Information Technology Outsourcing

Transcription

1 SEPTEMBER 2010 Information Technology Value drivers and the outsourcing decision process INSIDE: Improving the Relationship Examining the Value Drivers

2 2 VALUE DRIVERS AND THE OUTSOURCING DECISION PROCESS In the last twenty years, IT outsourcing has morphed from the exception to the rule for businesses around the world. As information technology accelerates in both capacity and complexity, businesses are turning their focus to their core competencies and adopting strategies to source IT in greater numbers. As the IT outsourcing market has grown, we have not seen a corresponding growth in discipline and rigor in the process for selecting and managing the provider. As a result, the increase in demand, added IT complexity and lagging maturity in understanding and managing IT sourcing relationships have led to suboptimal pairings and unmet expectations. Through our work in IT services, we have seen that the selection and management of the outsourcing relationship is governed by six key value drivers (see sidebar). Experience has shown that an unclear understanding of the relative value and importance of these drivers results in dissatisfaction on both sides of the equation by leading to mismatched provider-consumer pairings and contracts that may actually prevent expectations from being met. AlixPartners recent survey of CIOs and IT executives confirms these observations. The survey reveals that while no respondent regrets the decision to outsource, none is completely satisfied with all aspects of the relationship with the service provider, and that several opportunities exist within the contract development and negotiation process to improve the partnership. While a lack of total satisfaction is not entirely surprising, these findings do reveal several specific ways in which the process and governance of sourcing can be improved. What value is the consumer expecting to achieve from the outsourcer? How are these Value Drivers defined? Cost: services provided at a lower overall operating cost Customer Service: a clear structure that aligns to the business, and provides support that meets agreed service levels with timely communication, resolution and follow-up on issues Innovation: bringing forward new services and capabilities to improve cost, performance, and speed while enabling new customer solutions Quality: high levels of availability, performance and security driven by common management processes / best practices, and reported using agreed metrics Relationship Management: effective governance that augments delivery capability and allows company and vendor to develop a more personal relationship and move more toward a partnership Speed: services provisioned more promptly, where order-to-operation is measured in days, not weeks (1) In June 2010, AlixPartners conducted in-depth interviews with CIOs and IT executives from 19 companies across industries, with total revenues of $84Bn USD.

3 3 HOW CAN PROVIDERS AND CONSUMERS IMPROVE SATISFACTION WITH THEIR OUTSOURCING RELATIONSHIP? First, understand the trade-offs between the value drivers relative to business goals over the expected life of the contract. Each side must clearly understand the relative value of each of the key drivers. Our experience and our survey results indicate that this is not always the case. For example, while respondents identify Quality as the most important, in practice, Cost often drives provider selection and influences contract terms. As one survey respondent noted, We pushed so hard on cost during the initial contract that we had little flexibility left and no incentive for the provider to introduce change. Similarly, despite Quality s top ranking in importance, subsequent discussions with survey respondents revealed that once the contract is signed and execution started, service delivery becomes king. Service delivery involves all of the value drivers, not just quality; clearly, all are important to both the consumer and provider throughout the life of the contract. Negotiating an outsourcing contract around these six value drivers can be challenging, given the multiple and conflicting objectives at play, but it is essential to treat value drivers as a system. While the need to consider value driver trade-offs is certainly not a ground-breaking revelation, it is often lost in the battle of the negotiations and can lead to a disappointing working relationship. Our findings and experience suggest that the outsourcing relationship is best based on agreed value drivers, evaluation measures and a clear understanding of each driver s connection to the strategies and objectives at hand. Cost should be used as a guide to achieve the right balance while still generating the overall value required. Second, approach the outsourcing process with the same care and discernment as you would when selecting a business partner. To achieve a solid working model and relationship, consumers must look for providers that can meet their specific needs, including products, service, relationship, and innovation in addition to cost. Consumers whose operations are very process-oriented, for example, will want to find a supplier with a similar culture. The outsourcing relationship is a partnership it s critical that the parties are culturally and geographically well-matched. Size also matters. Large outsourcers allocate well-qualified individuals to manage their large accounts on a fulltime basis. This typically includes an account manager and highly skilled and dedicated technical individuals. This model does not work as well for smaller contracts, as the provider-cost structure cannot carry the overhead and, often, smaller customers have no need for full-time technical staff. Work to find a provider that has the right skills, abilities and track record of success for you and who will treat your business as important to their success. As one CIO told us, I can call the CEO of my outsourcer and he will call me back. Will that ever happen with the first tier guys?

4 4 HOW CAN PROVIDERS AND CONSUMERS IMPROVE SATISFACTION WITH THEIR OUTSOURCING RELATIONSHIP? (CONTINUED) Finally, consider the speed of change, both in your business model and operations and in the technology used to support them, to ensure that your contract is written accordingly. The majority of CIOs with whom we spoke complained of a lack of provider innovation to improve customer service or reduce costs. Consumers consider innovation a critical component in achieving outsourcing objectives, yet it is rarely written into the contract in measurable terms. IT outsourcing involves dynamic, continually changing products and services, yet contracts are typically approached with a commodities-mindset that considers Cost the key driver. As a result, those who sign three- to five-year contracts often find themselves disappointed early in the contract, as the speed of business or technology change has outpaced the parameters that drove the outsourcing decision and resulting contract terms. Instead, consumers and providers should include innovation provisions in the contract. To ensure mutual benefit from innovation, both the consumer and the provider must trust that value-adding innovation will result in a benefit to both parties; sharing cost-savings with the provider incentivizes innovation and increases the likelihood of customer satisfaction. Consumers and providers should also define and agree upon a process by which new ideas can be presented and quickly assessed; idea backlog will quickly kill enthusiasm for innovation. Finally, both parties should agree upon metrics and measures to determine the value generated from innovation and to assist in value sharing. In short, cost too quickly becomes the preeminent concern during contract negotiations, and other critical drivers of success including quality, service, and innovation are given less attention than they deserve. To enable a successful, mutually beneficial relationship, both consumers and providers must carefully consider each value driver, both when selecting a partner and importantly when negotiating and drafting the terms and conditions of the partnership agreement. A Model for Successful IT IT outsourcing success is based on a few critical success factors: A sound outsourcing business strategy must be developed, understood and agreed upon. This strategy should be based on business value creation, not simply cost reduction The selected vendor must have the processes, tools and people / skills to deliver value immediately as well as have a business plan to grow and mature continually with market demands Clear service level agreements must be defined, understood and agreed upon, including metrics and measures for quality, performance and schedule A defined transition plan must be developed and put into place to move to the new business model Joint governance procedures must be put in place to ensure quality of service, adherence to local laws, regulations and policies Other actions, including a self assessment, vendor assessment, a review of governance / oversight roles and responsibilities, and maturity models can assist significantly in the IT outsourcing planning process.

5 5 AN EXAMINATION OF THE VALUE DRIVERS BY RANK AND BY CONTRIBUTION TO THE DECISION PROCESS In our survey, respondents ranked Quality as the top value driver, with Cost and Customer Service closely behind. Speed follows, with Relationship Management and Innovation ranked least important. Yet in many cases, further discussion with respondents revealed that the importance of these drivers differed widely with their assigned rank. In each case, lessons can be applied to the contract development and negotiation process to improve the benefit from and satisfaction with the outsourcing relationship for both the consumer and the provider. OUTSOURCING VALUE DRIVERS % OF VOTES BY POSITION 120% 100% 80% 60% 40% 20% 0% 1 Votes 2 Votes 3 Votes 4 Votes 5 Votes 6 Votes Innovation Relationship Management Speed Customer Service Cost Quality Source: IT Value Drivers

6 6 1: QUALITY Value grade: 3.97 / 5.0 Quality is not binary, nor is it static. Both the provider and consumer must anticipate changes in quality requirements and proactively embrace changes to service / product delivery. Key Lessons: CONSUMER Understand and clearly communicate your quality standard. Use your standard in the provider assessment process and eliminate those that cannot, or are unable, to deliver to your standard. Establish a QA process, team and metrics / measures as part of the delivery contract. Allow for change, monitor for a need to change and make changes when needed to continue to meet or exceed the standard. Treat this component in line with the importance you have placed on it. PROVIDER Quality service and products are the most critical measure for winning and maintaining business with your customers. You must understand what your customer means when discussing quality and how they measure it. Outline this understanding in the service contract and support it by visible and proactive processes and people. Through constant measures and reporting, look for improvement in products and services to achieve the quality standard set by the customer. PERCENT OF RESPONDENTS SATISFIED WITH QUALITY OF SERVICE / PRODUCT 5% 21% Yes No Partial Source: IT Value Drivers 74%

7 7 2: COST Value grade: 3.79 / 5.0 Consumers are looking for continuous improvements in efficiency to drive lower operational costs, but many are not seeing these being brought forward, primarily due to contract requirements and constraints. Both consumers and providers are hampered by agreements that fail to encourage the provider to bring forward cost reduction ideas without penalty and to allow sharing of cost savings. Don t let the contract, which is intended to provide value, become an obstacle to achieving that goal. Key Lessons: CONSUMER To achieve and maintain a competitive cost position, the consumer must be willing to assess and change organizational behaviors to partner with providers and to create an environment where both consumer and provider benefit from cost reduction ideas. PROVIDER Because cost-sharing restrictions apply only to the incumbent and not to the challenger, providers must provide the best value for cost at contract initiation and build in cost reduction metrics with a share option. Creating this win/win for both parties safeguards the customer s business, improves customer relations and loyalty, and increases competitive barriers. PERCENT OF RESPONDENTS SATISFIED WITH COST OF SERVICE / PRODUCT PERCENT OF CONSUMERS THAT SHARE COST REDUCTION SAVINGS 21% 16% Yes, satisfied No, unsatisfied Partially satisfied 11% 5% Yes - do share No - do not share Other Source: IT Value Drivers Source: IT Value Drivers 63% 84%

8 8 3: CUSTOMER SERVICE Value grade: 3.68 / 5.0 Although respondents provided relatively high marks for Customer Service and indicated that they were less likely to make trade-offs in the service model, 84% of the respondents indicated improvement is needed. This suggests that Customer Service is an area of opportunity for providers to develop competitive advantage. Specifically, consumers cited an interest in improved service processes (quality, speed, consistency) and in improved customer relations focus (dedicated account management, improved customer facing skills, prompt communications). Survey respondents ranked Customer Service nearly as important as Cost. How service is provided and how it is perceived should be given as much attention as Cost when choosing a provider, negotiating the contract, and during regularly scheduled provider review sessions. Key Lessons: CONSUMER During the RFP process, be clear on the service model that is needed to support your business. Include specific measures and metrics aligned to the importance the service model (processes, personal relationships and communications) has to your operation and/or customer base. Clearly communicate the expected company-to-company interface encompassing both strategic and tactical needs (both in terms of executive level / escalation and operational execution). Require the provider to outline key processes and metrics, relationship diagrams and communications schedules. PROVIDER During the RFP process, pay particular attention to decision and measurement criteria relating to customer service. Align the customer-facing elements of your service model to address the unique needs of the customer and put in place agreed metrics that demonstrate adherence to process. Cultivate and maintain personal relationships both as a barometer to services issues and as a means of understanding service weaknesses that may invite competitive entry. PERCENT OF RESPONDENTS INDICATING PROVIDER SERVICE MODEL ALIGNED TO NEED 5% 11% Yes, service model aligned No, improvements suggested Other Source: IT Value Drivers 84%

9 9 4: SPEED Value grade: 3.5 / 5.0 A majority of respondents reported satisfaction with speed of services. Still, consumers cited a need to increase service transparency, improve communications and problem solving actions, and improve overall process. Though respondents ranked Speed fourth overall in the value driver ranking, they indicated a willingness to make changes to increase velocity of delivery. In a multiyear contract, we expect Speed to become more important in year two and beyond as markets change, cost pressures mount and the need for new products and services are seen as enablers for increased market share and shorter ROI. Key Lessons: CONSUMER If speed is critical, only consider providers whose initial offerings meet your needs out of the box and who have demonstrable process efficiencies that compress idea-to-product delivery timelines. Consumers must also consider Speed along with Innovation; being fast with the right product is a winning combination. PROVIDER Process efficiency is critical to meet expectations and demand. If the customer s business model is dynamic (changing product / service needs), the provider must either be actively involved with key business leaders to reduce lead time for product / service development or be actively searching for and presenting complementary products / services to augment their offerings. PERCENT OF RESPONDENTS SATISFIED THAT PROVIDER HAS BEST PRACTICE TO DELIVER QUICKLY PERCENT OF RESPONDENTS SATISFIED WITH SPEED OF SERVICE 5% 42% 53% Yes, provider has best practice No, provider does not have best practice Non-applicable Source: IT Value Drivers 11% 21% Yes, satisfied with speed of service No, dissatisfied with speed of service Non-applicable Source: IT Value Drivers 68%

10 10 5: RELATIONSHIP MANAGEMENT Value grade: 3.31 / 5.0 Despite the above average value grade, nearly all the respondents were dissatisfied with the level of Relationship Management being provided. To address what appears to be a lack of partnership and understanding of business needs, respondents expressed a need to: Have more frequent and regularly scheduled meetings to discuss strategy and service improvement Improve management of overall operation (multiple service groups / teams) with a single point of contact Minimize turnover in Account Management to enable leveraging of business knowledge and relationship investment Key Lessons: CONSUMER Although Relationship Management is low on the decision value ladder, you must evaluate critical providers in the selection process as you would a business partner. This is a partnership that is meant to deliver specific value to your enterprise. Business dynamics require a broad set of skills to resolve problems and the resources to bring them quickly into play. Your ability to reach out to a specific individual who you know and who knows you and your business is essential in averting problems, or solving them quickly when they arise. PROVIDER Develop and maintain a personal relationship with key members of the customer organization. This relationship can provide an added component of the competitive barrier to entry but, more critically, it enables a broader understanding of the business enterprise and the problems it faces as well as advanced warning of emerging needs and opportunities. As IT sourcing moves more toward commodity buys, relationships will grow increasingly important in retaining existing clients. PERCENT OF RESPONDENTS SATISFIED WITH RELATIONSHIP MANAGEMENT 5% Yes, satisfies No, does not satisfy No answer Source: IT Value Drivers 95%

11 11 6: INNOVATION Value grade: 2.39 / 5.0 Though respondents ranked Innovation the lowest among the six outsourcing value drivers, they consistently noted the lack of Innovation as a constraint to achieving satisfactory results in the other five value drivers. Nearly 80% of the respondents want providers to increase the level of innovation introduced. However, they have either failed to provide incentives to encourage innovation in their contracts or they believe that the outsourcer is unable or unwilling to bring ideas forward. Consumers expect providers to present innovative ideas on a proactive basis and to expand the scope to the entire IT and business domain. Yet, they said that when Innovation is introduced, it is typically reactive, limited to the areas under the direct control of the outsourcers, and / or of minor value. To drive Innovation, specific wording must be included in the outsourcing contract and progress must be regularly monitored. Key Lessons: CONSUMER Technological change related to IT outsourcing is dynamic and accelerating. contracts, even those for short durations, are likely to outlive the useful life of the technology or service being purchased. To address this, include innovation upfront, outline specific innovation goals (e.g. number of ideas, continuous cost improvement, and continued quality improvement) and monitor them regularly. PROVIDER Innovation in the IT Sourcing domain is a fundamental requirement. Your willingness and ability to adopt new technologies and processes provides critical competitive and cost advantages and is the cost of entry to compete in this space. When approaching new clients (or existing clients during re-negotiation), bring your ability and success in innovating to the forefront. Keep in mind that if you are unwilling or unable to bring innovation into play, your competition will use this as a competitive advantage. PERCENT OF OUTSOURCERS THAT INTRODUCE INNOVATIONS INTO THE OPERATIONS 26% 26% Yes, Innovations were introduced No, Innovations were not introduced Some Innovation was introduced Source: IT Value Drivers 47%

12 12 AlixPartners conducts a broad range of surveys and research in industries around the globe. To learn more about our publications, or to contact the AlixPartners professional nearest you, please visit AlixPartners is a global firm of senior business and consulting professionals that specializes in improving corporate financial and operational performance, executing corporate turnarounds and providing litigation consulting and forensic accounting services when it really matters in urgent, high-impact situations.