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| Management Briefings
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Nailing jelly to the wall: Nick Mayes, PAC (April 2010)
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Many IT services relationships set out to deliver innovation, but in practice it is a goal that is
difficult to achieve and even more complex to quantify.
Restrictive contract frameworks and differing expectations between the client and the supplier
often get in the way of clear and measurable innovation. One experienced buyer of IT services
recently told PAC that: “Innovation in IT services is an oxymoron.”
A complaint we often hear in the user community is that while their external services partners
normally deliver on basic service level agreements (SLAs), they seldom go that extra mile in
terms of bringing new ideas or different ways of thinking to help users tackle their business
challenges.
But the problem is – what should this extra mile include and how can customers incentivise
vendors to deliver it within the framework of a commercial contract?
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Fine tuning your financing: Simon Tennant, PA Consulting (February 2010)
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It is a widely held belief that outsourcing is a good way for companies to fine-tune the running of
their organisation and save money.
The problem is that developing and rolling out a full strategic sourcing plan will not secure you
significant cost benefits in the short-term – typically, these benefits appear in the mid-term.
So for organisations looking to deliver short-term cost savings, the most effective course of
action is to simply make the best of the sourcing structure already in place.
However, this should go far beyond squeezing the best value out of the various suppliers, to
reviewing what is included in the existing sourcing structure and how to get the best out of
existing relationships.
Through ‘good housekeeping’ you may discover opportunities to reduce the costs of your sourcing arrangements in the
following areas.
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Cutting to the core: K Bailey/I Ypma/R Graham, Alastor/Coffey Graham (Nov 2009)
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Outsourcing is now a mature business. For many years, users have outsourced what they see
to be commodity services – both IT and business processes – to external suppliers, with varying
amounts of success.
Now there is a growing desire for users to explore the outsourcing of non-commodity business
processes (those value-added elements that can often differentiate the organisation) and, in
some cases, to create an increasingly virtual business. But what is the basis for such an
outsourcing decision and what business risks and contractual issues are associated with it? As IT has matured, the focus of user organisations – in terms of the way in which they see
value delivery from IT – has shifted up the ‘maturity model’.
Initially, businesses used IT to automate and reduce the transaction costs of commodity processes,
such as order and invoice processing. The focus then moved up the scale to the provision of new,
value-added services – risk portfolio management, project planning, or shared service centres.
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Virtues of virtualisation: Martyn Hart, National Outsourcing Association(Sep 09)
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At the start of this year, the NOA predicted that 2009 would be the year that virtualisation bursts
into the outsourcing industry. Analyst firms including Gartner have backed this view, predicting a
55% increase in revenue within the EMEA virtualisation software sector during the course of 2009.
Europe is indeed leading the way in adopting virtualised technologies, with Gartner figures
showing that the UK, Germany and France represent 89% of the total EMEA virtualisation
revenue.
Based on the evidence, it is clear that more organisations than ever are switching or
considering switching to virtualised platforms. So why this surge?
The main reasons why businesses switch to a virtual world are cost savings, space savings and
green improvements.
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Being more human: Barbara DeGuise & Charles Rosenfield, Alsbridge (June 2009)
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To meet the business objectives of an outsourcing project, the company’s operating processes
and organisational designs must change for the good of the emerging, more efficient business
model.
You may be a small business seeking help with tasks that require only part-time attention, or a
medium-sized firm buying a mature, commodity service. But in either scenario, someone in your
company will wonder why their job has to bear the brunt and ask: why not outsource someone
else’s job?
The decision to co-source or outsource is complex and always requires an assessment of
current operations, a review of the candidate processes, and a meaningful savings plan. Those
savings can come from process elimination, increased efficiency and the oft-resulting reduction
in labour.
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Being human: Barbara DeGuise & Charles Rosenfield, Alsbridge (May 2009)
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Outsourcing is an important, results-oriented vehicle for improving efficiency, lowering operating costs and establishing a
leaner re-skilled organisation. But as with any major change, those people worried about its impact on them often work against
its objectives.
Any outsourcing deal involves change for both the user company and the provider. And some degree of confusion, fear and
uncertainty can be expected when two complex entities are joined together. For employees of the group being outsourced,
these emotions are intensified by a legitimate concern about their future employment.
Whether the outsourcing provider wishes to establish relationships with a retained team or absorb the client team into its own
organisation, it will only be successful if it involves HR, assesses employment issues in the earliest stages of the deal, and
communicates honestly with existing and new staff.
The alternative is unhappy employees and a diminished value from the service that the provider has worked so hard to
acquire.
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Cutting corners: Lee Ayling & Tim Amatt, EquaTerra (February 2009)
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To view governance as an unnecessary cost, or anything other than being an integral part of an
outsourcing deal, is a major mistake – especially since outsourcing contracts can be worth
hundreds of millions of pounds, and failure to appropriately address effective outsourcing
governance can see the value of an outsourcing relationship drop by as much as 50%.
To be fair, outsourcing governance is becoming more valued than it used to be. Once
considered an afterthought in the process of negotiating and implementing an outsourcing
contract, it is now much better appreciated. However, an understanding of its true value
remains far from universal amongst organisations with contracts in place – and this is
concerning.
Partly the problem stems from a general lack of understanding as to what outsourcing
governance actually means. Put simply, it refers to the management of an outsourcing contract
to ensure that the agreement between the buyer and service provider achieves its goals.
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Coming of age: Dominic Trott, Pierre Audoin Consultants (November/December 2008)
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The public sector were once known as laggards in their approach to IT outsourcing but this is
no longer the case. A succession of reports and initiatives, channelled into spending policy, has
meant that what was perhaps an immature approach to IT outsourcing has been forced to do a
lot of growing up in recent years.
In particular, the local government sector has been faced with challenging targets for cost
savings and efficiencies. And once initial steps such as outsourcing infrastructure, applications
and business processes have been made, this area is being forced to innovate in order to
generate further savings.
Following the Comprehensive Spending Review period of 2004 (CSR04), during which
£22 billion of savings were generated within the UK public sector, CSR07 called for a further
£30 billion of savings to be made. With the upcoming Operational Efficiency Review, for which
‘back office/IT’ is one of three threads of investigation, this figure is set to grow even higher.
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Standards delivered: Lynda Cooper (August 2008)
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IT service management (ITSM) is the running of IT services to deliver value to the business – and given that services
operations can consume up to 80% of an organisation’s IT budget, it is essential that this is managed well.
Just as project management is used to manage projects, so service management is used to manage services. But it is
important to note that service management is not about designing and building the actual hardware, software, applications or
tools – this is done by a project. Instead, service management takes the technical product and manages it as a service that
can be delivered to the customer to support the business.
Focusing on outsourced IT service management, best practice is encapsulated in two main standards or frameworks.
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Knowledge for sale: Shamus Rae, KPMG (May 2008)
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Outsourcing and offshoring continue to develop as important business strategies. But while organisations are still trying to
master IT outsourcing (ITO) and grapple with business process outsourcing (BPO), along has come a new industry trend:
knowledge process outsourcing (KPO).
KPO, also referred to as ‘knowledge services’, is different to more traditional outsourcing offerings and approaches in that it
cuts into the main core competencies of many organisations. What’s more, while cost reduction seems to have been the prime
motivator of the ITO and BPO waves, ‘intellectual arbitrage’ appears to be the main driver with KPO. Various research sources suggest the KPO industry will be worth anything between $10 billion and $17 billion by the year
2010. So while the level of optimism on industry growth varies, few doubt the fact that the industry will grow at a staggering
rate.
The financial services sector accounts for a major proportion of the KPO industry. Based on KPMG’s recent study Knowledge
process outsourcing – Unlocking top-line growth by outsourcing the core, we expect the financial services KPO industry to be
worth more than $5 billion by 2010.
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Heart of the matter: John Dean, MLG Management Consultants (March 2008)
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There is genuine interest in the potential benefits that business process outsourcing can offer
companies eager to find ways of remaining competitive. However, in many ways BPO is still a
relatively new and immature field. Many vendors spin convincing tales of ‘best of breed’ delivery
capabilities and all the significant benefits they can help businesses achieve…well, caveat
emptor!
Yet there are undoubtedly many benefits to be gained from a successfully outsourced business
process – whether that process is the company’s IT infrastructure, its customer interaction
centre, one of its distribution or manufacturing facilities or its distribution fleet.
The oft-quoted adage of sticking to one’s knitting has its attractions. Running computer
departments or fleets of vehicles and warehouses isn’t a manufacturing company’s game and
there are specialists who can do this better/cheaper/faster for you. But companies can be enticed with the promised financial benefits to the extent that they lose track of the many risks
associated with divesting operational responsibility for a key process to another organisation.
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Poles apart?: Hugo Minney, Minney.org (January 2008)
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Return on investment is crucial in any outsourcing contract. But how do you use ROI to make the right buying decision?
Having worked on both the supplier and buyer side in IT contracts, one major stumbling block is that the salesperson and the
buyer involved may have completely different viewpoints – they may not even calculate ROI using the same units.
Take, for example, a decision to outsource IT services. There’s a cost involved: the capital cost of purchasing equipment and
legal fees; the cash cost of parallel running; the time cost in effecting the transition; the risk cost in understanding the
processes and matching the culture.
The service provider involved will have its own way of measuring the price of these inputs, both its own and the client’s inputs.
But the client may measure only its own costs using its own measures, or make some assumptions about the ways the
supplier is measuring.
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Doing business with an 800lb gorilla: David Butler, Triple IC (November 2007)
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Recently I was working with a very experienced and capable CIO, studying his outsource
contract. He was unhappy with the supplier’s performance. So I did the obvious thing. I looked
at the supplier’s performance against the contracted service level agreements.
I then felt obliged to tell this CIO that his supplier was regularly hitting and sometimes
exceeding the agreed SLA targets. On this basis alone, there was little to complain about.
Nevertheless the CIO wasn’t persuaded. “Whatever story the SLAs tell, I’m still not satisfied,” he
said. “I still don’t think I’m getting value for money. And, more to the point, neither do my CEO
and my CFO.”
The outsource supplier’s team were working flat out to ensure they met the agreed levels of performance. They didn’t respond
well to being told they were doing just that – but it wasn’t enough. And who could blame them?
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Future of outsourcing?: Simon Scarrott, Compass (September 2007)
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The worldwide growth in outsourcing means that ensuring value for money in outsource contracts – once the preserve of
senior managers – is now a key challenge for many corporate executives.
Traditionally, companies have considered contractual benchmarks as a vital means of establishing value, in terms of fair
market pricing in the context of industry and market standards. However, most benchmarking exercises offer only a limited
perspective of value; they tend to exclusively describe value in pure financial terms at a single point of the contract term –
rather than over its full term.
So while benchmarking is fundamental to ensuring competitive market rates, it is not, in isolation, a sufficient foundation for a
better and healthier outsourcing relationship over the long term.
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Source of success: Douglas Peden, Osborne Clarke (June 2007)
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There have never been more processes and services outsourced than there are at the moment,
yet there is still a fear of outsourcing. Concerns range from the problems of data security and
loss of strategic control to the cost of making redundancies and bad publicity.
When an outsourcing or offshoring deal fails, the problems can take many months and even
litigation to solve. As such, businesses need to consider a number of areas carefully before
progressing.
As with anything, it is vital to ask the right questions in order to check the viability of an
arrangement. It is also sensible, at the very start of the process, to identify the potential
problems you may encounter in outsourcing certain types of service, as well as the possible
solutions to them. All this could help you avoid disputes in the future.
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Made for sharing: Arun Aggarwal, TCS (April 2007)
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The instinct to ‘outsource everything’ to a single supplier can be appealing, but it is often
a less effective strategy. Thanks to an increasingly mature market and improved
management tools and techniques, the trend is increasingly towards multi-sourcing as
the model of choice for modern global business.
Multi-sourcing increases the complexity of the supply chain and relationships with
supplier organisations, so it’s not suitable for every organisation or process. However,
with careful implementation, it has the potential to reduce cost and risk, and provide
easier access to the best suppliers for a programme of work. The future of outsourcing
will truly be a shared one.
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Out with the new?: Iebe Ypma, Alastor Consulting (February 2007)
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Outsourcing used to be seen as a remedy for immediate cost, service or complexity problems.
This approach has often led to disillusionment. By year three of such an outsourcing arrangement,
customers no longer feel the contract is relevant to their changing business requirements, and the
cost benefits associated with the initial financial engineering may have ceased.
For longer-term success, an outsourcing deal needs to be: appropriate for the maturity of the function being outsourced and the organisation where the
function is deployed; flexible, to reflect changes in business needs, the available technology and the maturity of
the organisation being serviced; and innovation-friendly, to encourage innovation in cost reduction, scope, applications and
infrastructure.
This article focuses on the innovation issue.
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Surviving renewal: Bahl/Rajpal/Tedakapalli, Everest Research Institute (Nov 06)
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Stakeholders in the outsourcing market have a huge
opportunity and many challenges ahead of them because the
outsourcing market is undergoing significant changes. This
fundamental restructuring will have a direct bearing on the
way buyers and suppliers structure deals.
These changes are especially significant in light of the major
renewal trend now underway. Everest Research Institute
estimates that $118 billion of outsourcing business will be up
for renewal between 2006 and 2008. With buyers and
suppliers having already renewed $30 billion of that business
at the time of writing, this leaves a total of $88 billion worth of
business still up for grabs.
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Social skills: Andrew de Cleyn, LogicaCMG (September 2006)
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As outsourcing activity grows, companies are looking for more sophisticated ways to
manage their expenditure, to ensure they get the best return on investment.
A recent study by Warwick Business School has shown that well-managed outsourcing
arrangements based on mutual trust can create a 20-40% difference on service, quality,
cost and other performance indicators over outdated power-based relationships. The
survey shows that CEOs who neglect to actively manage their relationships with
outsourcing partners are missing out on a ‘trust dividend’ worth up to 40% of the total
contract value.
In trying to identify what makes for success in outsourcing, practitioners invariably
highlight ‘relationships’ – but there are few precise findings on how such successful
relationships should be developed. Good relationships don’t just happen: the overall
strategic business intention must determine the nature of the relationship and the contract.
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Dispelling the offshoring myths: Lisa Hammond, Centrix (July 2006)
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Many organisations have struggled to achieve lasting value from offshoring. Although it’s often presented as a ‘no brainer’,
successful offshoring relies on intelligent choices about what to offshore and how to do it. Key to this is having an
understanding of the truth behind common offshoring myths, to ensure your sourcing strategy delivers real and long-term
benefits for your business.
For many years, offshoring was seen as a tactic for reducing the cost of back-room functions such as payroll and IT, and for
much of that time it attracted little attention. This started to change in the late 1990s as companies began offshoring those
functions – such as manufacturing, IT applications development & maintenance and call centres – that have a greater impact
on customer service and top and bottom-line revenues. Suddenly, offshoring morphed into an item on the senior management
agenda.
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Hints and tips: Steve Emmett (May 2006)
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Outsourcing has been part of the business world for over half a century but despite its
perceived maturity there are always aspects that can be improved, particularly in the
pacesetting area of IT sourcing.
The art of making your outsourcing deal successful is like any other activity; it needs to
be thought through with care. Whilst the market is mature, most companies who
outsource do so for the first time with little experience and a view that they are only
trying to save money or focus on their core activity.
Talking to existing users, suppliers and independents will allow you to gain the
knowledge needed to avoid the common mistakes.
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After the ink is dry: L Campbell/C Hyatt/D Karabinos, EquaTerra (March 2006)
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Seeing the ink dry on any just-completed outsourcing deal is a cause for celebration. But
then the hard work starts. You are about to launch and administer a new service
provider relationship on a scale more complex and riskier than anything most companies
have ever done before.
A Conference Board study found that 97% of respondents who had experienced
outsourcing would outsource their operations again – but would pay less attention to
service levels and focus more on the contract and contract governance. This shows that
businesses must be aware of the need to develop professional and highly detailed
management capabilities that will help them achieve successful, effective long-term
sourcing relationships.
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Opening up outsourcing: LogicaCMG (January 2006)
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Your company is considering outsourcing for the first time, and you’ve heard that it’s the non-core processes that are
the top candidates. But you suspect that this would give rise only to low-level benefits, and ‘non-core’ processes sound
like ‘unimportant’ ones. Do you really have any of those? What processes really can be outsourced?
This article helps you to identify what can be outsourced, what it means for your business, and what kind of benefits
can be expected. Start-up outsourcing agreements can benefit from knowledge drawn from the most advanced
outsourcing deals.
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