced with multisupplier management and integration
Protracted procurement process
Can attract a single large provider
Single Source
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Recommendations
• Embrace the idea of a multisourced environment to support business needs, and re-skill IT to effectively manage and optimize external provider relationships.
• The IT services market offers everything but maturity. Risk management is fundamental to every IT sourcing evaluation.
• Employ the sourcing life cycle as the key to successful business operations.
• Master sourcing governance and management to deliver seamless business operations.
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