Business-Oriented Trends in IT Outsourcing

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Identifies business-oriented trends in Information Technology outsourcing

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Business-Oriented Trends in IT Outsourcing : 

Business-Oriented Trends in IT Outsourcing Alan McSweeney

Objectives : 

January 30, 2012 2 Objectives To identify business-oriented trends in Information Technology outsourcing

Topics : 

January 30, 2012 3 Topics Outsourcing Trends Business-Oriented General IT Trends Transition and Transformation Within Outsourcing Outsourcing and Innovation

ITO Trends : 

January 30, 2012 4 ITO Trends

State of Outsourcing in 2011 : 

January 30, 2012 5 State of Outsourcing in 2011 Survey conducted by the London School of Economics Outsourcing Unit 1,209 Buyers, Providers and Advisors of Outsourcing Services Large study across spectrum of outsourcing industry Provides insight into market trends and therefore should be part of any organisation’s strategy

State of Outsourcing in 2011 : 

January 30, 2012 6 State of Outsourcing in 2011 Key points Outsourcing increasing across all organisation sizes and organisations that do not currently outsource Cost an important factor After cost, track record, culture, global scale and knowledge are important Advisors playing an increasingly important role Outsourcing providers not aware of how they are perceived Focus is on business benefits rather than technology

State of Outsourcing in 2011 – Some Results : 

January 30, 2012 7 State of Outsourcing in 2011 – Some Results Nearly three quarters or organisations plan to increase outsourcing activities 59% of organisations with a shared services function and planning to increase outsoucing significantly Shared services function is an organisational infrastructural stepping stone to outsourcing Key reasons for outsourcing are Cost reduction - 60-76% view as very important, depending on organisation size More effective operations - 50-64% view as very important, depending on organisation size 46% have found outsourcing very effective in reducing costs 35% have found outsourcing ineffective in innovation 31% have found outsourcing ineffective in proving access to new technology 31% have found outsourcing ineffective in proving access to business process knowledge and experience In-house delivery of IT and Business Processes still dominates with outsourcing limited to Help Desk and application development and support Factors rated as very important such as not being convinced of service providers’ capabilities (39%), not being convinced of long-term business benefits (30%), insufficient short-term cost savings (37%) and fear of disruption limiting (31%) decisions to outsource 29% of outsourcing suppliers view buyers not being convinced of their capabilities as being very important - gulf between buyer and provider IT infrastructure and application development and maintenance outsourcing are seen as the core outsourcing areas by buyers 68% already outsource infrastructure and will increase or plan to outsource 62% already outsource application development and maintenance outsourcing and will increase or plan to outsource 63% of medium-sized companies and 44% of large companies say outsourcing has been very effective in reducing costs Buyers rate financial stability, track record and change management/governance process delivery, scale, industry specific knowledge and culture as the most critically important skills of outsourcing suppliers The role of advisor in working with buyers on outsourcing is increasing

Study Respondents’ Profile : 

January 30, 2012 8 Study Respondents’ Profile

Buyers’ Organisation Size by Revenue : 

January 30, 2012 9 Buyers’ Organisation Size by Revenue

Buyers’ Industries : 

January 30, 2012 10 Buyers’ Industries

Outsourcing And Shared Services Delivery Dominate Global Service Models Over Next 3 Years : 

January 30, 2012 11 Outsourcing And Shared Services Delivery Dominate Global Service Models Over Next 3 Years Emerging from the recession, will your company increase / reduce its reliance on the following operating models for general and administrative functions, over the next three years?

Most Organisations With Shared Services Are Increasing Outsourcing : 

January 30, 2012 12 Most Organisations With Shared Services Are Increasing Outsourcing Emerging from the recession, will your company increase / reduce its reliance on the following operating models for your general and administrative functions, over the next 3 years?

Business Challenges Driving Outsourcing In 2011 : 

January 30, 2012 13 Business Challenges Driving Outsourcing In 2011 How Important Are The Following Business Drivers Behind Your Company's IT Outsourcing And BPO Decision-Making This Year? Answer = Very Important

Europeans Want To Drive Out Cost And Globalise – Without Changing Their Processes : 

January 30, 2012 14 Europeans Want To Drive Out Cost And Globalise – Without Changing Their Processes How Important Are The Following Business Drivers Behind Your Company's IT Outsourcing And BPO Decision-Making This Year? Answer = Very Important

Buyers Achieving Modest Business Results Beyond Cost-Reduction With Their Outsourcing Initiatives : 

January 30, 2012 15 Buyers Achieving Modest Business Results Beyond Cost-Reduction With Their Outsourcing Initiatives How Effective Have Your Current Outsourcing Initiatives Been At Achieving The Following Business Benefits To-Date?

What Is Your Primary Sourcing Model For Managing The Following IT and Business Processes? : 

January 30, 2012 16 What Is Your Primary Sourcing Model For Managing The Following IT and Business Processes? Untapped sourcing potential In-house delivery of IT and Business Processes still dominant in 2011

Concerns Holding Back Outsourcing In 2011 : 

January 30, 2012 17 Concerns Holding Back Outsourcing In 2011 How Important Are The Following Factors Preventing Your Organisation From IT Outsourcing Or Business Processes Over The Next 12 Months?

Providers Oblivious To Buyers’ Perception Of Them : 

January 30, 2012 18 Providers Oblivious To Buyers’ Perception Of Them How Important Are The Following Factors In Preventing Your Clients From Outsourcing IT Or Business Processes Over The Next 12 Months? (Outsourcing Providers)

Demand For Core General And Administrative Outsourcing Reaches Unprecedented Levels : 

January 30, 2012 19 Demand For Core General And Administrative Outsourcing Reaches Unprecedented Levels

First-Time Enterprise Buyers Look To Jump Into BPO : 

January 30, 2012 20 First-Time Enterprise Buyers Look To Jump Into BPO % Buy-side organizations looking to outsource for the first time over the next 12 months

Effectiveness Of Current Outsourcing Engagements: Mid-Market Organisations Benefitting The Most : 

January 30, 2012 21 Effectiveness Of Current Outsourcing Engagements: Mid-Market Organisations Benefitting The Most How Effective Have Your Current Outsourcing Initiatives Been For Achieving The Following Business Benefits To-Date? Answer = Very Effective

The Enterprise Market Gears Up For An Aggressive Spike In Scope-Expansion Across Maturing Functions : 

January 30, 2012 22 The Enterprise Market Gears Up For An Aggressive Spike In Scope-Expansion Across Maturing Functions % Buy-Side Organisations Already Outsourcing And Intending To Increase Scope Over The Next 12 Months

After Financial Considerations, Buyers Care (Or Say They Care) About The Governance, Industry Acumen And Cultural Attributes Of Providers : 

January 30, 2012 23 After Financial Considerations, Buyers Care (Or Say They Care) About The Governance, Industry Acumen And Cultural Attributes Of Providers How Important Are The Following Attributes To Your Clients Today, When Considering A Service Provider Relationship For IT/BPO Services?

Providers Underestimate Importance Buyers Place On Change Management, Governance And Culture : 

January 30, 2012 24 Providers Underestimate Importance Buyers Place On Change Management, Governance And Culture

Advisors Are Buoyant About It When Looking At Future Outsourcing Plans : 

January 30, 2012 25 Advisors Are Buoyant About It When Looking At Future Outsourcing Plans Do You Expect Your Clients To Increase Or Reduce Their Activity Across The Following Areas, Over The Next 18 Months? Outsourcing Advisers And Suppliers

Management Consultants Increasingly Influencing Outsourcing : 

January 30, 2012 26 Management Consultants Increasingly Influencing Outsourcing Extent By Which Providers Have Been Seeing The Following Advisors Influence Their Clients' Outsourcing Decision-Making Over The Last Six Months

ITO Concerns : 

January 30, 2012 27 ITO Concerns Transition takes too long Not integrated Business disruptions Increased business risk Lower service quality Treatment of acquired employees Does not deliver value High cost of operation Confusion over what is being sold

Analysis of Some Information Technology Trends : 

January 30, 2012 28 Analysis of Some Information Technology Trends AICPA – Survey of members from 2001 to 2011 on initiatives in IT that are of concern to their 370,000 members http://www.aicpa.org/INTERESTAREAS/INFORMATIONTECHNOLOGY/RESOURCES/TOPTECHNOLOGYINITIATIVES/Pages/2011TopTechInitiatives.aspx Gartner – well known analyst company Two very different views of information technology trends Business-oriented Technology-oriented IT tends to be concerned with technology trends for themselves rather than their application to business IT outsourcing needs to concern itself with business needs rather than just pure IT

Gartner – Key IT Trends 2008 - 2011 : 

January 30, 2012 29 Gartner – Key IT Trends 2008 - 2011 How relevant are these trends to the business and to end-user organisations? Where have the old trends gone to – lack of continuity between years? Are they fads more than trends?

AICPA Top 10 IT Initiatives 2001-2011 : 

January 30, 2012 30 AICPA Top 10 IT Initiatives 2001-2011

AICPA Top 10 IT Initiatives 2005-2011 : 

January 30, 2012 31 AICPA Top 10 IT Initiatives 2005-2011

Security, Privacy, Governance, Disaster Recovery : 

January 30, 2012 32 Security, Privacy, Governance, Disaster Recovery

Data, Information and Document Management/ Integration and Analysis and Related Initiatives : 

January 30, 2012 33 Data, Information and Document Management/ Integration and Analysis and Related Initiatives

AICPA Top IT Initiatives : 

January 30, 2012 34 AICPA Top IT Initiatives Notice any differences? Business-oriented focus of IT initiatives Not concerned with IT plumbing and infrastructure (such as cloud) but on business concerns - running the business - and business-related IT concerns – potential impact of IT systems on the wider business Security, privacy, disaster recovery/business continuity and governance concerns dominate How will pure technology trends assist in delivering these initiatives? Effective IT outsourcing assist with addressing these concerns

Transition and Transformation Within Outsourcing : 

January 30, 2012 35 Transition and Transformation Within Outsourcing Transition is the entire process for assuming operational responsibility for the acquired entity Transition moves the acquired entity organization from its current mode of operation to an integrated managed mode of operation Transition includes the takeover of the “as-is” business and operating environment as well as contractual requirements necessary to facilitate the transfer. Transformation is the implementation of completed integrated solution within a specified time, that lead to entirely integrated operation, service enhancements and/or quality, productivity, technology improvements and cost savings/reductions An approach to transformation is very important for successful outsourcing Transformation is the basis for greater cost savings and innovation Outsourcing without transformation is a risk as what is outsourced can stagnate over time

Transition and Transformation : 

January 30, 2012 36 Transition and Transformation Transition Transformation Steady State Operation Customer Infrastructure and Applications, Staff, Support Processes and Tools Customer Infrastructure and Applications, Transferred and Being Supported by Supplier Standardised Infrastructure Through Refresh, Customer Support Processes and Tools Replaced by Supplier Standards Primary Support Transferred to Appropriate Cost Location Transition and transformation is a process that must be articulated effectively to customers Customer must understand the implications and must accept the process Delays or stoppages affect supplier’s costs

Outsourcing Process : 

January 30, 2012 37 Evaluation and Decision Negotiation and Contract Signing Pre-Operation and Pre-Integration Start Transition Transformation Steady State Operation of Integrated Entity Preliminary Transition Plan Due Diligence Final Transition Plan Integration Preparation Transition Initiation Finalise Integration Solution Architecture Due Diligence Review and Confirmation Transformation Planning Contract Effective Date Service Commencement Date Outsourcing Process Contract Review Transformation Delivery Transition Completed Transformation Completed

Transition and Transformation Management : 

January 30, 2012 38 Propose, Negotiate and Close Planning Research, Analysis, Identification Preliminary Transition and Transformation Plans Due Diligence Final Integrated Transition Plan Transition Transformation Ongoing Operation Transition Initiation/Kick-off Post Contract Verification Solution Handoff Acquisition Management Office Transfer Operation Commencement Preparation Final Integrated Transition Plan Transformation Initiation/Kick-off Stabilisation Standardisation Transformation Close Signed Contract Integration Start Review Transition Criteria Achieved Terms and Conditions Transition to Delivery Handoff Transformation Review Transformation Criteria Achieved Transformation to Delivery Handoff Delivery Quality Review Milestone Handoff Events Key Reporting Events Acquisition Engagement Stage Transition and Transformation Phase Activity Transition and Transformation Management

Types of Outsourcing Arrangement : 

January 30, 2012 39 Types of Outsourcing Arrangement Efficiency/Utility (Make it Cheaper) arrangement outsourcing focuses primarily on cost control and, over time, cost reduction, with the goal of maintaining consistency in the delivery of services Business Enhancement (Make it Better) arrangement is about business productivity. The organisation’s performance, as compared with their competitors, will improve, resulting in movement toward defined business goals Transformational (Make me Money) arrangement is characterised by a partnership between the service provider and service recipient that is focused on innovation and new business, changing the very basis on which an organisation competes Which arrangement are you looking for?

Outsourcing and Innovation : 

January 30, 2012 40 Outsourcing and Innovation Outsourcing is not viewed by buyers or suppliers as a source of innovation Not seen as an agent of change, innovation, transformation, access to new technology Outsourcing is seen as “your mess for less” Buyers neglect the value of transformation and how it can contribute to innovation Providers do not sell transformation as a pre-requisite for innovation as well as further cost savings Companies looking to outsource should look for a transformation vision from their supplier

Business Challenges Driving Outsourcing In 2011 : 

January 30, 2012 41 Business Challenges Driving Outsourcing In 2011 How Important Are The Following Business Drivers Behind Your Company's IT Outsourcing And BPO Decision-Making This Year? Answer = Very Important Innovation, Change, Access to New Technology, Transformation seen as relatively unimportant

Europeans Want To Drive Out Cost And Globalise – Without Changing Their Processes : 

January 30, 2012 42 Europeans Want To Drive Out Cost And Globalise – Without Changing Their Processes How Important Are The Following Business Drivers Behind Your Company's IT Outsourcing And BPO Decision-Making This Year? Answer = Very Important Innovation, Change, Access to New Technology, Transformation seen as relatively unimportant outside Asia

Buyers Achieving Modest Business Results Beyond Cost-Reduction With Their Outsourcing Initiatives : 

January 30, 2012 43 Buyers Achieving Modest Business Results Beyond Cost-Reduction With Their Outsourcing Initiatives How Effective Have Your Current Outsourcing Initiatives Been At Achieving The Following Business Benefits To-Date? Existing outsourcing suppliers not seen as effective in delivering Innovation, Change, Access to New Technology, Transformation

Effectiveness Of Current Outsourcing Engagements: Mid-Market Organisations Benefitting The Most : 

January 30, 2012 44 Effectiveness Of Current Outsourcing Engagements: Mid-Market Organisations Benefitting The Most How Effective Have Your Current Outsourcing Initiatives Been For Achieving The Following Business Benefits To-Date? Answer = Very Effective Existing outsourcing initiatives not seen as effective in delivering Innovation, Change, Access to New Technology, Transformation

After Financial Considerations, Buyers Care (Or Say They Care) About The Governance, Industry Acumen And Cultural Attributes Of Providers : 

January 30, 2012 45 After Financial Considerations, Buyers Care (Or Say They Care) About The Governance, Industry Acumen And Cultural Attributes Of Providers How Important Are The Following Attributes To Your Clients Today, When Considering A Service Provider Relationship For IT/BPO Services? Buyers of outsourcing services do not rate Innovation and Transformation as important supplier attributes

Providers Underestimate Importance Buyers Place On Change Management, Governance And Culture : 

January 30, 2012 46 Providers Underestimate Importance Buyers Place On Change Management, Governance And Culture Buyers of outsourcing services do not rate Innovation and Transformation as important supplier attributes but suppliers still underestimate the important of Innovation

Transformation Process Introduces Standardisation : 

January 30, 2012 47 Transformation Process Introduces Standardisation Takes disparate set of sources and creates standard model Effective transformation is an enabler of innovation with IT function On-demand self-service Elastic Measured and metered usage and pricing Scale Resilience Available Secure From … To …

A Tale of Three Outsourcing Vendors : 

January 30, 2012 48 A Tale of Three Outsourcing Vendors Sample analysis of three vendors involved in outsourcing Dell – small outsourcing practice based on acquisition of Perot Systems and legacy outsourcing business HP – large outsourcing vendor with expanded practice since the acquisition of EDS IBM – large outsourcing vendor By no means exhaustive – there are many outsourcing service providers

Vendor Comparison Summary : 

January 30, 2012 49 Vendor Comparison Summary Outsourcing Revenue for Dell includes all services including outsourcing Dell performing poorly relative to its competitors: Lower margins Lower proportion of service and outsourcing revenues

Vendor Comparison : 

January 30, 2012 50 Vendor Comparison Compare Dell, HP and IBM Comparisons taken from 10-K filings Difficult to make exact comparison Major service-related takeovers Dell acquire Perot in Nov 2009 HP acquire EDS in Aug 2008 Classification of revenues not consistent between years Restatement of revenues Dell 2010 10 K Services revenue for 2009 = 5,351 Services revenue for 2008 = 4,980 Dell 2009 10 K Services revenue for 2009 = 5,715 Services revenue for 2008 = 5,320

Vendor Comparison : 

January 30, 2012 51 Vendor Comparison Which vendor can articulate a transformation vision for your organisation?

IBM : 

January 30, 2012 52 IBM Revenue from Hardware – classified as Systems and Technology Software Services – divided into: Global Technology Services - provides IT infrastructure services and business process services, including outsourcing and other services Global Business Services - provides professional services and application management services Outsourcing classified as: Strategic Outsourcing Services - existing infrastructure Global Process Services - standardised processing platforms and business process outsourcing Gross margins not reported down to outsourcing business area

IBM – Financial Summary : 

January 30, 2012 53 IBM – Financial Summary

IBM – Financial Summary : 

January 30, 2012 54 IBM – Financial Summary

IBM – Financial Summary : 

January 30, 2012 55 IBM – Financial Summary

IBM – Financial Summary : 

January 30, 2012 56 IBM – Financial Summary Consistent performance Balanced across product and service areas C. 22% revenue from outsourcing

HP : 

January 30, 2012 57 HP Revenue from Services – classified under: Infrastructure Technology Outsourcing Business Process Outsourcing Technology Services Application Services ESS – Enterprise Systems, Storage and Networking Software Personal Systems Imaging and Printing Financing Does not report Net Income for individual business lines Earning from Operations rather than Net Income – includes acquired intangible assets, pension settlements, etc. Earning from Operations greater than Net Income by c 30%

HP – Financial Summary : 

January 30, 2012 58 HP – Financial Summary

HP – Financial Summary : 

January 30, 2012 59 HP – Financial Summary

HP – Financial Summary : 

January 30, 2012 60 HP – Financial Summary

HP – Financial Summary : 

January 30, 2012 61 HP – Financial Summary Substantial increase in outsourcing revenue after EDS acquisition Services Earning from Operations % substantially greater than average Earning from Operations % across all business areas Services including outsourcing more profitable

Dell – Financial Summary : 

January 30, 2012 62 Dell – Financial Summary

Dell – Product/Software/Services Breakdown : 

January 30, 2012 63 Dell – Product/Software/Services Breakdown

Dell – Product/Software/Services Breakdown : 

January 30, 2012 64 Dell – Product/Software/Services Breakdown

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