Zia Qureshi, Chief Executive Business Catalyst Managing Outsourcing - The Sustainable Approach World Outsourcing Summit, USA Zia Qureshi, Chief Executive Business Catalyst

This Presentation is in 3 Parts Introduction Case Study – Commonwealth Bank Sustainability Framework

Introduction “Many organisations fail to achieve true benefits of outsourcing” – Dun & Bradstreet reports that 20-25% of all outsourcing relationships fail within two years, and 50% fail within five. “A sound management framework is the first step towards benefit realisation & sustainability “ Zia Qureshi

Key Criteria for Sustainability Clear strategy – outsourcing drivers Sound commercial deal Governance / operational mgt. structure Relationship Management Correctly defined scope and service levels Business planning process Understand why you are outsourcing Ensure clear understanding of the underlying business purpose & business drivers Investigate outsource vs re-engineer options Strategy is articulated via business plans – update as business plans evolve Value proposition for both parties underpins outsourcing life-cycle

Commonwealth Bank of Australia (CBA) Australia’s largest domestic financial organization > 10 million customers, 3000 ATMs, 120 000 point of sale terminals within stores In 1997, 1500 IT employees transferred to EDS The then largest outsourcing deal in financial services = $5 billion deal. Bank bought 35% of EDS EDS responsible for Banks’ IT operations, maintenance and development Surpassed original goal to reduce costs by 20% by year 3 and improved service levels by 10% The bank faced an environment where they faced lower and lower costs, increased competition from non-traditional competitors – they needed a way to control the quality Their value chain was being attacked at every point by new competitors e.g.. Financial technology – brokers & originators could set up new businesses – CBA decided to change their org structure to replicate the value chain. They decided to in-source loan processing (The bank’s core competency) and outsource IT. They did a basic market study of the market infrastructure – need to outsource on a competitive basis – avoid a monopoly situation – had to be in both parties interests – volume of work they were outsourcing would make a difference to the service provider. One huge benefit for the bank was when they were looking for new technology upgrades (e.g.. Eftpos) – what took them months to do, took EDS 48 hours to complete (capacity enhancement)

Commonwealth Bank of Australia David Murray, Managing Director, Commonwealth Bank of Australia

Sustainability Framework Key elements include: Soundness of Commercial Deal Governance Framework / Relationship Management Business Planning Framework Build Meaningful Measurements Implementation & Change Management

Soundness of Commercial Deal Proper Due Diligence – deals awarded on sales presentation rather than provider hard evaluation Sales Team Soundness of commercial deal is the starting point – sets the tone Sales people often view the sales process as a “game” – with this mindset, they fail to focus on the unique needs of their customer The next problem is when the “A” Sales Team goes out & sells the contract but sends in the “C” Team to deliver & manage the account

Between Rock & a Hard Place Delivery Team Between Rock & a Hard Place CLIENT EMLOYER

Soundness of Commercial Deal Undertake in-depth financial analysis of the deal to assess whether business case is realistic “ No one delivers outstanding value to clients to make a loss for their own business” Soundness of commercial deal is the starting point – sets the tone Sales people often view the sales process as a “game” – with this mindset, they fail to focus on the unique needs of their customer The next problem is when the “A” Sales Team goes out & sells the contract but sends in the “C” Team to deliver & manage the account

Soundness of Commercial Deal Avoid under bidders – it affects the quality of resources Conduct comprehensive risk analysis Soundness of commercial deal is the starting point – sets the tone Sales people often view the sales process as a “game” – with this mindset, they fail to focus on the unique needs of their customer The next problem is when the “A” Sales Team goes out & sells the contract but sends in the “C” Team to deliver & manage the account

Soundness of Commercial Deal Plan to achieve the objectives and strategies of both parties Soundness of commercial deal is the starting point – sets the tone Sales people often view the sales process as a “game” – with this mindset, they fail to focus on the unique needs of their customer The next problem is when the “A” Sales Team goes out & sells the contract but sends in the “C” Team to deliver & manage the account

Governance Framework / Relationship Mgt Key Principles: Maintain effective overall relationship management and contract management arrangements

Governance Framework / Relationship Mgt Establish a “one team concept” to provide strategy, direction and facilitation

Build multi-level organizational touch points Governance Framework / Relationship Mgt Build multi-level organizational touch points Well defined accountabilities

Governance Framework / Relationship Mgt Build mechanism for effective performance review – formal (scorecards) and informal measures

Partnership vs Contractual Relationship In a contractual relationship one party (A) provides goods or services to another (B) in exchange for payment. In a partnership two or more parties (A & B) combine their resources to serve a common client base and share the benefits. Both of these types of relationships are relevant at different aspects of an outsourcing arrangement. Both of these are operative at different aspects of an outsourcing relationship

Managing Outsourcing Relationships Can Be Complex CEO & Executives Business Partnership Relationship Management Client Outsourcer CEO & Acct Executives Strategic Intent & Value Proposition Service Delivery Projects & End-to-End Service Management Professional Services Management Partnerships Contractual Agreements SLA’s In-house Services Third Party Services Outsourcer Services Operational / IT Strategies Vision - Solution Design Professional Services Strategic Advice / Innovation CIO / One-team Concept

Relationship Management - Pitfalls Outsourcing demands an entirely new management style i.e. leading out rather than managing down Organizations often struggle to measure quantity, costs and customer satisfaction Over-reliance on penalty clauses Unresolved differences in culture and management styles Lack of leadership skills – need results based goals, communication and negotiations Point 2 Organizations can only achieve what they can measure however they often struggle to measure the quality of services they receive and how these compare against industry norms Basic characteristics such as quantities, costs & customer satisfaction are difficult to measure Point 3: Need to pay careful attention during the early transition phase, otherwise negative early experiences become difficult to overcome Point 4 Penalties are poor motivators of good performance – absence of performance incentives makes it difficult to drive overall relationship, especially towards continuous improvement & increased value

Critical Components for Managing the Outsourcing Relationship Management Structure Leadership Skills Relationship Structure WHO WHAT WHY Source: Michael F. Corbett

Relative Increase in Importance of Management Skills after Outsourcing New Management Skills Relative Increase in Importance of Management Skills after Outsourcing Same More Important Much More Important Business Technical People Negotiation Communication Planning Administration Organizational Financial 20 40 60 80 100 Survey of 30+ CIOs by Michael F. Corbett

Governance Plays An Increasingly Important Role Boards are increasingly accountable - ensure deals are conducted according to appropriate control standards Build active Risk Assessment into review process Business Managers participate in performance review (with functional experts) to ensure added value Avoid “penalty” mindset within Governance Team – nurture supplier success and view them as an asset Governance Team Structure Account Relationship Management Report to Project Champion (CEO) Manage all aspects of the relationship in accordance with vision Manage service delivery, contractual & commercial issues Ultimate decision in cases of dispute Commercial Management Ensure contractual arrangements are met within a commercial arena Ensure deliverables are provided as per agreement Manage the issues register Report progress to Account Relationship Manager Manage & control contract changes Service Delivery Mgt Day –to- day service management activities, delivered in accordance with agreed procedures Problem management – develop resolution action plans & ensure escalation processes monitored Define service performance benchmarking Develop & maintain accurate service delivery & performance rating Monitor performance against defined service levels/ balanced score card

Commonwealth Bank of Australia David Murray, Managing Director, Commonwealth Bank of Australia

Business Planning Framework Outsourcing is often managed as a contract management exercise rather than a business operation(s) requiring unique leadership, management focus and processes The “Outsourcing Business Plan” is key to adopting a true business management approach PURPOSE: Provide means of dealing with the evolving business needs and expectation management between the provider and the client, at strategic and operational levels

Commonwealth Bank of Australia David Murray, Managing Director, Commonwealth Bank of Australia

Outsourcing Business Plan Structure Strategy Financials Operations Human resource Communications Objectives, tactics, targets Profitability, ROI, savings Key Projects, timeline, service levels, KPI’s State of the partnership, HR needs Means of communication Ref: Bell Canada

Create Responsive Business Plans Plans need to recognize both parties need to maintain profitability over the long term Align business objectives between parties – integrate these into the strategic business plans Client is involved in provider’s business planning cycle – input into scope, timing, review process Focus team to pick up change signals early - revise plans as things change

Create Responsive Business Plans Build “improvement initiatives” into planning, ensure customer feedback into planning cycle Iterative process - as plans change, adjust measures and rewards Plan is mechanism to reflect changes in the business context Ensure performance measures & SLAs tightly support each other and link into plans

Build Meaningful Measurements The reality with many outsourcing contracts is that they have scores of SLA measures: Do they have a business outcomes perspective? How much time / cost in tracking and reporting? Who really gets time to look / act on them all? How many are really critical to the business outcome? Do you have a real basis to proactively interact, plan, monitor, measure and improve the arrangement?

Example of successful implementation: Sustainability Framework Revisited Example of successful implementation: Soundness of Commercial Deal Relationship Governance Framework Business Planning Framework Build Meaningful Measurements Implementation & Expectation Management

Change Management Impact on key stakeholders Top management visible support and commitment Lateral leadership Joint accountability

Include Change Management Principles… Partnering mentality: develop shared vision and commitment to common business outcomes Continuous improvement: proactively seek and assess technological advances and openly share performance information Cultural alignment: share information about current and desired cultures

Management Expectation Gap Superior Expertise Best Practice – Sales vs Delivery Innovation Quantum leap in Business Improvement – turn key Relationship Management Base Level Operations Low Medium High Institute communication strategies to manage unrealistic expectations from the very start