The Capabilities Your Suppliers Need to Make Outsourcing Work Mary C. Lacity Professor of IS Leslie Willcocks David Feeny

2 95+ case studies, 140 decisions in US, Europe, and Australia, over 500 interviews IT Outsourcing: n= 98 decisions British Aerospace DuPont Inland Revenue Enron IRS Rigg’s Bank South Australia Swiss Bank Insourcing/Backsourcing: n= 18 decisions Continental BakingBrown GroupWestchester County Occidental Petroleum Ralston Purina Vista Chemicals MEMC Application Service Provision: n=10 decisions Corio EDS Host Analytics mySAP Zland Business Process Outsourcing: n = 4 decisions BAE Systems Lloyd’s of London Offshore Outsourcing: n = 10 customer-supplier pairs in progress Anonymous Case Studies by Participant Request: Fortune 500 companies 15 Years of Sourcing Research:

copyright Feeny, Lacity, Willcocks, Where are you on the learning curve? Phase 1: Hype & Fear Phase 2: Early Adopters Best & Worst Practices Emerge Focus on Costs Phase 3: Market Matures Richer Practices Emerge Focus on Quality Phase 4: Institutionalized Focus on Value-added Size of Market Customer Learning Time

4 Phase 1: Fear & Hype All artwork and web design © 2002 by Rebecca KempRebecca Kemp “Slaying the IS Dragon with Outsourcery” 1989 “Selling One’s Birthright,” 1989 “Outsourcing: A Game for Losers,” 1995 “The Outsourcing Bogeyman,” 2004 “Offshore Outsourcing Dragging Down Bonus Pay,” 2003 “Software:Will Outsourcing Hurt America’s Supremacy?” 2004

copyright Feeny, Lacity, Willcocks, Immature Customers Assess supplier resources rather than capabilities Have unrealistic expectations Focus too much on baseline costs & services

copyright Feeny, Lacity, Willcocks, Mature Customers Understand their objectives and how outsourcing fits into overall strategy Assess the supplier’s delivery, transformation, and relationship competencies vis-à-vis objectives Assess own capability to manage the supplier Commit necessary customer resources and management to make outsourcing work. Focus on overall value-added: fair market price, good service, adaptability, good relationship, possible revenue generation

copyright Feeny, Lacity, Willcocks, CUSTOMERSUPPLIER 9 Core Customer Capabilities Feeny & Willcocks, SMR, Core Supplier Capabilities: Feeny, Lacity, Willcocks 2004 Phase 3 & 4: Markets Mature Richer Practices Emerge Focus on Quality, Transformation & Value-Added

8 Business and IT Vision Delivery of IS Service Design of IT Architecture Business Systems Thinking Contract Facilitation Technical Architecture Contract Monitoring Vendor Development Technical Doer Relationship Builder IS Leadership; Informed Buying 9 IT Capabilities Customers Need In-House to make IT Outsourcing Successful Feeny & Willcocks, Sloan Management Review, Vol. 39, 3, 1998, pp

copyright Feeny, Lacity, Willcocks, RESOURCES CAPABILITIES COMPETENCIES 12 Capabilities to evaluate in your supplier

copyright Feeny, Lacity, Willcocks, Relationship Competency Transformation Competency Delivery Competency Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management 12 Capabilities to evaluate in your supplier Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

copyright Feeny, Lacity, Willcocks, Delivery Delivery Competency is based on capabilities which determine the extent to which a supplier can respond to a customer’s day-to-day operational services minimum requirement that customers seek in all suppliers includes supplier’s domain expertise, business management capabilities, etc. a supplier’s delivery competency--although crucial for success--may not serve to meaningfully distinguish suppliers.

copyright Feeny, Lacity, Willcocks, Transformation Competency is based on capabilities which determine the extent to which a supplier is equipped to delivery radically improved services in terms of cost and quality vitally important if the customer is seeking radical transformation of its back office from the outsourcing relationship. includes the supplier's capabilities to exploit technology, redesign business processes, and empower staff to a customer-focused culture. transformation capabilities must be exploited for the customer's benefit, not just to increase the supplier's margin. Transformation

copyright Feeny, Lacity, Willcocks, Relationship Competency is based on capabilities which determine the extent to which a supplier is willing and able to align with the customer's needs and goals The relationship competency uses innovative plans, aligned contracts, and governance structures and processes to ensure the promise of win/win relationships. This is the most difficult competency to find in a partner. Size of deal important factor Relationship

copyright Feeny, Lacity, Willcocks, Domain Expertise: the capability to apply and retain sufficient professional knowledge of the process domain to meet user requirements Customer wants the supplier to manage transitioned staff to eliminate poor performers, adjust capacity, leverage untapped potential of best people For body-shop outsourcing in which the customer hires suppliers for specific tasks, the customer should retain most of the domain expertise. For outsourcing relationships where the supplier has more responsibility, it may be more economical and effective for the supplier to employ most of the domain experts. Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

15 Business Management: the capability to consistently deliver against both customer service level agreements and suppliers’ own required business plans Savvy customers know that it is in their best interest to protect and ensure the supplier's financial health Savvy suppliers are upfront about their margin requirements Supplier Winner's Curse 12 Cases 3 Cases No Curse19 Cases 51 Cases Negative Outcome Positive Outcome Customer Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

copyright Feeny, Lacity, Willcocks, Behavior Management: the capability to motivate and manage people to deliver service with a “front office” mindset How do suppliers orient new employees to their culture? How do suppliers reward and incent desired behaviors? S2Tech, an Indian offshore supplier, hires only Indians with a minimum six years experience living in the U.S. & sets their hours as 1:00 to 10:00 to minimize time zone effects Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

copyright Feeny, Lacity, Willcocks, Sourcing: the capability to access whatever resources are required to deliver service targets Customer wants to benefit from supplier’s access to: economies of scale lower unit labor costs from supplier’s offshore operations scarce professional skills superior infrastructure Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

18 Process Improvement: the capability to design and implement changes to services processes to meet improvement targets Six Sigma, CMM, ISO certifications are only indicants of process improvement capability Customers complain certifications benefit suppliers more than customers Indian suppliers were all at level 4 or 5 U.S. customers were all at level 2 or below Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

copyright Feeny, Lacity, Willcocks, Questionable Value/Cost: "the overhead costs of documenting some of the projects exceeded the value of the deliverables." – Pam, Global Team Leader member, Biotech "You ask for one button to be moved and the supplier has to first do a twenty page impact analysis--we are paying for all this documentation we don't need." – Project Manager, Financial Services “Mistakes upstream replicate downstream” -- Retail “Certification is no substitute for experience” -- Everybody Process Improvement: the capability to design and implement changes to services processes to meet improvement targets Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

copyright Feeny, Lacity, Willcocks, Process Competency Goal is to redesign business processes to reduce costs and to improve quality through Six Sigma quality improvement discipline.  DPMO % % 366, % Process Capability Defects Per Million Yield Opportunities % 46, % 2308, %

copyright Feeny, Lacity, Willcocks, Process Competency Redesigning Processes such as Senior Leader Peer Review Old process: 640 senior leaders did paper-based peer reviews, assisted face-to-face by HR personnel New process: e-hr online peer review "What would have happened before, thirty people would have happily expanded a task to fill three months and as it is now, eight people have been busy for a month--bang! Done." -- Mike Margetts, Head of Implementation, Xchanging HR Services

copyright Feeny, Lacity, Willcocks, Technology Exploitation the capability to swiftly and effectively deploy technology in support of critical service improvement targets Technology is expensive and must be the master, not the servant e-HR to implement standardization, shared services, and self-service CGI co-develops annual technology plan with customer and supplier Customer verses supplier investment Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

23 Program management: the capability to prioritize, coordinate, ready the organization, and deliver across a series of inter- related change projects Multi-phased approaches Short cycles Balance paradox of rigorous project management with flexible pragmatism Operational Critical activity Preparation Service Set-Up Proces s People Technology Sourcing Environmen t Preparatio n Realignment Streamlining Continuous Improvement 2-3mths3-6mths6-9mths Source: Xchanging Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

copyright Feeny, Lacity, Willcocks, Customer Development: the capability to transition users of an internally provided service to customers who make informed decisions about service levels, functionality, and costs Requires aggressive communication and dissemination of the meaning of the partnership to all budget holders in the customer organization. To avoid excess costs caused by runaway user demand, customer development requires customer stakeholders to understand the financial consequences of their demands. Customer satisfaction monitoring and reporting Allows customers to define services, service levels Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

copyright Feeny, Lacity, Willcocks, Planning and Contracting: the capability to develop and contract for business plans which deliver ‘win/win’ results for customer and supplier over time. One supplier quipped, "If the customer says win/win, they really mean, the customer wins twice.“ Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

26 Planning and Contracting Fee-for-service contracts are suitable when customers' requirements are definable and when customers are primarily seeking modest cost reductions, variable spend, and the ability to focus on more value-added activities Previous strategic partnerships falsely assumed the customer had exploitable world-class back offices. Newer partnerships focus upon the customer's back office transformation first, commercial exploitation second.

copyright Feeny, Lacity, Willcocks, Organizational Design: the capability to design and implement organizational arrangements to realize plans and contracts ? Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

copyright Feeny, Lacity, Willcocks, Organizational Design: Offshore Onsite Supplier Engagement Manager Offshore Supplier Delivery Team Local Business Units Architects/ DBAs/etc. Project Managers Offshore Supplier Delivery Team Offshore Supplier Delivery Team PMO

copyright Feeny, Lacity, Willcocks, Onsite Supplier Project Managers Offshore Supplier Delivery Team Offshore Supplier Delivery Team Offshore Supplier Delivery Team Onsite Supplier Project Managers Offshore Supplier Delivery Team Offshore Supplier Delivery Team Offshore Supplier Delivery Team Architects/ DBAs/etc. Project Managers PMO Local Business Units Organizational Design: Offshore

copyright Feeny, Lacity, Willcocks, VP IS Team Lead Project Manager Director Development Staff Team Lead Development Staff Relationship Manager Team Lead Anchor Development Staff Team Lead Development Staff Kaiser & Hawk, 2004 Organizational Design: Offshore

copyright Feeny, Lacity, Willcocks, Example of a large deal, creating an organizational structure that operates like a strategic business unit within the supplier organization is an effective design Customer and supplier executives serve on the Board of Directors, which transforms the role of "customer" to active "partner." The supplier account manager assumes the more empowered leadership role of CEO, including a staff dedicated to business development beyond the focal customer. The CEO's direct reports include the supplier's Practice Directors who hold dual positions within the supplier parent organization to cooperatively share resources, best practices, and intellectual property across customer accounts. Organizational Design Example: Xchanging & BAE Systems’ XHRS

copyright Feeny, Lacity, Willcocks, Organizational Design Xchanging & BAE Systems’ XHRS

copyright Feeny, Lacity, Willcocks, Governance: capability to define, track, assess and fix performance Fee-for service governance in offshore: Customers complain they cannot rely on supplier’s internal governance mechanisms Customers designing dashboards Customers designing and demanding daily status reports Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

copyright Feeny, Lacity, Willcocks, Governance: capability to define, track, assess and fix performance Joint Boards of Directors can create a managerial schizophrenia Multiple Joint Boards help provide checks and balances among competing objectives Joint Board of Directors Joint Service Review Board Joint Technology Review Board Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise Example of Strategic/Enterprise Partnerships

copyright Feeny, Lacity, Willcocks, Leadership: the capability to identify, communicate, and deliver the balance of delivery, transformation, and relationship activities to achieve present and future success for both client and provider. Requires individuals who have the vision, experience, ability, and clout to serve as "CEO" of the relationship. 76 case studies of EDS, IBM, CSC, Accenture with similar contracts found customer/supplier leadership as main explanator of customer satisfaction Every customer expects the supplier’s A team Often customer demands a change in leadership with first few months—on both sides! Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

copyright Feeny, Lacity, Willcocks, Prioritize supplier’s competencies based on your outsourcing objective Main Customer Objective: Supplier’s Delivery Competency Supplier’s Transformation Competency Supplier’s Relationship Competency Lower costs on baseline services 1 st 3 rd 2 nd Transformation of back office processes 2 nd 1 st 3 rd New business development 3 rd 2 nd 1 st ETC…

copyright Feeny, Lacity, Willcocks, Supplier Perspectives on Client Potential Growth Value of Client Present Revenue Value of Client HIGH LOW HIGHLOW DevelopRe-commit De-commit Reap and Retain

copyright Feeny, Lacity, Willcocks, Challenges Remain Customer/Supplier ‘fit’ across scope and time Reality vs. rhetoric of ‘partnership’ Difficulty of achieving sustainable success