Rob Aalders & Andy Zaple Spring 2003 The A-Z of Outsourcing Rob Aalders & Andy Zaple Spring 2003

The A-Z of Outsourcing Getting into it Managing it Most ACS members will be involved or committed to it at some time. When you have to do it - do it right!

Getting Into Outsourcing The Basics Know your motives Define your principles Be rigorous in RFP Form the contract …including SLA

Know Your Motives Reality? Party Line Resource shortages Intuition Cognitive Dissonance1 Party Line Resource shortages Cost saving Focus on the core Competitive advantage Reality? Intuition Fear Imitation Frustration Action Man According to Leon Festinger, this is because any perceived inconsistency among various aspects of knowledge, feelings and behaviour sets up an unpleasant internal state - cognitive dissonance - which people try to reduce whenever possible (Festinger, 1957)

Know Your Motives Why is outsourcing the best solution? Kipling them Why is outsourcing the best solution? What will we outsource – all or some? How will outsourcing meet the objectives? Why can’t we meet them ourselves? When will they be delivered? How will they be delivered? Where will we outsource – on site or off?

?  Not Knowing Why Retain and strengthen Candidate for insourcing 2. Economies of Scale Criticality Relative Capability L H  Retain and strengthen Candidate for insourcing ? 1. Focus on core activities 3. Economies of Scope

(Strategy & Architecture) Map Your Goals Where you are (Be honest!) Where you want to be (Strategy & Architecture) How will Outsourcing Get you there?

Know Their Motives What are the provider’s goals What are their objectives? Why and how does your business fit in? How will they achieve YOUR objectives?

Why Define Principles Failure to define principles leaves the company open to the ‘opportunistic acts of a transient organisation’. Addresses the governance of complexity by concentrating on the fundamentals while leaving everything else for resolution by due process Outsourcing redistributes responsibility and accountability, and ‘when you redistribute responsibility and control to others, you must reallocate accountability and expertise for taking action’. Your prayers will be answered..if you obey me and are willing to put in hand the remedy your distress requires.. (Oedipus in Oedipus Rex)

Setting Principles Example of a Principle

Benefits from Setting Principles Ensures that decisions are made within a considered framework. Ensures that the framework is internally consistent Removes the need to micro-manage every decision. Communicates the rules of engagement to all in IT & business Reduces the probability of issues and disputes. Protects against arbitrary decisions made out of context. Supports the proper execution of the service level agreements Informs those involved peripherally, e.g. contractors, suppliers Provides a framework for future service level variances

Map Your Domain Know what you are outsourcing A large national organisation was getting ready for outsourcing …believing there were about five mid-range systems, the team sent out a message to all business managers, indicating that if a full listing was not provided, no support would be available once the outsourcer had taken over. A few weeks later the list had increased to over 50 systems and they were still counting. Nick Kovari This quote is one of many that could have been offered - all with the same message!

Evaluate - Set Relevant Criteria Ensure criteria relate to the outcome If Network Stability and Cost are an issue then: Make sure that the criteria relate to the goals and objectives!!

Evaluate - Scale Importance Six Levels of Criteria Ensure the meaning of each level is absolutely clear!

Evaluate - and Reflect! Query Five year plan, their goals, their objectives Talk to their staff - walk around - look at the desks Talk to their customers How will you do it? For every major objective - till they squirm! It helps them to help themselves Three Perspectives: Commercial - money and contract terms Technical - vendor’s ability to deliver Organisational - the people factor Retro-Engineer their costs Retro-Engineer their Pricing Model

Manage the Contract Formation …and the SLAs that are part of that contract Place and Protocol is yours - pick your battleground ‘The [vendors] standard form is invariably inadequate from the customer’s perspective” (Halvey & Melby) Reflect Goals and Objectives - the Why Design the relationship Change management process Embed the Principles Agree YOUR position - IP, damages, remedial action, pricing etc Document configuration management (the paper trail) Put your focus on the inevitable divorce

Manage the Contract Formation The Team Contract Team Leader (Program Manager) External Consultant who has done this before! IT Specialists HR Specialist Finance and Audit Independent Performance measurement specialist Mediation/Negotiation specialist Risk Management expert Legal advisers who have done this before! ‘The principal cause of the power imbalance …is that the host company does not regard the contract as part of the outsourcing process. The vendor, on the other hand, regards the contract as the final stage in the sales cycle and its representatives are schooled in how to best close the deal’

The Value of a Consultant

Manage the Contract Formation Cover (apart from the obvious): Document management & control (Library) Publicity and advertising Human resources - competency and stability Performance dispute resolution Ongoing management (Principles) Service Level Agreements (Performance) Definition of current environment Third party performance audit (Honest Broker) Termination for various reasons.

Manage the Relationship “Failure in BPO is seldom caused by inability to perform. Rather, poor relationship management causes a mismatch in results and expectations, which leads to dissatisfaction or an inability to recognise a cultural gap” Source: Business Process Outsourcing, Sourcing Interests Group Research Report 1998 “You can have the best contract in the world, but if you don’t manage it, it doesn’t do you any good” Peter Gearhart, Allied Signal Inc., CIO Magazine 15/5/96 Administer the Contract….. Manage the Relationship!

Issues in ‘Contract Governance’ Clients do not apply sufficient resource to the management of the relationship Fail to appreciate scale and scope of management task Managing the relationship by bullying over the trivial or irrelevant Number of help desk calls Power Outages and Storm Damage Uncontrollable hardware failure... What is the scale and scope of the relationship?

‘Contract Governance’ Dimensions Time Horizon Service Improvement Technology & Services Strategic Management Service Delivery Support Processes Manage the Relationship Plan Administer the Contract Monitor & Control Core Processes

Time Horizons Service Delivery (‘the now’) Management of day to day service delivery Strategic Technology & Services (1 - 6 month view) Management and oversight of current ‘change projects’ Service Improvement (3 - 6 month view) What improvements to service levels are required? How are these going to be achieved? Management (18 month - 3 year view) What new services will be required to support the client’s business? What service levels will be required (including changes to existing service levels)? What will be required to develop and implement these successfully?

Core Processes Planning Monitoring & Controlling Business Volumes Services New Modified Technology Capacity Budgets Monitoring & Controlling Supplier Performance Progress towards Strategic Objectives Compliance Customer/User Satisfaction Benchmarking Costs Benefits

Support Processes Managing the Relationship Administering the Contract Communicate with all Client Stakeholders ‘Educate’ Client Stakeholders Liaise between Stakeholders & Vendor - ‘organisational Alignment’ “Work on Process, Information and Personal Links” Administering the Contract Manage Issues Deal with Disputes Pay Invoices Collect Service Credits Maintain record of Communications Manage Variations

Client’s Governance Organisation Leadership “Chief Sourcing Officer” Efficiency Transition Management Contract Management Performance Management Financial Management Effectiveness Relationship Management Technical Advisors Business Process Management Architecture & Strategic Planning Source: Gartner Roles Required

Client’s Governance Organisation Behavioral Change Management Customer Service Orientation Influencing Others Information Seeking Strategic Thinking ‘Partnering’ Technical Business Requirements Analysis Service Performance Analysis Project Management IS Knowledge Business Business Function Knowledge Client Satisfaction Metrics Knowledge Negotiation Risk Management Strategic Business Planning Source: Gartner Competencies Required So what else can go wrong?

What can go wrong? Not knowing why(Covered this already…) Measuring the wrong thing Measuring the wrong way Rewarding the wrong thing the wrong way

?  Remember Your Motives? Candidate for insourcing Retain and Criticality Relative Capability L H Candidate for insourcing Retain and strengthen ? 

Measurement Service Level Management Service Process Management Specifying & quantifying SLAs Tracking & evaluating service processes Service Level Management Service Process Management (ITIL, COBIT, MOF of roll your own) Service Needs Service Process Service Level Agreement Tracking & evaluating SLAs Design & implementation of service processes “Service level management is the regular, systematic review of service provider performance against pre-defined service level targets”. Aalders: ‘The IT Outsourcing Guide’, Wiley 2001

Setting Service Levels Are these still ‘Key’? What is the value of improving this? What is our current performance…Oops? How should they be measured? What is the business impact of failing to achieve this level? Should this be the subject of rebates and bonuses? Are there any missing? Refer to the ITIL, MOF or COBIT catalogues

IBM ATMaster - an example of Best Practice

IBM ATMaster - Key Measures

IBM ATMaster - Key Measures

IBM ATMaster - Measuring the Right Way Initial Target: 95% availability. 7 days, 24 hrs per day. Measured quarterly Translated: 109.5 hours downtime per Quarter is acceptable ie the service could be taken down between the hours of 9 and 5 every Saturday and service levels would be met! Revised: Target 98% availability, Mon-Sat 07:00 - 18:00 & Sun 08:00 - 16:00. Measured quarterly. More than 19 hours downtime during these hours per Quarter would result in service levels being missed.

The Exchange - an example of How Not To! Electronic Trading platform in UK Life Assurance Software development, data centre & network management provided by AT&T 33% owned by AT&T - the service provider 67% owned by Origo Services - the customer ‘Open book’, cost plus commercial terms

Measurement and Reward What gets measured, gets done! What gets measured properly, gets done in line with expectations…. usually! What gets measured properly, and rewarded appropriately, delivers the business outputs you aspire to!

Measurement and Reward Checklist Measurement is the responsibility of the Provider and the customer. Focus your measurements on the important issues. Beware averaging - some is warranted, but it can dilute focus on what counts. Monitoring too many targets may distract attention from future improvement initiatives. Set ‘stretch’ targets where they really matter. Reward over-performance only where real business benefits result. Rebates are designed to promote future performance excellence, not to punish past poor performance. Even with the balance of bonuses, rebating tends to be confrontational.

Rewards & Rebates Bonuses due Stretch Target Minimum Acceptable Rebates due Improvements Bucket

Outsourcing Application Development How do we measure it? Need to measure outputs not inputs: Lines of Code? Function Points? Efficiency comparisons - $ per line; $ per Function Point? Realisation of business benefits? Or simply on-time, on budget delivery to quality criteria? Application Development is difficult to manage, whether in-house or outsourced. This doesn’t change the principles we’ve discussed; it makes them even more important!

Sharing Expectations Building the Foundations of a Successful Vendor-Client Relationship “Great discoveries and achievements invariably involve the co-operation of many minds” Alexander Graham Bell

Multiple Points of Misalignment Governance Vendor Client Sub- contractors Vendor Client Operation There are multiple opportunities for expectations to become misaligned. This will tend to lead to sub-optimal behaviors, inefficiencies and potential conflict.

Improving Performance by Sharing Expectations The Shared Expectations process has been used over many years in a variety of projects and outsourcing arrangements around the globe. The process is implemented through structured, facilitated sessions where both vendors and clients: Communicate their expectations of each other Set priorities to their expectations Score actual performance against expected performance for each expectation Review gaps between expected performance and actual performance Drive improvement by creating action plans and developing metrics to track progress Agree on follow-up procedures to ensure continual improvement

Shared Expectations Workshop Client Team Vendor Team Our expectations of Vendor Our expectations of Client Each workshop should involve no more than a dozen representatives - six from each ‘side’ Representatives should be peers of each other and have day-to-day interaction Each workshop should be of one full day’s duration, and ideally should take place ‘off-site’ A briefing session and ‘social function’ on the evening prior helps create an appropriate environment for the workshop Vendor performance to date against our expectations Client performance to date against our expectations Vendor expectations of Us? Client expectations of us? Our performance to date against their expectations Our performance to date against their expectations Combined Team Identification of gaps Agreement on priority issues Development of improvement plans Workshop Implementation Review Post Workshop

You will be more vulnerable than when the contract was let The End Is Nigh Consider Termination Performance Takeovers - them or you Changed management philosophy Taxation changes You will be more vulnerable than when the contract was let Last Take-Aways

Closing Thoughts Let the outsourcer manage Deal with expectations Represent your business Align the cultures Plan for the end ……….and have a Happy Christmas

Rob Aalders & Andy Zaple Closing Thoughts Thank you! Rob Aalders & Andy Zaple