Getting Good And Staying Good At (Out)Sourcing

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There is an increasing and continuing trend of organisations moving from in-house solution delivery to sourcing solutions externally. Organisations are divesting themselves of what they see as non-core functions. This is intended to improve operational efficiencies by using external suppliers’ perceived abilities to provide cost-effective, fit-for-purpose solutions quickly using the right technology. The responsibility and accountability for solution delivery and operation stills lies with the acquiring organisation. An organisation’s outsourcing zone of opportunity represents a challenge for both suppliers and for the acquisition function. Learn lessons from the experience of others to define exactly what you want of your outsourcing arrangement.

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Getting Good And Staying Good At (Out)Sourcing:

Getting Good And Staying Good At (Out)Sourcing Alan McSweeney

Increasing Trend In Outsourcing Non-Core Functions:

January 7, 2014 2 Increasing Trend In Outsourcing Non-Core Functions Increasing and continuing trend of organisations moving from in-house solution delivery to sourcing solutions externally Intended to improve operational efficiencies by using external suppliers’ perceived abilities to provide cost-effective, fit-for-purpose solutions quickly using the right technology Responsibility and accountability for solution delivery and operation stills lies with the acquiring organisation

Acquisition Trends:

January 7, 2014 3 Acquisition Trends Greater level of acquisition Greater acquisition of services with lengthier service relationships “Under the Cover” acquisition/outsour cing in the form of cloud/XaaS Cloud leading to ad hoc proliferation of outsourced services as business functions bypass what is perceived as slow, expensive IT

Divestment Of Non-Core Functions:

January 7, 2014 4 Divestment Of Non-Core Functions Organisations divesting themselves of what they see as non-core functions Application of Coase’s Law on the Nature of the Firm A firm will tend to expand until the cost of organising an extra transaction within the firm become equal to the costs of carrying out the same transaction on the open market When it is cheaper to buy the service externally it will generally be bought externally

Divestment Of Non-Core Functions:

January 7, 2014 5 Divestment O f Non-Core Functions Shrinking core competency focus as organisations move from in-house solution delivery to sourcing solutions externally

(Out)Sourcing Zone Of Opportunity:

January 7, 2014 6 (Out)Sourcing Zone O f Opportunity Outsourcing zone of opportunity represents a challenge for both suppliers and for the acquisition function What is the size of the outsourcing zone? How do you identify your outsourcing zone and then take appropriate action? Fundamental question as to the nature of the organisation

(Out)Sourcing/Acqusition:

January 7, 2014 7 (Out)Sourcing/Ac qusition Greater acquisition of solutions from external suppliers rather than in-house Aimed at improving operational cost-effectiveness and efficiency External suppliers seen as being able to provide solution more quickly, at lower cost and using suitable technology Acquiring organisation still needs to retain accountability for solution

Questions For Acquisition Function:

January 7, 2014 8 Questions F or Acquisition Function What value, if any, is outsourcing creating? What are the measures for evaluating outsourcing success and value and are they being achieved? Who owns and manages the outsourcing relationship(s)? How well are the efforts being managed? What are the risks and are they being managed effectively? What other new outsourcing opportunities should we pursue? How are lessons learned from outsourcing experiences applied elsewhere? How do we decide what other services to outsource? Does the approach to outsourcing help maximise value while minimising risk? Are standard methodologies and approaches used to manage outsourcing selection and implementation?

Avoiding The Outsourcing Value Lost:

January 7, 2014 9 Avoiding The Outsourcing Value Lost Outsourcing Potential Value Lost Outsourcing Potential Value Outsourcing Value Achieved } Lost value due to unachieved planned, savings, inadequate performance, rework and additional costs and inefficiencies Costs more than expected, delivers less than expected Lost value can be 30%-60% of originally expected

What Are The Real Costs Of Outsourcing?:

January 7, 2014 10 What Are The Real Costs Of Outsourcing? How realistic are the costs and benefits of outsourcing? How much is the desire to outsource leading to inaccurate estimates, either deliberate or just wishful thinking? How much is the desire to outsource at any cost causing strategic misrepresentation - deliberate distortion of actual costs?

Errors In Costing:

Errors In Costing Cost estimates are rarely accurate What we know about most projects is that they either or both overrun on costs and deliver less than expected Cost overruns are generally caused by a mix of errors in the initial cost estimates and deliberate distortions in order to cause the decision to be made January 7, 2014 11

Procurement ≠ Acquisition:

January 7, 2014 12 Procurement ≠ Acquisition Acquisition is not just about having a separate procurement function that manages supplier selection/ tendering with narrow an d singular focus on cost Procurement focus leads to a disconnect between selection and subsequent delivery Effective acquisition means taking a much wider focus than just a financial arrangement

All Too Often Procurement Throws A Solution Over The Wall To Delivery:

January 7, 2014 13 All Too Often Procurement Throws A Solution Over The Wall To Delivery Procurement Delivery

Beware Of The Externalities Of Procurement-Lead Acquisition and Outsourcing:

Beware Of The Externalities Of Procurement-Lead Acquisition and Outsourcing Externalities are costs that procurement-lead initiatives give rise to but which are paid for elsewhere Apparent cost-savings from procurement’s viewpoint lead to costs during implementation and operation January 7, 2014 14

It Is Not All About The Money:

January 7, 2014 15 It Is Not All About The Money Successful outsourcing is not about getting the lowest price at all costs It is about getting the lowest price for a sustainable solution under a reasonable contract from a skilled and experienced service provider An outsourcing arrangement is not a once-off economic business deal that automatically implements itself after the parties sign the contract It is an continuous commercial relationship with long-term economic and strategic consequences and impacts for both the supplier and the outsourcing organisation that depends on the choices the parties make and their subsequent behaviour An unwise choice can have serious and enduring negative consequences

Outsourcing Transaction Costs:

Outsourcing Transaction Costs There are (hidden/overlooked) costs associated with sourcing a service externally Selecting the wrong supplier Costs of writing contract Costs of enforcing contract Having a poor service contract that results in hidden cost and/or reduced service Overlooking personnel issues Loosing control over the outsourced activity Management, quality assurance and supervision overhead Implementation and termination costs Loss of flexibility Loss of integration between applications and data Data extraction costs Security framework implementation Effective transition to outsourcing requires full knowledge of costs – current and future January 7, 2014 16

Getting Costs and Benefits Right Is Very Important:

January 7, 2014 17 Getting Costs and Benefits Right Is Very Important Small error in costs will accumulate and become substantial over the life of the contract

A Small Error Over Time Becomes A Big Error:

January 7, 2014 18 A Small Error Over Time Becomes A Big Error Difference between what was expected and the actual costs can exceed the entire original cost where costs are poorly estimated and controlled

Outsourcing Death Spiral:

January 7, 2014 19 Outsourcing Death Spiral Naive And Simplistic Expectations Over-Dependence On Service Provider As Strategic Partner No Governance Model Insufficient Understanding Of Current State Of Services Being Outsourced No Defined Outsourcing Strategy No Service Catalog No Defined Future Operating Model Or Architecture Oversimplification Of Outsourcing Process Underestimated And Unquantified Resource Commitment Invalid Assumptions Unarticulated Expectations Incomplete Contract Incomplete SLAs/OLAs Insufficient Management And Oversight Lengthy Negotiations Unanticipated And Large Out-Of-Scope Services High Management Resources And Costs Backsourcing/ Insourcing/ Circumvention of Arrangement Development Of Parallel IT Services Constant Renegotiations Breakdown Of Relationship

Pitfalls Of Outsourcing:

Pitfalls Of Outsourcing Lack of management commitment to getting outsourcing right Limited or no knowledge of outsourcing methodologies and approaches Lack of an outsourcing communications plan Failure to recognise the business risks of outsourcing No using external sources of knowledge and experience Not allocating effective and skilled internal resources Rushing through the initiative to get the outsourcing arrangement in place at any cost Not understand what it takes to make the supplier productive Poor relationship management with supplier and within the organisation Not communicating the operation of the outsourcing relationship to the organisation January 7, 2014 20

Myth Of Outsourcing “Strategic Partnership”:

Myth Of Outsourcing “Strategic Partnership” Don’t do business with friends Don’t become overly friendly with those you do business with Outsourcing is a business relationship that will come to an end Keep a strong business focus at all times

Making An Explicit Decision On Where You Want To Be On The Outsourcing Spectrum:

Making An Explicit Decision On Where You Want To Be On The Outsourcing Spectrum January 7, 2014 22 Efficiency/ Utility Make It Cheaper Business Enhancement Make It Better Transformational Make Me Money Increased Scope and Complexity of Outsourcing Arrangement Primary focuses on cost control and cost reduction, with the aim of maintaining consistency in service delivery Concerned with organisational productivity and with improving performance leading to achievement of organisational goals Characterised by a greater partnership between the service provider and the organisation that is focused on innovation and new business, changing the way in which the organisation operates and uses technology

PowerPoint Presentation:

Making An Explicit Decision On Where You Want To Be On The Outsourcing Spectrum Efficiency/ Utility Make It Cheaper Business Enhancement Make It Better Transformational Make Me Money Increased Scope and Complexity of Outsourcing Arrangement Focus on Buying Focus on Tactical Sourcing with Some Organisational Restructuring Focus on Strateg ic Sourcing With Substantial Organisational Change January 7, 2014 23

Change In Relative Importance Of OutSourcing Objectives Over Time:

Change In Relative Importance Of OutSourcing Objectives Over Time January 7, 2014 24 You Start Looking to Achieve This You Evolve Over Time Into Looking At Achieve This

Outsourcing Effectiveness At Achieving Business Benefits:

Outsourcing Effectiveness At Achieving Business Benefits January 7, 2014 25

Outsourcing Effectiveness At Achieving Business Benefits:

Outsourcing Effectiveness At Achieving Business Benefits What is initially important is not what becomes important Learn lessons from the experience of others to define exactly what you want of your outsourcing arrangement January 7, 2014 26

Important Supplier Selection Factors:

Important Supplier Selection Factors January 7, 2014 January 7, 2014 27

Important Supplier Selection Factors:

Important Supplier Selection Factors Use these factors to evaluate suppliers and look for proven competence and referenceable delivery January 7, 2014 28

Strategic And Operational Skills Of High Performing Acquisition-Oriented Organisation :

Strategic And Operational Skills Of High Performing Acquisition-Oriented Organisation January 7, 2014 29 Governance Service Delivery Business Vision Architecture Internal IT Function Management External IT Function Business Alignment Business System Thinking Contract Management Effective Contract Enablement and Acceleration Informed Product and Service Acquisition Vendor Development Architecture Planning and Design Relationship Building and Maintenance End-to-End Systems and Technology View

Strategic And Operational Skills Of High Performing Acquisition-Oriented Organisation :

Strategic And Operational Skills Of High Performing Acquisition-Oriented Organisation Define the systems, information and processes needed to deliver on business requirements and optimally acquire and operate them Define and manage the architecture blueprint for the evolving platform that hosts operational systems and processes Manage external supply and acquisition Manage sourcing strategy Understand the external services market and develop and maintain the skills to select, engage and manage internal and external IT resources and services Identify the potential added value from IT service suppliers January 7, 2014 30

Areas Of Importance For Outsourcing Organisations During Outsourcing Implementation and Operation:

Areas Of Importance For Outsourcing Organisations During Outsourcing Implementation and Operation Ongoing Initiation Implementation Completion Analysis Service Transfer January 7, 2014 31 Outsourcing Planning Outsourcing Agreements Service Transfer Service Provider Evaluation Sourced Services Management Outsourcing Completion Outsourcing Strategy Management Governance Management Relationship Management Value Management Technology Management People Management Knowledge Management Organisational Change Management Threat Management

Skills To Look For In Outsourcing Service Providers During Outsourcing Implementation and Operation:

Skills To Look For In Outsourcing Service Providers During Outsourcing Implementation and Operation Ongoing Initiation Implementation Completion January 7, 2014 32 Service Design and Deployment Service Transfer Service Delivery Contracting Service Transfer Knowledge Management Relationship Management People Management Performance Management Threat Management Technology Management

Strategic And Operational Skills Of High Performing Acquisition-Oriented Organisation :

Strategic And Operational Skills Of High Performing Acquisition-Oriented Organisation January 7, 2014 33 Business IT Supplier Ecosystem IT Mediates Between the Business and the Supplier Ecosystem, Acting as a Lens Focussing Business Needs on Appropriate Suppliers IT Needs To Focus Appropriate Services on Appropriate Suppliers

Lack Of Focus During Key Outsourcing Stages Leads To Loss Of Value:

Lack Of Focus During Key Outsourcing Stages Leads To Loss Of Value January 7, 2014 34 Value Gap Cause by “Fire and Forget” Approach to Outsourcing Loss Of Interest During Key Implementation and Operational Stages Level of Focus, Attention and Interest

Outsourcing Is Not Just For Christmas …:

Outsourcing Is Not Just For Christmas … … It is for a good chunk of your (business) life An overemphasis on the act of outsourcing rather than on the long-term nature of the business relationship that will follow will lead to trouble The selection process and the tender are not ends in themselves: they are means to an end January 7, 2014 35

Outsourcing And Due Diligence:

Outsourcing And Due Diligence Perform due diligence as part of negotiation/service design/transition stages: Discover and become familiar with organisation culture and Build trust management style Confirm any assumptions Verify costs and business case Identify additional risks not already documented Validate the transition plan Validate the infrastructure Validate the operational approach Identify any additional opportunities Ensure no transaction-breaking reasons Consider taking an M&A approach to implementing outsourcing

Lots of Scope To Get Acquisition Wrong:

January 7, 2014 37 Lots of Scope T o Get Acquisition Wrong Inadequate management Unarticulated end-user needs Insufficiently defined requirements Poor supplier selection Defective contract definition Deficient underlying technology selection

Outsourcing Relationship Management Officer (ORMO):

Outsourcing Relationship Management Officer (ORMO) Develop and manage outsourcing strategy Oversees outsourcing projects and manage portfolio of outsourcing arrangements Continuously appraise the portfolio of outsourcing initiatives to calculate their business value, avoid redundancies in effort, manage risks and develop and report metrics Conduct feasibility analyses for outsourcing initiatives across the organisation Ensure that there is consistency in outsourcing objectives and business objectives Conduct reviews/assessments/lessons learned and manage knowledgebase Ensure compliance with standard outsourcing methodology and process to maintain a standard operational framework

Capabilities Of A High Performing Acquisition Function:

January 7, 2014 39 Capabilities Of A High Performing Acquisition Function Acquisition Project Capabilities Capabilities and associated practices relating to activities concerned with to establishing, executing, and ensuring the transition of an acquisition project Acquisition Organisational Capabilities Consists of cross-project c apabilities related to defining, planning, deploying, implementing, monitoring, controlling, appraising, measuring and improving processes Acquisition Support Capabilities Capabilities that help implement generic practices and assist processes and work products described in more than one other process areas Acquisition High Skilled Capabilities Capabilities for quality and process performance, monitoring variation in processes, evaluating the impacts of proposed process changes, and systematically deploying processes across the organisation

Specific Acquisition Capabilities And Their Relationships:

January 7, 2014 40 Specific Acquisition Capabilities And Their Relationships Configuration Management (CM) Process and Product Quality Assurance (PPQA) Measurement and Analysis (MA) Decision Analysis and Resolution (DAR) Quantitative Project Management (QPM) Organisational Performance Management (OPM) Organisational Process Performance (OPP) Causal Analysis and Resolution (CAR) Organisational Process Definition (OPD) Organisational Process Focus (OPF) Project Planning (PP) Requirements Management (REQM) Agreement Management (AM) Solicitation and Supplier Agreement Development (SSAD) Acquisition Requirements Development (ARD) Acquisition Technical Management (ATM) Acquisition Verification (AVER) Risk Management (RSKM) Acquisition Validation (AVAL) Integrated Project Management (IPM) Acquisition High Skilled Capabilities Acquisition Project Capabilities Acquisition Support Capabilities Acquisition Organisational Capabilities Project Monitoring and Control (PMC) Organisational Training (OT)

Key Acquisition Capabilities:

January 7, 2014 41 Key Acquisition Capabilities Agreement Management Acquisition Requirements Development Configuration Management Measurement and Analysis Project Monitoring and Control Project Planning Process and Product Quality Assurance Requirements Management Solicitation and Supplier Agreement Development Acquisition Technical Management Acquisition Validation Acquisition Verification Decision Analysis and Resolution Integrated Project Management Organisational Process Definition Organisational Process Focus Organisational Training Risk Management Organisational Process Performance Quantitative Project Management Causal Analysis and Resolution Organisational Performance Management

Acquiring Acquisition Capabilities – Focus on Skills That Add Value:

January 7, 2014 42 Acquiring Acquisition Capabilities – Focus on Skills That Add Value Acquisition Technical Management (ATM) Organisational Process Performance (OPP) Organisational Performance Management (OPM) Acquisition Validation (AVAL) Quantitative Project Management (QPM) Causal Analysis and Resolution (CAR) Acquisition Verification (AVER) Organisational Process Definition (OPD) Organisational Process Focus (OPF) Organisational Training (OT) Integrated Project Management (IPM) Risk Management (RSKM) Decision Analysis and Resolution (DAR) Acquisition Requirements Development (ARD) Agreement Management (AM) Project Monitoring and Control (PMC) Project Planning (PP) Requirements Management (REQM) Solicitation and Supplier Agreement Development (SSAD) Configuration Management (CM) Measurement and Analysis (MA) Process and Product Quality Assurance (PPQA) Initial Sets Improving Skilled and Experienced Very Capable Acquisition Skills and Capabilities

Summary:

Summary Understand the size of the outsourcing zone Identify your outsourcing zone and then take appropriate action Beware of proliferation of “Under the Cover” acquisition/outsourcing in the form of cloud/XaaS as business functions bypass what is perceived as slow, expensive IT Get costs right by being realistic Procurement ≠ Acquisition Successful outsourcing is not about getting the lowest price at all costs Avoid the outsourcing death spiral Making an explicit decision on where you want to be on the outsourcing spectrum Develop an approach to outsourcing due diligence Learn lessons from the experience of others to define exactly what you want of your outsourcing arrangement Avoid lack of focus during key outsourcing stages Understand and develop the capabilities of a high performing acquisition function Appoint a Outsourcing Relationship Management Officer (ORMO) January 7, 2014 43

More Information:

January 7, 2014 44 More Information Alan McSweeney http://ie.linkedin.com/in/alanmcsweeney

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