Maximising value in IT outsourcing

Transcription

1 24, rue Salomon de Rothschild Suresnes - FRANCE INEUM Kurt Salmon M100 Y100

2 24, rue Salomon de Rothschild Suresnes - FRANCE INEUM Kurt Salmon M100 Y100 Introduction Outsourcing is not a new concept, with organizations using it as a mechanism to reduce cost, to focus investments on core business initiatives and benefit from industrial IT processes. Traditionally, value has been generated by moving work to lower costs locations without strong focus on measuring end to end costs and defining transformation objectives, productivity gains and value indicators. With cloud computing reaching its maturity level, this approach will be required to change. Each CIO has to define the organization value indicators expected from the outsourced services and manage them through the contract duration. The ideas presented in this paper allow CIOs to identify how to define them in order to maximize the value of their outsourcing agreements over the lifetime of the contract. Eric Tirlemont Kurt Salmon Global CIO Advisory Practice Director

3 The path around is well worn, particularly around the what, where, and who questions. The real challenge facing CIOs is about delivering the maximum value from over the life of a contract. Value realisation is mainly focussed on the initial cost savings associated with the outsourcing activity, typically over the first months of the contract. Where efforts are made to measure value beyond this period, practices are at best rudimentary and the results are not greeted with great levels of confidence. Given most outsourcing contracts are in the 5 to 10 year range it is surprising that there is not more effort placed in determining value over the life of the contract. In not measuring value, CIOs make their lives more difficult by upholding the perception that IT is no more than a support act rather than an essential strategic function within the business. This paper seeks to highlight the challenges CIOs face in determining the value of their outsourcing contracts and presents ideas for maximising the value they create. Outsourcing trends Traditionally, outsourcing has been used as a mechanism to reduce costs. Whilst this still holds true CIOs are looking at outsourcing to address other business challenges. Access to key skills, flexible resource pools and new technologies (such as cloud) are driving thinking towards outsourcing. Outsourcing will continue to grow but the large deals that have typically characterised will probably reduce in number as organisations look to outsource either standalone IT services or complete business processes, including the IT component. This will increase complexity, and with it, the risk of failure to deliver suitable returns if the value drivers are not fully understood and addressed. To stand a chance of maximising value in this ever more complex landscape, CIOs need to understand the challenges that impede value creation in order to exploit the opportunities presented.

4 Core challenges preventing value maximisation Determining value is of course contextual, based on the internal and external influences acting on an organisation. Whilst the challenges described here are generic, their impact will differ from organisation to organisation. Ensuring the retained organisation effectively manages the supplier Many organisations fail to ensure the retained IT function has the appropriate skills to manage the supplier. This can mask issues in the short term, but over the longer term, value will start to erode through more change control, lower quality, and higher charges. Organisations tend to point the finger of blame for these issues towards the supplier but fail to diagnose or deal with the root cause of the problem within the retained organisation. For example, one UK retail bank was recently preparing to outsource legacy applications to an offshore provider. Although the organisation dealt with numerous suppliers, they didn t actively manage them. The internal skills were geared towards writing code and not formally managing suppliers. Hence for the CIO to achieve the targets in the business case he had to up-skill the IT group in the fundamentals of commercial management across the development value chain. Don t outsource your problem To drive maximum value from outsourcing, a CIO needs to ensure the internal processes and structures are fit for purpose. This frequently goes beyond the borders of the CIOs immediate control, but if not managed properly the value of outsourcing will diminish. Therefore, business partners should be deeply embedded in outsourcing decisions, especially as outsourcing moves up the value chain from to Business Process Outsourcing. The same UK bank mentioned earlier had a poor software development lifecycle process, frequently resulting in many change controls and poor quality deliverables. Only the code development part of this lifecycle was to be outsourced, but the CIO had to address some structural weaknesses feeding into the development process. The poor quality of business requirements, poor governance processes and weak project management practices were pushing the code development to start before the design was complete. Failure to address the root causes would merely result in transferring the same problems faced internally to a supplier. Change requests would continue to be high, and deliverables would continue to be of poor quality, resulting in an outsourced service that failed to be cost-effective over its life. This scenario is not uncommon. All too often outsourcing makes business sense, but the more difficult challenge is to implement necessary changes to the underlying internal processes to maximise value from the new operating model.

5 Measuring value beyond initial savings For many organisations, outsourcing IT services reaps short term cost savings simply by using cheaper resources. The real challenge comes when the core objective is not a direct financial measure; for example, access to new skills or new technologies. A CIO must articulate and measure how indirect benefits drive value for an organisation and be able to measure them. The starting point is the business case, which must contain a clearly articulated view of how value will be created for the organisation through outsourcing. However, corporate objectives and value drivers are typically not static and change over time. By contrast, a business case invariably reflects a position at a specific point in time. Therefore CIOs must be able to identify what levers to pull and how to continue to deliver value once reality and the business case diverge. Once initial cost savings have been banked, the organisation will move on but the CIO will still have many years of an outsourcing contract to run and must have a tangible way to demonstrate continued value from the deal. Ensure the commercial structure supports the business objectives Contractually, many CIOs focus on getting the best (which often means the lowest) price and defining a complex array of SLAs to drive a supplier s performance. Whilst price is important in achieving value, many CIOs forget that a supplier will provide similar services to other customers, and that collectively these organisations will compete for valuable supplier resource. Clearly, being assigned lower skilled resource is not going to drive the value that is expected. Moreover, huge effort is often expended in creating a suite of SLAs that are invariably focussed on supplier performance. But they are often not dynamically linked to business priorities as they change over the timeframe of the contract. Indeed value derived from SLAs will typically be achieved after the first months of a contract. Given value assessment usually stops at this juncture it is questionable how SLAs add true value to the business. The challenge is to develop a business case and commercial structure that is flexible, aligned with business objectives, and which motivates the supplier to deliver against the contractual targets. Equally, organisations must retain the ability to direct and manage supplier delivery performance over the full term of the contract. Measuring value needs to be core to the business case with a clearly articulated view of how value will be created for the organisation through outsourcing services.

6 Steps to maximise value from outsourcing This section identifies four principles to help CIOs address their set of challenges and outlines steps to enable organisations to maximise the value they receive from outsourcing. Define, capture and build measures for a changing world Value is an evolving concept over the life of an outsourcing contract. To have confidence in the value of outsourcing CIOs need to: Move away from the complex basket of SLAs. Focus on only a few core measures linked to the strategic aims of the CIO and, ultimately, to those of the business. These should form the basis of the business case and should not be limited to the initial savings. Develop a clear sense of how value is created through these core measures and what levers can be pulled to alter performance, reflecting these in the business case. Measure the primary drivers. Monetary benefits may be a 2nd or 3rd level benefit (e.g. the primary benefit may be about reducing process times). Create measures that can be captured and analysed. Fact-based as opposed to intuition! These do not have to be financial in nature. Build or buy tools and develop processes to capture data on performance and value. Develop the internal capabilities CIOs must ensure the capability of the organisation is aligned with and supports the objectives of the outsourcing arrangement. To achieve this a CIO needs to: Build a learning and adaptive organisation to incorporate best practice from suppliers to continually improve the organisation Determine the skills needed and assess where this best resides supplier or retained organisation Align internal processes to support the outsourced service. All too often this is where value leakage occurs; therefore it is imperative CIOs undertake a transformational programme to align the retained organisation to the new service. Work in true partnership with suppliers and business stakeholders as they are now critical to the success of delivering a service that is value enhancing. This is arguably the most difficult one to get right as the changes required may transcend the traditional IT domain, moving into the business arena. Recognising that outsourcing can result in improved ways of doing business as well as providing IT services should be a lever that is exploited across the business and used as a means to raise awareness, interest and ownership. The key is about being sensible with what can and what should be measured to develop a clear sense of what is driving value. CIOs should not stick rigidly to a set of measures defined at a point in time but should build a contract that can evolve over time with the supplier. Key to this is building a close, flexible partnership with the service provider.

7 Work in partnership with your suppliers The standard response from many CIOs and IT leaders regarding outsourcing is.i don t care how you do it, just do it.. But this is wrong! CIOs should care how suppliers do things as this is fundamental to learning about new and innovative solutions. Value can be improved by building a true partnership by: Helping suppliers manage their own attrition rates. Good people want challenging work, but if you only give the supplier mundane tasks their good people will leave. Negotiating a fair price. Beating a supplier down on price may mean you win in the short term, but over the long term the supplier may look for other ways to increase their margin. Developing a partnership charter that both parties sign up to, clearly articulating what each other will provide. For example, seconding resources from suppliers into the business, not just in technical roles, can both inform and increase the standing of the outsourcer. Suppliers should also be pro-active in the relationship rather than merely responding to requests. Suppliers should be encouraged to suggest innovative ways of using IT services to enhance the value that the business receives. Cultural barriers may make this difficult so CIOs should be alert and clear the roadblocks, internal & external, if required. Developing a true partnership fosters closer co-operation and gives access to a much wider pool of flexible resources that can also bring new and fresh ways of doing things to drive value over the longer term. Communicate the achievements Whilst communication doesn t directly build value, it does grab hold of the message and thereby aid the value-add argument. CIOs must be able to articulate the value that outsourcing has delivered, and (more importantly) continues to deliver over the life of the contract. This means: Developing a communication plan, using simple metrics in business language and showing the numbers! Highlighting projects and successes throughout the life of the contract that could not have been achieved without outsourcing (e.g. new skills or innovative solutions) and be able to quantify the impact. IT does not exist in a vacuum and having better communication helps build a body of evidence demonstrating this value-add, which might otherwise be ignored. CIOs must be able to articulate to peers and business colleagues the value that outsourcing has delivered, and (more importantly) continues to deliver over the life of the contract.

8 Conclusion To maximise value from outsourcing, CIOs must take a holistic view. The challenges and the principles to improve value are inter-related. Context is all important as this dictates the enormity of the challenges and therefore what needs to be done to counter them. Maximising value is about staying focussed over the life of the contract, adjusting the concept of value in line with changing business objectives, and developing closer partnerships with suppliers.

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