The future of application outsourcing: making the move from tactical to strategic

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1 IBM Global Business Services White Paper The future of application outsourcing: making the move from tactical to strategic Application Services

2 Page 2 Contents 2 Introduction 2 Success brings new challenges 4 What the future holds 7 The emerging trends 7 Leveraging economies of scale and experience 10 Delivering business value 10 Transformation in manageable steps 11 The future of application outsourcing at work today 12 Getting started with an assessment 13 Other ways to take action 14 Conclusion Application outsourcing has come a long way since the Y2K projects of the 1990s. As marketplaces expanded to global proportions and competition followed application outsourcing has filled an ongoing need for cost-effectiveness by providing development and maintenance resources at price points that organizations could not reach locally or internally. It did not take long, however, for CIOs to realize that application outsourcing s attractiveness as a cost-cutting tactic was only part of the story. The same broadened access to new talent and advanced techniques and technologies can and does deliver additional benefits, most notably faster time to market for new applications and upgrades alike. While there will always be a place in virtually every business plan for application outsourcing s cost benefits, there is also room for new opportunities and new points of view. Application outsourcing is continuing to evolve, transforming from a strictly tactical solution to a strategic one as it proves itself able to deliver measurable business value and competitive advantage. This paper presents the IBM point of view on the future of application outsourcing: where new technology and techniques will lead, where the greatest opportunities for business advantage lie and how CIOs can best take advantage of all that application outsourcing has to offer. Success brings new challenges In the near future, application outsourcing will need to address a variety of challenges, some external and some created by the very opportunities application outsourcing has itself created. For example, application outsourcing s ability to deliver significant cost savings has enabled organizations to put new

3 Page 3 Governance has proved to be a trouble spot for many application outsourcing solutions, with efforts hampered by time, distance and language barriers. Still a source of IT value, application outsourcing is now being re-examined as a potential source of business value. downward pressure on IT budgets. As a result, CIOs are being challenged to transform one-time or short-term savings into repeatable, consistent efficiencies. Many CIOs are also looking to application outsourcing to provide sustainable savings that can be used to self-fund new business-oriented projects. Governance is another area where, up until now, application outsourcing may have created as many challenges as it has solved. Organizations which have embraced application outsourcing with numerous projects and vendors have begun to realize that they may actually have made their processes and models more complex, or that they lack processes for integrating across cultures, languages and time zones. Risk management is probably the most obvious challenge inherent in application outsourcing. CIOs are constantly looking for new ways to offset the risks that come with offshoring. These risks arise from such varied sources as language barriers, political unrest, or natural disasters such as typhoons or earthquakes. Not all the challenges application outsourcing will have to address in the future are of its own creation. As CIOs and their organizations become more comfortable with the concept of application outsourcing, they are asking themselves if their current outsourcing solutions are doing everything possible to help the business achieve its objectives. They are also asking their outsourcing vendors to combine this new emphasis on business objectives with the existing emphasis on IT objectives.

4 Page 4 Application outsourcing is well-suited to help deliver the substantial change that organizations are looking for, while mitigating business-threatening disruptions. Perhaps the most important challenge application outsourcing will have to meet in the near future is organizations need for change. In the recent IBM Global CEO Study, 83 percent of CEOs said substantial change was needed within their enterprise. 1 In the past, substantial change often meant substantial disruption, and a disappointingly long-term horizon for seeing the benefits of change. The application outsourcing choices an organization makes now can help ensure that future change is more organization-friendly, allowing the organization to embrace change without having to commit to massive disruptive transformations over a short period of time. To achieve this goal, application outsourcing solutions will need to work hand-in-hand with infrastructure and a myriad of application solutions, from in-house custom applications to new Internet applications. What the future holds Meeting this new set of challenges will require application outsourcing solutions to share some important attributes: The future of application outsourcing will include measurable benchmarks that illustrate the achievement of business goals and objectives. Accountability It is no longer enough for application outsourcing solutions to benefit just one department. The entire business needs to see the benefits in the way of measurable benchmarks that determine the achievement of specific business goals or objectives. And it is not simply the IT department or the CIO who will be held accountable for the achievement of these goals and objectives. The outsourcing provider will need to reference these goals in contracts and create pricing strategies based on them. Predictability As application outsourcing solutions become more complex, the single most important attribute of any solution will be governance. Up to now, governance has often been an afterthought not a part of the contract and not discussed

5 Page 5 until a problem arises. It is no surprise, then, that so many projects fail because of poor project management and the corresponding lack of consistent, robust governance. As organizations develop new partnerships around the globe, application portfolios will become more complex and more diverse and application outsourcing solutions will need to become more flexible. Going forward, governance will need to become an integral part of any application outsourcing solution. The governance tools and processes used will need to be ones that have been specifically designed for outsourcing and can accommodate outsourcing attributes such as geographically distributed workflows, language and cultural differences and differing time zones. Moreover, these tools and processes will need to be consistent across both projects and geographies. Flexibility According to the 2008 IBM Global CEO Study, 85 percent of CEOs see partnering as a way to capitalize on global integration opportunities. 2 This means CIOs will need to achieve a new level of flexibility to manage ever more diverse and disparate application portfolios. Application outsourcing solutions will need to be correspondingly flexible. Organizations will want the ability to choose between various types of application outsourcing projects, from management of a single application to full outsourcing of an entire application portfolio, without having to resort to an inordinately large number of vendors. Location will need to be more flexible, as well. Organizations and their solution providers will need the ability to shift workloads dynamically as skill sets, price levels and local conditions change. Since changes such as these are inevitable over the life of an outsourcing contract, application outsourcing providers will need to be able and willing to encompass those changes as a part of their usual business processes.

6 Page 6 In order to continue to shorten applications time to market, application outsourcing solutions will need to include integrated processes and technologies for governance and testing. Faster time to market A large part of application outsourcing s strategic capability lies in its ability to help an organization deliver solutions to the marketplace faster, thereby establishing and/or maintaining the organization s competitive edge. Doing the same things faster is not enough, however. Improved methods and processes need to be incorporated, as well. Application outsourcing solutions will need better, built-in governance to reduce the errors that slow down the development process. Testing will need to be an integral part of the solution, with processes and methods that are specifically designed to coordinate with the other phases of the development cycle. Vendors will need to be able to deliver best-of-breed resources that consistently make use of the latest techniques and technologies to reduce development cycles even further. Application outsourcing is now being leveraged to provide sustainable savings that can be used to fund an organization s transformation efforts. Improved cost effectiveness On the economic front, future application outsourcing solutions will need to do much more than replace one labor source with a less expensive one. To be truly cost-effective, an alternate labor source needs to be as skilled and as available if not more so than the source it is replacing. The savings will need to be quantifiable and consistently delivered in order to enable the CIO to use those savings to fund ongoing transformation efforts. Most important, future application outsourcing solutions will need to combine highly affordable and available labor with more efficient, automated processes. A holistic view The fewer vendor relationships an organization must sustain in order to achieve its application outsourcing goals, the less time, effort and cost it will take to manage those relationships. In the future, CIOs will look to vendors to

7 Page 7 provide a wide range of application outsourcing solutions and access to ancillary services such as infrastructure transformation under one roof. Vendors will also need to be able to integrate all those services on behalf of their clients. In the near future, application outsourcing vendors will need to be more holistic in their delivery approach providing access to a full range of ancillary services such as infrastructure transformation and support. The emerging trends As application outsourcing continues its evolution from a tactical cost-cutting tool to a strategic tool for business advantage, there are three emerging trends that IBM believes hold great promise: Globally distributed development A new outsourcing methodology that is specifically designed to help close the productivity and quality gaps between centralized and geographically distributed teams. Business-aligned outsourcing The responsibility for achieving business value from application outsourcing solutions will be shared between the organization and the outsourcing provider. Transformational outsourcing Application outsourcing will work hand-in-hand with infrastructure solutions, open-system initiatives and virtualization to ease the way to gradual, nondisruptive systems transformation. Emerging trends in application outsourcing include globally distributed development and both business-aligned and transformational solutions. Leveraging economies of scale and experience Globally distributed development, the first of the future trends for application outsourcing, has been designed from the beginning as an outsourcing solution. It leverages what outsourcing does best providing access to the right

8 Page 8 skills at the right price, no matter where in the world those skills reside. It also works to mitigate the downside of outsourcing by establishing a standard methodology that includes software development processes, scientific decisionmaking based on collected data, architectural disciplines such as service oriented architectures and robust governance. The work units of a globally distributed development project can be completed concurrently to shorten development time. They share processes and tools to help ensure quality and mitigate risk. The basic element of this new methodology is the work packet. A work packet is a self-contained work unit that is composed of all the processes, roles, activities and input required to allow a team to conduct an outsourcing activity in a predictable, successful manner while maintaining visibility and continuity with the overall outsourcing team. As illustrated in Figure 1, each application outsourcing project is broken down into individual work packets that are then assigned to the team best suited to perform that task (based on bandwidth, previous experience, cost, and other criteria). Each team completes its work packet using a common, predefined set of processes, techniques and tools that have been designed to overcome barriers of culture, distance and time. Once each work packet is completed, the primary project team assembles the packets to create and test the solution. If there should ever be a problem with an individual work packet being completed due to local issues such as weather, the consistent processes and robust built-in governance helps assure that the work packet can be assigned to another team and still obtain the same quality results.

9 Page 9 Figure 1. Globally distributed development is a simple concept that has the potential to deliver dramatically more effective application outsourcing results Globally distributed development can be used to handle any and all stages of the application life cycle. Benefits for the sponsoring organization can include lower development and maintenance costs, enhanced risk mitigation through the distribution of different parts of a single project to different geographical regions and faster time to market due to the methodology s extensive use of automation and its ability to address multiple parts of an application outsourcing project simultaneously.

10 Page 10 Delivering business value As CIOs continue to align their internal efforts with their organization s business goals and objectives, outsourcing solutions will, by necessity, follow suit. In the near future, it will no longer be the CIO and his or her department who are solely responsible for this business-it alignment. Outsourcing vendors in general and application outsourcing vendors in particular will be retooling their processes and methods in order to measure and substantiate an outsourcing solution s business value. A higher-level partnership between IT and application outsourcing vendors will fuel the shift to a new emphasis on business value. As an outgrowth of this new alignment, testing will become an even more important measure of the success of an application outsourcing solution. New metrics are even now being developed and deployed to quantify and document business value in a variety of application outsourcing situations. Portfolio assessments will become crucial first steps in the business alignment process, and will serve as touchstones throughout the life of application outsourcing relationships. Transformation in manageable steps Transformation can be an alarming concept in today s business world. Often, transformation has meant massive, rapid change that disrupts day-to-day business and makes current techniques and processes instantly obsolete. Transformation does not have to be either alarming or disruptive. Application outsourcing can play an important role in a practice of gradual changes that link legacy systems with transformational technologies to provide a thoughtful, strategic path to new opportunities and competitive advantage.

11 Page 11 Properly leveraged, application outsourcing can make business transformation easier to achieve and less disruptive. The more successfully organizations can combine application outsourcing with other transformational services such as open-source software, Web-based delivery and service oriented architecture, the greater competitive advantage can be delivered. Application outsourcing providers who can deliver this full range of transformational services will be of immense value to these organizations. The future of application outsourcing at work today An important European bank was looking for an application outsourcing provider to handle its mortgage processing capabilities. Along with the traditional cost-savings benefits of application outsourcing, the bank was looking for a variety of quality enhancements that, until recently, would have been extremely difficult to achieve in combination with cost-savings and would have involved possibly prohibitive risk levels. These enhancements included increased skill levels, faster speed to market for new initiatives, improved service levels to users and compliance with new industry regulations. The application outsourcing solution that IBM implemented for this bank included four managed hosting environments development, systems integration, test/ pre-production and production to support implementation of two separate packaged applications and the full application systems life cyle. The IBM solution also included infrastructure that could be scaled rapidly to accommodate an increase in transactions and a full governance methodology. Offshoring capabilities were leveraged at two different global locations to provide the necessary cost savings while maintaining high skill levels and reducing risk. The solution resulted in faster speed to market for new initiatives. The new mortgage process has positioned this bank at the forefront of its industry, and equipped it to expand its position in the marketplace significantly, In addition, the solution resulted in 100% improvement in IT service delivery while costs were reduced by one-third. Future trends leveraged included: Business-aligned outsourcing Transformational outsourcing Emphasis on governance.

12 Page 12 An application portfolio assessment provides the comprehensive, objective view of an organization s applications that is an important starting point for future application management efforts. Getting started with an assessment As the client example in this paper illustrates, it is never too early to begin thinking about and acting on the future. A good first step for organizations is an objective assessment of their existing application portfolios. In many organizations, mergers, acquisitions and reorganizations have resulted in fragmented application portfolios that are difficult for CIOs to get an accurate handle on. Before any new opportunities can be explored, organizations need to know exactly what applications are in their portfolios, what the applications are used for, how often they are used, who uses them and how happy those people are with the applications current performance. An application portfolio assessment profiles an organization s application portfolio, identifying issues and constraints based on the organization s business and IT strategy and enterprise architecture. This enables the CIO to understand which applications are delivering business value, so that investments can be focused on these as appropriate. Alternatively, CIOs can look carefully at low-business-value applications and consider approaches to reduce these applications costs or remedy the risks and issues thereby increasing the applications business alignment.

13 Page 13 Fully leveraging the strategic value of application outsourcing will require a stronger emphasis on governance and testing and a new focus on business value. Figure 2: An application portfolio assessment allows an organization to make informed investment and outsourcing decisions based on the business value of an individual portfolio of applications. The results of this assessment provide prioritized recommendations aligned to an organization s unique business priorities, for example: Modernize applications for greater agility reduce development cycle time for faster time to market and increased business flexibility Reduce cost of managing and maintaining existing applications savings can be used for innovation and value creation activities Improve alignment of business and IT investments focus on high business value processes, services and applications Reduce complexity of applications, remove constraints and rationalize skills requirements while leveraging existing staff. Other ways to take action For organizations who have not yet established the business value of their applications or who need to reassess their portfolios an application portfolio assessment is an important starting point. For organizations that are farther along the path to leveraging the full strategic value of application outsourcing, there are still some things they can do to better position themselves for the future.

14 Page 14 Focus on governance When negotiating or renegotiating an application outsourcing contract, ask the hard questions and expect straight answers about such crucial issues as governance, testing and mitigation of offshore sourcing risks. Redefine success Go beyond standard application outsourcing service level agreements and strive to redefine success as the sustainable delivery of specific business value. Think big picture Consider the advantages of more transformational outsourcing arrangements, where a vendor or vendors provide robust, multidimensional assistance with application outsourcing, testing and infrastructure. Conclusion Application outsourcing s newly recognized ability to deliver measurable improvements in business performance is transforming it from a tactical solution to a long-term strategic solution for creating and maintaining competitive advantage. In the near future, there are three trends that will likely play critical roles in delivering this advantage: globally distributed development, business-aligned outsourcing and transformational outsourcing.

15 Page 15 IBM is uniquely qualified to assist organizations in the strategic use of application outsourcing. IBM is a pioneer in the development of a globally distributed development methodology and maintains a network of global delivery centers that leverage a shared set of processes and tools. IBM has first-hand knowledge of the challenges and opportunities presented by business transformation. As a result of its own well-documented transformation, IBM offers a proven, practical method for application portfolio assessment and management. To learn more about the future potential of application outsourcing, and how your business can benefit from it, contact your IBM representative or visit: ibm.com/services/applications

16 Copyright IBM Corporation 2008 IBM Corporation Route 100 Somers, NY U.S.A. Produced in the United States of America All Rights Reserved IBM, the IBM logo and ibm.com are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both. If these and other IBM trademarked terms are marked on their first occurrence in this information with a trademark symbol ( ir TM ), these symbols indicate U.S. registered or common law trademarks owned by IBM at the time this information was published. Such trademarks may also be registered or common law trademarks in other countries. A current list of IBM trademarks is available on the Web at Copyright and trademark information at www,ibm.com/legal/ copytrade.shtml. Other company, product and service names may be trademarks or service marks of other companies. References in this publication to IBM products or services do not imply that IBM intends to make them available in all countries in which IBM operates. 1,2 IBM Global CEO Study 2008, www-935.ibm.com/services/us/gbs/bus/html/ ceostudy2008.html GBW03056-USEN-00

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