Research Briefing Results of Research Studies: Making the Outsourcing Decision and Optimizing Value from outsourcing March 8, 2007

2 CORE’s Research Program Making the outsourcing decision Optimizing value from outsourcing Fixing a problem outsourcing/managing the end game of outsourcing Outsourcing governance and management processes

3 Research Methodology Questionnaires developed in consultation with Research Advisory Committee Interviews with 17 major organizations, including 12 client organizations, 2 service providers and 3 advisors Survey across CORE’s contact base of 800 people representing organizations of varying size in a wide range of industries Review of relevant literature

Making the Outsourcing Decision

5 Objectives and Scope of Research Objective: –Determine how organizations approach key outsourcing decisions, both strategic and operational Scope: –Whether and what to outsource –Why outsource? –Scoping –“Your mess for less” vs fix in advance –Vendor selection –Single provider v multi-sourcing –Transfer of people and assets –Offshoring

6 Key Findings Outsourcing is still more tactically than strategically driven, although close to half say that their outsourcing initiatives are part of an overall strategy. More organizations are moving to a more strategic approach Strategically driven organizations tend to outsource to focus on core competencies rather than to reduce cost. Conversely, tactical outsourcing is mainly cost driven Organizations are still not outsourcing non-core competencies because of lack of confidence in outcomes, perceived risks around privacy, IP, customer service and measurability issues

7 Key Findings (cont.)

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9 Scoping: Scope decisions are driven by: –Clarity of responsibilities – avoidance of “grey areas” –Measurability –Match to service provider capabilities No clear preference for broad scope or narrow scope deal – depends on circumstances. Size less important than clarity Optimize before or after outsourcing? –Client organizations mainly want to outsource and then optimize a process/activity in partnership with the service provider rather than fix it before outsourcing

10 Key Findings (cont.)

11 Key Findings (cont.)

12 Key Findings (cont.) Provider selection –Providers are selected for the transactional rather than by relationship –Proven track record with the function/activity being outsourced is key –Ability to handle many functions and ability to deliver globally not seen as being as important as being best of breed for a secific function Single-Provider or Multi-sourcing strategy? –Neither single-provider or multi-sourcing approaches predominates, but multi-sourcing is becoming more prevalent

13 Key Findings (cont.)

14 Key findings (cont.) Transfer of people and assets: –Tendency is to want to transfer people and assets, particularly where this is necessary for successful delivery Offshoring is not currently being directly used to a significant extent, but a large number of respondents plan to initiate offshoring in the next year Service providers are, however, using a global delivery model to offer clients the benefits of lower costs. Clients embrace global delivery model where there are benefits

15 Overall Conclusions Organizations want to outsource more and are doing so, but are wary of the risks They are moving to a more strategic approach to outsourcing They want to be sure that: –Scope can be clearly defined and performance measured –The service provider has a strong track record with the specific function/process/activity being outsourced –Cost will be controllable –Risks can be managed Buyers are far more savvy than was previously the case

16 Overall Conclusions Organizations have passed the stage of blanket fear/distrust of outsourcing The key requirement for outsourcing to develop into more of a business strategy, and to expand the outsourcing market is for providers to give customers greater confidence that outcomes will be achieved ad risks mitigated This could include more standardized offerings where possible, and also greater simplicity in management and measurement of outcomes

Optimizing Value from Outsourcing Outsourcing

18 Objectives and Scope of Research Objectives: –Obtain insight into how organizations drive value from outsourcing Scope –What are the outcomes organizations are seeking their relative importance? –What are the value drivers, and their relative importance? –What are specific management approaches and tools to drive value? –Focus mainly on domestic outsourcing –Differentiate between ITO, ADM and BPO

19 Key Findings Outsourcing is maturing in large Canadian organizations: –Many larger organizations, particularly in financial services, have active outsourcing programs –Two thirds of organizations surveyed have undertaken ITO or ADM initiatives –BPO not as prevalent. HRO most common form of BPO –Many larger organizations have established internal outsourcing centres of expertise The level of satisfaction with outcomes is mixed: –75-80% are satisfied with their ITO and DM initiatives, but only about 50% are satisfied with their BPO initiatives –It is clear that organizations are still struggling with deriving the expected level of value from BPO

20 Key Findings (cont.) Kinds of outsourcing reported

21 Key Findings (cont.) Satisfaction with outcomes

22 Key Findings (cont.) No single outcome is dominant as an objective of outsourcing organizations. Rather there are several objectives that are more or less equally important: –Focus on core business –Improvement in service quality –Product or process innovation –Cost management – cost reduction, cost avoidance, making cost more variable –Access to capabilities Cost management/reduction is no longer paramount

23 Key Findings (cont Outcomes targeted from outsourcing

24 Key Findings (cont.) Innovation is probably the outcome least meeting expectations: –Unrealistic expectations –Unwillingness to invest –Lack of a framework for innovation –Focus on just getting the basic outcomes –More innovation will come with maturity

25 Key Findings (cont.) Certain value drivers that are seen as critical for all outsourcing: –Clear mutual understanding of objectives and service requirements –Scope management In addition, for BPO, other value drivers seen as very important are: –Adaptability of the outsourcing to the client’s changing business –Governance –Relationship and trust between client and provider –Change management inside the client organization –Innovation

26 Key Findings (cont.) Value Drivers

27 Key Findings (cont.) Organization are focusing on certain key management processes to improve outcomes: –Governance –The “stay-back” team –Use of best practices –Focus on leadership –Gain sharing No intent to change duration of outsourcing relationships

28 Key Findings (cont.) Measurement still focuses on service levels and service provider performance rather than outcomes Benchmarking is extensively used – 70% say they use it at least some of the time, and 80% for ITO Effectiveness of benchmarking is seen as mixed. Seen as sometimes useful and increasingly seen as one indicator of performance rather than as conclusive evidence

29 Overall Conclusions Four major paradigm shifts: Cost reduction no longer paramount as a targeted outcome Shift to managing value rather than just performance Service providers being evaluated on heir ability to be a good partner, not just ability to deliver the services Outsourcing increasingly being seen as a transformation initiative, not a service contract