Group IT Outsourcing and Offshoring A Case Study: Zurich Financial Services Sechster Schweizer Ökonomentag Michael Paravicini Chief Information Technology Officer Zurich, 4 March, 2005
Agenda 1. Zurich - Facts and Figures 2. Group IT Strategy 3. Outsourcing Framework - Key Drivers to Outsource - Real or Perceived Threats to Outsourcing - Knowledge Transfer / Retain Intellectual Capital - Successful People Transition and Retention 4. ZFS Outsourcing Initiatives 5. Summary and Lessons Learned 2
Zurich 2004 Facts and Figures USD 49.3 Billion Premiums ~60 000 Staff USD 2.6 Billion Net Operating Profit Main Markets (on basis 2003 GWP): - No. 2 worldwide, General Corporate - No. 4 General Insurer in Europe - No. 4 General Insurer in US - No. 2 in Switzerland, General Ins. - No. 4 in Germany, Life and General Ins. - No. 3 in UK, General Ins - Farmers is No. 3 in US (Personal) - No. 2 in US Property & Casualty - Commercial 3
Global Zurich IT End of 2002 7 650 IT Staff Globally over 30 CIOs Challenges: - no global strategy - few synergies - limited knowledge transfer - no global sourcing - very high fixed costs - outdated infrastructure - no standards or roadmap Off-shoring: several country-specific initiatives, without coordination through Group IT Outsourcing: several attempts without agreement 4
Zurich Infrastructure Roadmap 2002 USA Europe Los Angeles Mercer Island Grand Rapids Baltimore Columbus Oklahoma City Isle of Man UKDC Dublin Benelux Deutscher Herold Schlieren/Zürich Wien Milano Barcelona Lissabon 6 Large Data Centers heavily decentralized infrastructure and IT-units 5
Significant Turn-around Achieved within 18 Months IT-Costs IT-Staff Global Data centers Global Sourcing contracts Reduced by 7 650 >20% 6 3 550 2 3 0 Further strategic results Global IT-Organization integrated in Group Strategy Global Sourcing Strategy defined Global Outsourcing of Desktop-Services agreed with IBM Network and Network Management Europe outsourced to Equant Global Application Development and Maintenance outsourced to CSC 6
Agenda 1. Zurich - Facts and Figures 2. Group IT Strategy 3. Outsourcing Framework - Key Drivers to Outsource - Real or Perceived Threats to Outsourcing - Knowledge Transfer / Retain Intellectual Capital - Successful People Transition and Retention 4. ZFS Outsourcing Initiatives 5. Summary and Lessons Learned 7
Group IT Strategy Overview of Key Activities A. Consolidation of Infrastructure - Infrastructure optimization - Transformation of decentralized to centralized Infrastructure - Refresh of key technology components - Review of Global Sourcing Strategy - Change to on-demand computing A. B. B. Group IT Governance - Implement new GIT Delivery Model - Introduce global process framework - Improve IT budget & financial control - Develop new pricing model for Group IT - Group IT Governance E. Risk Management - Disaster Recovery and BCP - IT Security Strategy - Operational Risks - Regulatory and legal risks E. Focus on Business Partners D. C. C. Application Portfolio Review - Reduce TCO of legacy applications - Application landscape consolidation - Application off shoring/outsourcing - SAP consolidation strategy - Prioritization of application portfolio D. Service Delivery/ Business Alignment - Performance Measurement - Sustained high service delivery / availability - Demand management - Ensure alignment to business strategy 8
Agenda 1. Zurich - Facts and Figures 2. Group IT Strategy 3. Outsourcing Framework - Key Drivers to Outsource - Real or Perceived Threats to Outsourcing - Knowledge Transfer / Retain Intellectual Capital - Successful People Transition and Retention 4. ZFS Outsourcing Initiatives 5. Summary and Lessons Learned 9
Direct Offshoring vs Outsourcing Outsourcing services transfers the responsibility of delivery and resourcing to an external suppliers Offshoring - services are delivered from centers in countries remote from client s location often to low wage countries ZFS opted for Global outsourcing as the risk of offshoring was too big: - No incentive for staff to transfer expertise - loss of strategic knowledge - Management of skill transfer at own risk - No internal expertise on off shore countries - difficult to manage - Cultural and language barriers - Inadequate vendor presence onshore - increased operational complexity Outsourcing can support a broader global delivery strategy, not simply to cut costs 10
50% of all Outsourcing Transactions Fail. Gartners research state that 50% of outsourcing deals fail, this is due to: - Inadequate contracts that do not contain industry standard terms and conditions - Contracts that fail to include clear Statements of Work, which result in misaligned expectations - Pricing that is skewed in either the service provider s or customer s favor, and - Inadequate post-contract governance However, TPI The Global Sourcing Advisors, note that based on their experience outsourcing transactions with precisely designed contracts and expectations that are well managed have a <5% failure rate! 11
Manage Expectations Be Clear on Objectives (Gartner Drivers to Outsource Applications) Reduce costs Improve service levels to end users Focus on core business Scalability/flexibility of application resources/capacity Upgrade application quality, processes, methodologies Access to critical technical skills/resources Optimize performance of applications staff Reduce applications staff/headcount Move from customized to standardized platform Access to industry or process skills Improve speed to market Enhance e-business applications Technology transformation (re-host, re-platform) Take advantage of offshore delivery models CEO CFO CIO BU Source: Gartner 2003 AO User Research (preliminary) (n=106) 80% 77% 72% 72% 72% 70% 65% 63% 55% 51% 46% 46% 35% 15% 12
Real or Perceived Threats to Outsourcing raised by all Stakeholders Staff - Job security - Aggregator rather than Program Manager - Off-shoring Country Management - Loss of control - Corporate Center Influence - Lock in to one single Provider / Dependency Business - Loss of differentiation / competitive edge - Disruption - low productivity during Transition Increase of Overhead / Administration - Break of a highly integrated Process 13
Retaining Critical Business and Application Skills is Key! Business Business Analysts Program Mgt Application Service Provider Relationship Mgt I.T. Application Development and Maintenance Functional Testing User Testing Shared Infrastructure and Services Functions in Operating Model Strategic Planning Tactical Prioritisation Customer SLA Management Architectural Governance Programme Management Controlling Service Mgt/Problem Mgt Business Requirements Conceptual Design and Estimate Detailed Design & Estimating Environment Management Project Management Coding/Development UT/AIT/FT/Regression Testing Architecture, Risk, Security and Other Services Platform Optimization Estimation Validation & Approval UAT Implementation Mgt 14
Addressing Staff Concerns Achievement of people related objectives - significant contributory factor in evaluating suppliers Job Security Equivalent Terms and Conditions Maintaining Service All employees had the right to transfer response above target Long term career opportunities for employees transferred to CSC with ongoing redeployment opportunities Special provisions e.g a certain percentage of the transferred are designated as Key Personnel Outsourcing Agreement ensured roles maintained in local environment Contract negotiated Equivalent Terms & Conditions provided in aggregate for the agreed period of time Transition focused on training new processes for retained organization Heightened workflow management discipline to stabilization Manage expectations of Business Partners Career Development Champion Career Development internally - new skills and business knowledge Manage the size of retained organization and role structures/ fulfillment 15
Agenda 1. Zurich - Facts and Figures 2. Group IT Strategy 3. Outsourcing Framework - Key Drivers to Outsource - Real or Perceived Threats to Outsourcing - Knowledge Transfer / Retain Intellectual Capital - Successful People Transition and Retention 4. ZFS Outsourcing Initiatives - ewp Desktop Outsourcing - Application Outsourcing 5. Summary and Lessons Learned 16
ewp Desktop Outsourcing: ZFS Challenge ZFS Challenges Global migration to XP Implementation of ADS and global help desks Standardized ewp Platform Delivery of global and lean processes Vastly improved IT Security Significant savings and switch to unit pricing (on demand) Cost effectiveness Zurich standalone Outsourcing Level of standardization Decision to go for a full Managed Services Outsourcing on a group-wide basis with IBM in December 2003 17
ewp Desktop Outsourcing: Scope of the Agreement Contract duration: > 5 years 7 countries: US, Canada, UK, Germany, Switzerland, Spain, Italy Approximately 60 000 devices globally 3 service blocks - PC/laptop (full life cycle support) - Help Desk - Backup and Printing services, printers Transfer of "in-scope" staff to supplier No Hardware takeover by supplier (complexity, profitability) 18
Key Benefits of the ewp Desktop Initiative Standardized Service and Technology Improved security with the implementation of a standard directory structure Global help desk to provide consistent support around the world Common processes for user policy management and platform support Full Refresh of Core Technology Global migration to XP Security improvements in software updates, patch management, personal firewalls, data security, etc. Full refresh cycle of all desktops, monitors and software Consistent software build for the core countries Lower Total Cost of Ownership Flexibility to adjust costs as demand changes with unit pricing Improved supplier leverage with standard hardware and software images Centralized control over procurement reduces risk of over/under licensing Significant savings over internal migration to XP and Hardware refresh 19
Application Outsourcing: Scope of the Agreement Elements of the application development and maintenance UK Life UK General Germany Contract duration >5 years NA Corporate Switzerland 4 in-scope countries - United States - United Kingdom - Switzerland - Germany (pending final negotiations) NA Consumer Staff transfer of approximately 1 600 Zurich employees and a few hundred contractors 20
Key Benefits of the Application Outsourcing Initiative Increase Flexibility Increase Productivity Reduce Cost Significant global flexibility, on variable component Alignment of Supply and Demand Fast access to required skills Fast ramping up for higher demand Support of fast Business Transformation Faster Time to Market Significant productivity increase over contract term Global Process Framework CMM level 3 Critical Service Level Agreement's & penalties Applications portfolio reengineering Significant savings over contract term Blended rate / Offshoring Platform consolidation and rationalization Cost variability and full transparency Comprehensive SLA and financial reporting 21
Agenda 1. Zurich - Facts and Figures 2. Group IT Strategy 3. Outsourcing Framework - Key Drivers to Outsource - Real or Perceived Threats to Outsourcing - Knowledge Transfer / Retain Intellectual Capital - Successful People Transition and Retention 4. ZFS Outsourcing Initiatives - ewp Desktop Outsourcing - Application Outsourcing 5. Summary and Lessons Learned 22
Key Lessons Learned Build and manage retained Governance model - Reengineer processes to effectively manage the outsourced resources/partner - Build strong central Global Sourcing Team to avoid scope creep Prioritize people related objectives for successful staff transfer and knowledge retention - Negotiate a fair deal to transferring staff - Maintain open and transparent communication E.g. change agent network - Don t overlook Career Development of retained teams Manage Business Expectations and get Business Buy-in early on - Be realistic on outsourcing objectives - Minimize disruption to business not affect the delivery of key IT projects Define the Contract well and manage to objectives - Use outside Advisor for contract drafting and guidance - Establish Baseline Productivity Index using external 3 rd parties to help in assessment and validation 23