Swiss IT-Outsourcing Survey 2003 SF-FS Schweizer Forum für Kommunikationsrecht simsa swiss interactive media and software association ZIK Zentrum für Informations- und Kommunikationsrecht der Universität Zürich March 2003
Introduction Survey: This Survey was conducted in January/February 2003 by the Zentrum für Informations- und Kommunikationsrecht Universität Zürich in cooperation with simsa (swiss interactive media and software association) and the Schweizer Forum für Kommunikationsrecht under the supervision of Prof. Dr. Rolf H. Weber, Prof. Dr. Reto M. Hilty and Dr. Rolf Auf der Maur. Analysis: The analysis of the aggregated results of the survey was performed by Arthur D. Little (Switzerland AG) under the direction of Dr. Herbert Wanner. Contact: Dr. Herbert Wanner, Seestrasse 185, 8800 Thalwil, 01 722 9818, @ wanner.herbert@adlittle.com. Presentation: The survey was presented at the occasion of the IT-Outsourcing Conference in Zurich, March 19th, 2003. Sponsors: The IT-Outsourcing Conference and the Swiss IT-Outsourcing Survey were supported by: 1
Agenda 1 About the survey 2 Management summary 3 Results of the survey 4 Best practice in IT Outsourcing 2
About the survey 1 The survey exhibits the IT Outsourcing practice behaviour of 46 of the Top 200 companies in Switzerland regarding IT Outsourcing Allocation of the companies to different industries Others 19% Industry 11% Transport 11% Retail 7% Banking 12% 9% Insurance 11% Telecommunication 9% Food 11% Health-care The survey was conducted and analysed in Spring 2003 The illustrated results are based on a standardised questionnaire The questionnaire was sent to 93 companies out of the Top 200 in the Swiss Market It was answered by 46 companies, the return rate therefore being 49% The addressee of the questionnaire was the Head of the legal department or the Chief Information Officer Total companies addressed: 93 Total companies participating: 46 Return rate: 49% 3
Agenda 1 About the survey 2 Management summary 3 Results of the survey 4 Best practice in IT Outsourcing 4
Management summary 2 Most of the companies have a long history of IT Outsourcing projects: as a consequence they are now much more realistic about it Current Awareness and Objectives Return on Investment Most of the companies have outsourced IT systems once or more. The areas being outsourced are selected case-by-case. With regard to the objectives of IT Outsourcing companies in general have become more realistic. Cost cutting is not the only objective any more More often than in the past, companies define qualitative objectives for their activities. This makes it more difficult to compare objectives and results In 54% of all organisations Outsourcing was only partly successful or not successful at all One of the key learnings was: Outsourcing processes are like a vectorial due diligence you know your own business better afterwards The aggregated amounts spent on outsourcing are considerable. 85% of the companies spend more than 1 million Swiss Francs for IT Outsourcing overall Reviewing their projects only half of the companies resultet in a positive return on investment. For 36% of them the return exceeded one million Swiss Francs Despite the fact that 29% of the enterprises initially defined cost reduction as an objective of IT Outsourcing, only 16% have actually saved money as a result There are many reasons why Outsourcing projects have not shown a positive return on investment In most of the companies, Outsourcing projects have taken longer than estimated 5
Management summary 2 Many companies are not aware of the risks associated to IT Outsourcing. It must be a very well planned and managed process Relationship to Outsourcing Partner Future Outlook 70% of the companies would do another Outsourcing project. However, only 56% would continue with the same service provider 21% of the companies feel constrained by the current contracts with the vendors Many companies are not aware of the insurance coverage of their vendor. The risks resulting from this situation must not be underestimated One third of the companies have never outsourced IT systems but are considering to do so. They are in different stages of planning A number of these companies plan to start an Outsourcing project even in the near future Best Practice in IT Outsourcing Outsourcing typically contains five distinct phases. It has a strategic as well as an operational dimension with a continuous feedback loop The Outsourcing Strategy is a dynamic process continuously adapting to changing requirements and searching the best partner for a particular IT issue The selection of components to be outsourced should be done one-by-one based on a business case for each step Implementing an Outsourcing initiative requires careful management. Review results must be fed back to the IT Strategy department 6
Agenda 1 About the survey 2 Management summary 3 Results of the survey 4 Best practice in IT Outsourcing 7
Agenda 3 Results of the survey 3.1 3.2 3.3 3.4 Current awareness and goals The return on investment A view to the vendors What will the future bring? 8
Results of survey Current awareness and goals 3.1 Most of the companies have outsourced IT systems once or more. The areas being outsourced are selected case-by-case Areas outsourced by the companies Did not outsource IT systems 5% 25% Software Management 24% Data Centre 19% Network (voice and/or data) Three thirds of the companies have outsourced all IT systems or parts of it 69% of them have performed more than one Outsourcing project Almost one third have considered or are considering Outsourcing all IT systems or parts of it in the future 27% 68% 11% 8% Helpdesk Distributed systems Mostly data centres, networks and applications are outsourced 6% Security Considered or are considering to outsource IT systems 1% Finance & Accounting Systems 6% Others 9
Results of survey Current awareness and goals 3.1 With regard to the objectives of IT Outsourcing companies in general have become more realistic. Cost cutting is not the only objective any more Objectives influencing the decision for IT Outsourcing 30 29% of the companies identify Save Costs as the main reason for IT Outsourcing 20 Many companies try to become more efficient and flexible through IT Outsourcing 10 More often than in the past, companies state qualitative reasons as a basis for an IT Outsourcing decision: 0 29% 22% 18% 8% 7% 6% Decrease costs Increase flexibility Increase efficiency Achieve better management Get Management to concentrate less on IT Skills availability 10% Others Achieve better management Getting management to concentrate less on IT Skills availability 10
Results of survey Current awareness and goals 3.1 More often than in the past, companies define qualitative objectives for their activities. This makes it more difficult to compare objectives and results Objectives and Results for Outsourcing activities Results Objectives Decrease costs 29% 18% Increased efficiency Increase efficiency 22% 18% 18% Increased flexibility Increase flexibility 16% Saving money Achieve better management 8% 7% 6% 10% Improved working processes Get management to concentrate less on IT 7% No need for increased IT investm. Skills availability 7% Get mgmt to concentrate lesson IT Others 1% 6% Better management 2% Better security 16% Others 29% of the companies wanted to save cost by IT Outsourcing 16% are saving money as a result 22% of the companies wanted to have more flexibility with the help of IT Outsourcing 18% achieved it as a result 18% of the companies defined higher efficiency as a goal of IT Outsourcing and 18% reached this goal 8% wanted to manage their IT better with the help of Outsourcing 6% reached this goal Sometimes there are even negative results such as Higher administration Higher coordination effort Difficult know-how transfer 11
Results of survey Current awareness and goals 3.1 In 54% of all organisations Outsourcing was only partly successful or not successful at all. There are various reasons for this Reasons Gründe, for Outsourcing warum ein Projekt initiatives die ziele not meeting nicht erreicht expectations hat 46% Outsourcing was successful 50% Outsourcing was partly successful 4% Outsourcing was not successful There are many reasons why Outsourcing has not met expectations: Complex technology Changing requirements Level of service fulfilment, major personnel changes Too expensive It is a never ending project Difficulties with the Outsourcing partner Contract too static not allowing enough flexibility to develop alongside the business Lack of internal know-how over time Lack of flexibility in late stages of Outsourcing 12
Results of survey Current awareness and goals 3.1 One of the key learnings was: Outsourcing processs are like a vectorial due diligence you know your own business better afterwards Why Outsourcing succeeds Lessons learned Competent Partner, good advice Software could be installed and run as planned Continued efforts after initial contract was signed Flexibility in contract and pricing Management relationships were professional Realized cost savings by sell and lease-back of IT assets Obtained a more flexible service at lower cost Set clear objectives and do not allow scope creep Careful evaluation of Outsourcing Transparent communication among partners is key Monitoring of client-team is key Take enough time for due diligence and negotiations Outsource only if you have a detailed understanding of the service aspects and cost structures Define a flexible pricing (e.g. yearly benchmarking of service) and include penalties in the contract Concentrate on business alignment Define SLAs and SLM at an early stage Take cultural differences into account Never outsource a problem or a monopoly Do not underestimate how much knowledge you need internally in order to define requirements 13
Agenda 3 Results of the survey 3.1 3.2 3.3 3.4 Current awareness and goals The return on investment A view to the vendors What will the future bring? 14
Results of survey The return on investment 3.2 The aggregated investments spent on Outsourcing are considerable. 85% of the companies spend more than 1 million Swiss Francs overall Aggregated costs of IT Outsourcing 10 Mio. Most of the companies spend more than 1 Million Swiss Francs for their IT Outsourcing activities 3% of them spend even more than 10 Million Swiss Francs 12% of the companies spend less than 1 Million Swiss Francs 1 Mio. 750 000 500 000 250 000 0 6% 6% 85% 3% The financial data collected cover the total cost spent for IT Outsourcing. 15
Results of survey The return on investment 3.2 Only half of the projects resulted in a positive return on investment. For 36% of them the return exceeded one million Swiss Francs Return on investment Only half of the companies have reached a positive return on investment 52% Of projects have shown return on investment < > < > 10% < > 8% < > 18% > 18% 36% CHF 1 000 000 500 000 250 000 100 000 50 000 Most of the companies calculate a return on investment of more than 500 000 Swiss Francs The period until improvements become effective varies between 0 and 5 years Immediately 15% 1-6 months 15% 6 months 1 yr 37% < > 10% 20 000 10 000 2-5 years 29% 5 years and more 4% 16
Results of survey The return on investment 3.2 There are many reasons why Outsourcing projects have not shown a positive return on investment Reasons why Outsourcing projects have not shown a return on investment 17% IT problems 25% Vendor problems 17% Poor communication between vendor and advisor 8% Lack of communication between departments 8% Management decisions or change over Most of the companies call vendor problems in general as the main reason for an unsuccessful Outsourcing project 17% identify problems with the IT infrastructure as a reason for the project failure Poor external and internal communication is another reason for failed Outsourcing projects 8% Lack of understanding of the contract process 8% Market influences 8% Contractual agreements 17
Results of survey The return on investment 3.2 In most of the companies Outsourcing projects have taken longer than estimated. There is a variety of reasons for it Duration of Outsourcing projects and why they were delayed Effective project duration 70% 15% 15% < > < > < 6 months 1 year 2 years Reasons for project delay UMTS TIME Most of the Outsourcing projects take between 6 and 12 month In 40% of the companies, the Outsourcing project has taken longer than estimated Reasons for the delay are Market influences Vendor problems Contractual agreements IT Problems Lack of communication 21% Market influence 21% Vendor problems 21% Contractual agreements 15% IT problems 15% Lack of communication 7% Others 18
Agenda 3 Results of the survey 3.1 3.2 3.3 3.4 Current awareness and goals The return on investment A view to the vendors What will the future bring? 19
Results of survey A view to the vendors 3.3 70% of the companies would do another Outsourcing project. However, only 56% would continue with the same service provider Behaviour for the next Outsourcing project *** *** Reasons to change vendor 8% no 22% maybe 70% would outsource again 25% Too expensive 18% Better vendors in the market 14% Poor service 14% Management expectations not met 14% Better technology know how 12% Poor communications 3% Not enough Return on Investment More than one third of the companies would outsource their IT systems again 22% would possibly do it again, 8% would not do it any more 56% of the companies would select another vendor for their next Outsourcing project There are many reasons for changing vendors Too expensive Better vendors in the market Poor service Management expectations not met Better technology options now Poor communications Not enough ROI 20
Results of survey A view to the vendors 3.3 21% of the companies feel constrained by the current contracts with the vendor Reasons for the client to feel constrained by the Outsourcing contract Potential write-off due to early termination Contractual assumptions did not realise as envisaged Flexibility was not reached at reasonable cost Fixed term of contract Long contract (for 7 years) Not enough flexibility built in 21
Results of survey A view to the vendors 3.3 Many companies are not aware of the insurance coverage of their vendor. The risks resulting from this situation must not be underestimated Does the vendor have a professional liability insurance? 47% Yes More than half of the companies do not now whether the vendor has a professional liability insurance or not Only 47% do know that their partner has a professional liability insurance 53% Do not know! 22
Agenda 3 Results of the survey 3.1 3.2 3.3 3.4 Current awareness and goals The return on investment A view to the vendors What will the future bring? 23
Results of survey What will the future bring? 3.4 One third of the companies have never outsourced IT systems but are considering to do so. They are in different stages of planning Stages of planning Identified a need Spoke to vendor and / or consultants Discussed in mgmt board meetings Drafted project briefings 18% 42% 27% 3% 3% 2% 2% 3% Briefed vendors Briefed law firm Appointed a vendor Signed contract with vendor 27% of the companies have never outsourced However, of these 27%, 47% have previously considered Outsourcing and decided against it The other 53% are currently considering Outsourcing Most of these companies are in the stage of speaking with vendors or consultants and have discussions in their management board meetings 24
Results of survey What will the future bring? 3.4 A number of these companies plan to start an Outsourcing project even in the near future Timeframe to start an Outsourcing project 61% No plans 16% 6% 11% 6 months 1 year 2 years 6% 53% of the companies are currently considering an Outsourcing in the future 5 years Few of the companies that are considering starting an Outsourcing project plan to do so in the near future Their expectations are always the same Cost reduction 36 % Efficiency increase 27 % Better management 14 % Getting management to concentrate less on IT 9 % Flexibility 9 % Skills availability 5 % 61% of the companies that are considering Outsourcing have no concrete plans 25
Agenda 1 About the survey 2 Management summary 3 Results of the survey 4 Best practice in IT Outsourcing 26
Results of survey Best practice in IT Outsourcing 4 Outsourcing typically contains five distinct phases. It has a strategic as well as an operational dimension with a continuous feedback loop The five phases of Outsourcing Define Outsourcing strategy Select the Outsourcing partner Implementation Run Review Strategic dimension Operational dimension Clarify reasons for Outsourcing Identify and commit stakeholders Develop Outsourcing objectives and strategy Perform Cost-Benefit analysis Define project plan Develop requirements specification Evaluation of long list Conduct RFQ process Develop short list Find Best Fit Outsourcing partner Negotiate and finalise contracts Define new processes Develop detailed specification for Outsourcing Define and implement SLAs and Service Level Management Prepare organisation for new processes Implement new processes Manage Outsourcing Partner Control Service Level Agreements Decide on upgrades/functional extensions Investment decisions Evaluate results with respect to initial objectives Evaluate planned vs. actual cost Review objectives Review/re-negotiate contracts Extend/maintain/ter minate relationship with OS 27
Results of survey Best practice in IT Outsourcing 4 The Outsourcing strategy is a dynamic process continuously adapting to changing requirements and searching the best partner for a particular issue The strategic dimension of Outsourcing Define Outsourcing strategy Select the Outsourcing partner Strategic dimension The strategic decisions regarding Outsourcing are typically done by the IT strategy department The Outsourcing Strategy must deal with all aspects of Outsourcing as well as the components to be outsourced The selection of components to be outsourced should be one-by-one based on a business case for each one, i.e. networks, help desk, applications, processes Selecting the Outsourcing partner must be a process which aims at continuously evaluating the existing and/or new partners 28
Results of survey Best practice in IT Outsourcing 4 The selection of components to be outsourced should be done one-by-one based on a business case for each step The decision for components to be outsourced The strategic decisions regarding Outsourcing are typically done by the IT Strategy department Degree of business influence 1 2 3 4 5 Component A Component C Component B Component D The Outsourcing Strategy must deal with all aspects of Outsourcing as well as the components to be outsourced Selecting the Outsourcing partner must be a process which aims at continuously evaluating the existing and/or new partners 1 2 3 4 5 Economical potential 29
Results of survey Best practice in IT Outsourcing 4 Implementing an Outsourcing initiative requires careful management. Review results must be fed back to the IT Strategy department The operational dimension of Outsourcing Feedback into IT Strategy Implementation Run Review Operational dimension The operational dimension of Outsourcing is typically done by a project or delegates of the line organisation For each Outsourcing initiative a Service Level Management must be set up involving all concerned parties Careful preparation of the organisation for the new processes is crucial The review process must be a periodic task whereby the Outsourcing results are evaluated against the initial objectives and fed back to the IT Strategy department 30