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

2. 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!

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

4. 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)

5. 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?

6. ?  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

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

8. 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?

9. 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)

10. Setting Principles
Example of a Principle

11. 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

12. 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!

13. 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!!

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

15. 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

16. 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

17. 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’

18. The Value of a Consultant

19. 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.

20. 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!

21. 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?

22. ‘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

23. 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?

24. 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

25. 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

26. 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

27. 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?

28. 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

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

30. 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

31. 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

32. IBM ATMaster - an example of Best Practice

33. IBM ATMaster - Key Measures

34. IBM ATMaster - Key Measures

35. IBM ATMaster - Measuring the Right Way
Initial Target: 95% availability. 7 days, 24 hrs per day. Measured quarterly
Translated: 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 & Sun 08: :00. Measured quarterly.
More than 19 hours downtime during these hours per Quarter would result in service levels being missed.

36. 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

37. 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!

38. 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.

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

40. 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!

41. 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

42. 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.

43. 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

44. 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

45. 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

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

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