1. 1 Business Process Outsourcing Mary C. Lacity “In the Mountains,” 1867, Albert Bierstadt 1830-1903

2. 2 Readings Lacity, M., Feeny, D., and Willcocks, L., "Transforming a Back Office Function: Lesson from BAE Systems' Experience with an Enterprise Partnership," MIS Quarterly Executive, Vol. 2, 2, September 2003, pp. 86-103. Feeny, D., Lacity, M., and Willcocks, L., "Taking the Measure of Outsourcing Providers," Sloan Management Review, Vol. 46, 3, Spring 2005, pp. 41- 48.

3. 3 Business Process Delivery Customized Applications Standard Applications Application Operating Infrastructure Hosting Infrastructure Network Services Network Connectivity The Netsourcing Service Stack One-to-Many Business Models (merges to one-to-one)

4. 4 What Customers Want From Back Office Transformation Lower costs Better service Variable costs Scalability Flexibility Trust Back Offices: Human Resource Management Procurement Finance Accounting Etc…

5. 5 Governance Capabilities Needed For Back Office Transformation Lower costs Better service Variable costs Scalability Flexibility Trust Service Excellence Process Improvement People Empowerment Technology Enablement Project Management Change Management

6. 6 Sourcing Options for Back Office Transformation 1.Do It Yourself (Insourcing) 2.Management Consultancy (Time & Materials) 3.Business Process outsourcing (Fee for service) 4.Equity Swap 5.Joint Ventures 6.Enterprise Partnership

7. 7 Business Process Outsouring With BPO, the supplier owns and operates the resources, including infrastructure, applications, and people, to deliver a business process as a service to customers. This a fee-for-service business model.

8. 8 BPO Survey: Size of Market n = 120 Source: Scholl, Rebecca, “BPO at the Cross Roads”, presentation At World Outsourcing Summit, Orlando Florida, 2002.

9. 9 Enterprise Partnerships New business model Most of our research is based on Xchanging Customers will be very interested in this model “An enterprise partnership is a business model that creates A 50%-50% enterprise between the customer and supplier whose primary mission is to share the cost savings generated from the supplier’s transformation of the customer’s back office operations. A secondary mission is to generate and share revenues from external sales to other customers after the transformation is complete.”

10. 10 Enterprise Partnerships Customer Spends ~$100 million A year Supplier takes over Resources & staff, Transforms function, and shares in savings.

11. 11 Enterprise Partnerships Customer Spends ~$100 million A year Supplier takes over Resources & staff, Transforms function, and shares in savings. $110 million transfers Supplier rebates say 15% = $16.5 million Any extra savings are the supplier’s revenues. Thus if the supplier can deliver the baseline services for $80 million, they would earn $13.5 million

12. 12 How Joint Ventures differ from Enterprise Partnerships Purpose of the Joining Division of Risk Management Responsibility Asset Base

13. 13 Xchanging Insurance Services (XIS) Xchanging Claims Services (XCS) Xchanging Human Resource Services (XHRS) Xchanging Procurement Services (XPS)

14. 14 Transforming Back Office to Front Office: and Enterprise Partnership for Human Resource Management Mary Lacity David Feeny Leslie Willcocks

15. 15 Xchanging Human Resource Services (XHRS) 10 year, £250million deal Benefits to BAE after 20 months: Promised cost savings on baseline services delivered 400 HR services levels have stay same or improved Web-enabled HR system rolled out to 40,000 BAE users 462 HR staff transferred to XHRS have been re-oriented New HR facility built and occupied Remaining HR staff focus on strategic HR activities

16. 16 Research Method Face-to-face interviews with 15 people including: HR Director, BAE SYSTEMS Enterprise Relationship Director, BAE SYSTEMS SBU HR Director, BAE SYSTEMS CEO of Xchanging Member, BOD, Xchanging Managing Director, XHRS 3 transferred BAE managers, now: CFO, XCS Head of Service, XCS Head of Resources, XCS 6 practice directors (Service, Process, Technology, Environment, People, Implementation) Documentations such as financial reports, practice manuals, performance assessments, annual reports, memos.

17. 17 Xchanging provides human resources, procurement, customer administration and accounting services to over 200 customers including BAE Systems, Lloyd's and the London Insurance Market. Xchanging employs over 1,100 people. Xchanging takes responsibility for the entire back office, specific functions or a particular business process and transforms them into fit for purpose services. In short, Xchanging cost for profit. Founded by David Andrews in 1999 About Xchanging

18. 18 About BAE SYSTEMS Prime contractor and systems integrator in the air, land, sea, space, and command and control market sectors. Defense, commercial, civil markets World-class capabilities in naval platforms, military aircraft, electronics, systems integration and other technologies. Eurofighter AstuteDestroyer

19. 19 About BAE SYSTEMS January 1999, British Aerospace announced merger with Marconi to create BAE SYSTEMS Investors promised £275 million in annual cost savings within 3 years "The proposed merger with Marconi Electronic Systems is an important step in the consolidation of the industry in Europe and creates a strong and highly capable business with significant cost benefits." -- Sir Richard Evans, Chairman of the Board, BAE SYSTEMS

20. 20 BAE SYSTEMS’ HR In 1999, Terry Morgan, Group HR Director charged with delivering 15% to 40% cost savings on annual HR spend of £25 million Group HR was small, focusing on senior pay & benefits, senior level development, organizational design 700 HR professionals in SBUs at 70 sites doing transactional activities such as payroll, benefits, recruiting, training, HR procurement Shared Services as solution to cost reduction…

21. 21 SBU Managing Director SBU Managing Director SBU Managing Director SBU Managing Director SBU HR Director SBU HR Director SBU HR Director SBU HR Director Transactional Activity/ Professional Services Transactional/ Professional Group HR Head Office SBU Managing Director SBU HR Director SBU Managing Director SBU Managing Director SBU Managing Director SBU Managing Director SBU HR Director SBU HR Director SBU HR Director SBU HR Director Group HR Head Office SBU Managing Director SBU HR Director FROM DECENTRALIZED: TO SHARED SERVICES: Transactional Activity/ Professional Services Transactional/ Professional Transactional/ Professional Transactional/ Professional

22. 22 Sourcing Options Considered 1.Do It Yourself (Insourcing) 2.Management Consultancy (Time & Materials) 3.Business Process outsourcing (Fee for service) 4.Enterprise Partnership

23. 23 January 2000: David Andrews proposes enterprise partnership Spring 2000: Invitation to bid June 2000: Letter of Intent signed with Xchanging June 2000 to February 2001 Contract Negotiations May 1, 2001 Go Live BAE/Xchanging Timeline

24. 24 Enterprise Partnership ? Because, against their normal practice, BAE SYSTEMS did not do a formal request for proposal, the HR team wanted to step back and invite Xchanging and another supplier to compete. At this stage in April 2000, Xchanging's team was devastated:. "When we told Xchanging that we were going to do a beauty parade with Xchanging and another BPO supplier, I have to say I have never seen David Andrews so shell-shocked." -- Chris Dickson, Relationship Director, BAE SYSTEMS

25. 25 Enterprise Partnership ? Would accept BAE transfers -- Use Exult’s existing staff Complete attention to BAE -- Just signed other megadeals Take service as-is -- BAE to clean up mess first May 2000

26. 26 BAE/Xchanging Negotiations June 2000 – February 2001 Scope Reduction: Eliminate North America Only 462 UK people to transfer rather than 560 "It is my perspective and obviously it is not perfect information but certainly I had a very, very strong view that there were some people in BAE SYSTEMS that had decided to de-scope the deal; who never really knew what the scope was but decided what scope they would find politically acceptable and that was it, that was the deal they wanted" - David Bauernfeind, CFO "So we ended up drawing a line in slightly the wrong place, in my view, so we still had some people in BAE SYSTEMS’ retained HR who were never going to play the strategic role as designed." – Steve Hodgson, Head of Resources, XHRS

27. 27 BAE/Xchanging Negotiations June 2000 – February 2001 50%/50% Joint Ownership 50%/50% split in cost savings, estimated baseline £25m/year: YEAR 2001 2002 2003 2004 2005 Percent 10% 15% 15% 15% 15% Delivered as a rebate, if £25million costs transferred, Xchanging would only charge £22.5million 50%/50% split on new revenue generation from external sales

28. 28 BAE/Xchanging Negotiations June 2000 – February 2001 Services: As-is measured within 6 months By year 5, improvement to upper quartile Governance: Joint Board of Directors: CEO of Xchanging and Group HR Head BAE 3 Xchanging execs & 2 BAEs non-execs Purpose: Protect the Rights of Shareholders Service Review Board: 3 members from BAE, 3 members from Xchanging Service specifications, price approval Purpose: Service performance monitoring Technology Review Board: Joint board to ensure £20 million investment

29. 29 Contract in Effect in May 2001

30. 30 Xchanging’s management believes that the capabilities required to transform a back office to a front office requires 7 generic business competencies rather than domain specific knowledge… How Did Xchanging Complete the Transformation?

31. 31 Operational Critical activityPreparation Service Set-Up Process People Technology Sourcing Environment Preparation Realignment Streamlining Continuous Improvement 2-3mths3-6mths6-9mths Transformation is Implemented in Four Phases

32. 32 People Competency People Competency builds champion teams from transferred employees by unlocking their talent and energy, primarily through extensive training programs and direct contact with Xchanging’s senior management: -- Induction Programs to 430 transfers within 6 weeks -- Management training -- New job descriptions -- New Customer-focused culture

33. 33 Preparation Re-alignment Streamlining Continuous Improvement Mourning Forming Storming Norming Performing Mechanisms Deliverables Measures Benchmarks Gate Mechanisms Deliverables Measures Benchmarks Gate Mechanisms Deliverables Measures Benchmarks Gate Mechanisms Deliverables Measures Benchmarks Gate People Competency

34. 34 Service Competency Define the as-is service, measures service, and agrees to service targets through a disciplined methodology called Service1st The goal is to provide the same levels of service during transition then move to customer-negotiated service levels based on individual customer needs.

35. 35 Service Specification & Reports Service Objective Customer TypeService Class CustomerService Item Customer Service Metrics e.g. accuracy cycle time frequency quality volume & Standards Service Competency

36. 36 Service Competency

37. 37 Service Competency XCS Service Team: As-Is Service: 400 service levels drafted Service Review Board approved in October 2001 But an extra £80 million a year in indirect procurement spend Was uncovered for fleet, contract labor, recruiting, stationary, And travel! HR was buying services from over 200 suppliers, All in decentralized budgets.

38. 38 Xchanging Procurement Services (XPS) Separate Enterprise Partnership signed November 2001 Worth £800 million over 10 years Sourcing Competency

39. 39 Sourcing Competency Car Fleets Non-technical contract labor Learning & Development Health Care Recruitment Renumeration & Benefits Stationary £80 million

40. 40 Sourcing Competency

41. 41 Example of ‘Un-bundling’ Key Cost Elements of Car Leasing

42. 42 Outcomes First Year on XPS o It took 8 months, not 2, to transfer spend o Only £35 million in 7 categories was transferred o To make up difference, BAE transferred 8 more categories: Travel, Printing, Office Furniture, Computer Consumables, Mobile Phones o On average, 12% savings delivered on categories transferred o Margins range from 5% to 45% depending on category

43. 43 Environment Competency Goal: create modern and well-branded physical spaces to build a visible front office for customers. Physical spaces also foster a front office mentality Xchanging built, bought furniture, and decorated new facility By February 2002 Occupancy held up by IT contract with CSC

44. 44 Preston Environment Competency

45. 45 Preston Ready! Environment Competency

46. 46 Preston Ready!

47. 47 Environment Competency "Space has a big impact on people's morale and the perception of their value-- Mike Margetts, Implementation Practice Director, Xchanging

48. 48 Process Competency Goal is to redesign business processes to reduce costs and to improve quality through Six Sigma quality improvement discipline.  DPMO 63.499.99966% 523399.9770% 366,80793.3% Process Capability Defects Per Million Yield Opportunities % 46,21099.37% 2308,00069.2%

49. 49 Process Competency Process Head & Master Black Belt: Mentors Black Belts: Full Time Green Belts: Part-time

50. 50 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

51. 51 Technology Competency Goal: Build and implement enabling technology on component driven architecture. Goal: Build and implement e-HR within 6 months Went on a recruiting rampage on May 1, 2001 Hired 19 full time technology managers, architects & specialists PeoplePortal went live on October 4, 2001

52. 52 Reference Performance PeopleRelationship Portal Contact Management HR Knowledge and Content Mgmt. Service Management eForms CC I Performance Control Core Enterprise HRIS ESS/MSS Core DW (Time Rel) Data and Process Integration CTR Xchanging Self Service e-HR Application Framework

53. 53 Implementation Competency Goal: to orchestrate the timing and resources required for the Other six competencies.

54. 54 Implementation Competency

55. 55 Implementation Competency PreparationRealignmentStreamliningContinuous Improvement June 2000 to May 2001 May 2001 to October 2001 November 2001 to December 2002 To May 2011 Data collected on BAE finances & people Service objective & preliminary service definition Structure & people plans Cost modeling Financial reporting & control plans Technology architecture designed Constant communication with targeted transfers 430 BAE staff are transferred & re- oriented, & retrained Detailed "as is" service specification defined & approved Black belts trained and working on first set process improvements; recruiting process redesigned & implemented PeoplePortal launched New Organizational design Shared Services established Preston Service Regional Teams established Downsized staff 3 more versions of Peopleportal Process Improvements to more HR services Future challenges: Attract external customers to increase revenues Sustain cost cuts and service improvements Upper quartile performance in all HR service areas

56. 56 2005 Update Obtained new business, including a £500,000 deal with Spirit Group for HR services in 2005 Partnership has earned numerous nominations and awards including UK’s National Outsourcing Association (2004) and BAE’s HR Excellence Award (2005)

57. 57 Findings as of 2005 Prior to the Xchanging partnership, HR at BAE SYSTEMS and CA at Llyod’s: (a)lack of investment, (b)lack of leadership, (c)lack of employee motivation, (d)lack of customer-focused service, (e)bureaucratic and inefficient processes, and (f)outdated and non-integrated technology. Preliminary findings assess the effectiveness of using an enterprise partnership as a vehicle for transforming this low functioning back office into a commercial enterprise.

58. 58 Finding 1: The Enterprise Partnership model creates a clash of cultures, but cultural incompatibility may be just what you need. "What was obvious to me, the Xchanging people were part of a small company desperate to succeed, and that desire to succeed just didn't exist in the BAE SYSTEMS HR culture." -- David Bauernfeind, CFO “If you left work at half past six, you were having a late night at BAE. I mean, that is the BAE culture. I was in at ten to seven this morning and I'll be here at nine o'clock tonight and that is the Xchanging culture.”

59. 59 Finding 2: The Enterprise Partnership model uses multiple short-term implementation phases that yield faster results and pose less risk than a single, large-scale project. "Innovation doesn't need to be a big idea, it can be lots of little things...What we like doing is introducing a bit of change every three months because it has much more immediate impact rather than building a great big filthy system." -- David Andrews, CEO Xchanging "If you don’t do it within three to six months then you don’t do it." -- Mike Margetts, Implementation Director, Xchanging

60. 60 Finding 3: The Enterprise Partnership model views technology not as a solution, but rather as an enabler. "People are altogether more flexible and creative and clever to fit around a system." -- Mike Margetts, Implementation Director, Xchanging "I wanted to see what happened if you improved business processes and services without touching IT. That was just a quirk of mine which was a very lucky break because in fact what we found was that we could engineer a huge improvement and do it on the back of the old legacy system." -- David Andrews, CEO, Xchanging.

61. 61 Finding 4: When employing Fee- for-Service Outsourcing or an Enterprise Partnership model, be sure to manage user demand. "We are seeing some evidence of increased demand with Xchanging HR Services. It's the early days yet, but demand for service before XHRS was always restricted because as an HR Director, you only have the number of people that you could get your MD to agree to, so that effectively capped it. Of course, we have taken that away now and people can demand ever more and more." -- Steve Hodgson, Head of Resources, XHRS.

62. 62 Finding 5: Both Fee-for-Service Outsourcing and The Enterprise Partnership Model uncover spend previously hidden in decentralized budgets. "The cost has increased quite substantially. We’re just having a review on that at the moment. At the moment that communication isn’t clear and it does look as if costs are going up. But in reality, we’re doing a review of it and we’re doing some investigation on it, in reality it probably isn’t going up because of Xchanging. It just means that we need to probably transfer budget over that hasn’t traditionally sat within the HR team, so that it's all as one and recharged against that, that total mass, rather than part left within the business. But it is a concern." -- Kim Reid, HR Director, BAE SYSTEMS

63. 63 Finding 6: The Enterprise Partnership model delays due diligence until after the contract is in effect, which speeds the negotiation process and more fairly distributes the burden of newly discovered costs. "The quality of the data about the HR function in terms of not just what salaries people were on but just who was there, how many to within 10%. Really, really surprising and if anything that experience, if I ever needed drilling home about why BAE needed to do the deal, that did it. If you can’t tell how many people are in your own function within 10% to 20% what chance have you got of providing value added HR for a business? It was just shocking." -- David Bauernfeind, CFO, XHRS

64. 64 Finding 7: The Enterprise Partnership model aligns incentives better than fee-for- service outsourcing. "So if it was a traditional customer/supplier relationship, I think it would be very much customer/supplier which perhaps may not be totally joined up in the middle. You would get the instance that the customer would blame the supplier for not delivering a service. For me, the partnership means that the accountability for delivering the service into the business is mine. I have to make sure that it delivers a seamless service so that myself and my other HR directors in this business will not say ‘the reason this went wrong was because Xchanging did this’. If something goes wrong it’s because we did it. It’s very much a partner type relationship." -- Kim Reid, HR Director, BAE SYSTEMS

65. 65 Finding 8: The Enterprise Partnership model does not perfectly align incentives. In the past, the joint governance between customers and suppliers we studied led to a managerial schizophrenia. Because the enterprise's primary customer is also an owner, the customer has two competing goals: to maximize cost-efficient service delivery from the enterprise and to maximize the revenue of the enterprise. How can the customer do both? Furthermore, if the same executives sit on the Board of Directors of the customer company and the enterprise company, which hat should they wear? Should they be pushing for more services at a reduced cost, thereby squeezing as much as they can from the enterprise? Or should they push for generating more revenues, which distract the enterprise from their needs?

66. 66 Finding 9: The Enterprise Partnership model benefits from generic business competencies rather than domain-specific knowledge. "I always say the best HR people are people who haven’t been in the HR function all their lives. You need a different view. So the Xchanging team, although they are not HR professionals, it works probably better that they are not because if they go in understanding all the pitfalls that there may be, then they’ll never make any changes, so sometimes it is better." -- Kim Reid, HR Director, BAE SYSTEMS

67. 67 Finding 10: The Economics of the Enterprise Partnership Model need to Work for the Client and Supplier Without Over-Reliance on Third Party Revenues. "The business development in year one at this stage was almost zero because the focus was let’s get our act together in delivering this to BAE SYSTEMS first before we all turn salesmen and go out and start selling ourselves. It is always a hard decision to make because our future relies on getting third party business…" -- Alan Bailey, New Business Development, XHRS

68. 68 Can Success be Replicated? Ideal Customer Profile The customer has a large back office spend of at least £25 million per year and at least 500 employees, making the deal large enough to attract a competent external supplier The customer's back office operations are highly decentralized, allowing the opportunity for significant savings from centralization and standardization The customer's back office operations have not received high management attention historically, allowing the opportunity for significant savings and service improvement from better management The customer's organization would resist centralizing and standardizing themselves due to internal political resistance, unwillingness of senior management to make the required upfront investment, or lack of skills and experience of back office staff to make the transformation.

69. 69 RESOURCES CAPABILITIES COMPETENCIES 12 Capabilities to evaluate in your supplier

70. 70 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

71. 71 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.

72. 72 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

73. 73 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

74. 74 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

75. 75 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

76. 76 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

77. 77 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

78. 78 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

79. 79 Technology Exploitation the capability to swiftly and effectively deploy technology in support of critical service improvement targets Technology is expensive and must be the servant, not the master 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

80. 80 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

81. 81 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

82. 82 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

83. 83 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.

84. 84 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

85. 85 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

86. 86 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

87. 87 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

88. 88 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

89. 89 Organizational Design Xchanging & BAE Systems’ XHRS

90. 90 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

91. 91 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

92. 92 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

93. 93 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…

94. 94 Supplier Perspectives on Client Potential Growth Value of Client Present Revenue Value of Client HIGH LOW HIGHLOW DevelopRe-commit De-commit Reap and Retain

95. 95 Challenges Remain Customer/Supplier ‘fit’ across scope and time Reality vs. rhetoric of ‘partnership’ Difficulty of achieving sustainable success

96. 96 Further Information: Lacity, M., Feeny, D., and Willcocks, L., “Commercializing the Back Office at Lloyd’s of London: Outsourcing and Strategic Partnerships Revisited,” forthcoming in the European Management Journal, Vol. 22, April, 2004. Lacity, M., Feeny, D., and Willcocks, L., "Transforming a back-office function: Lessons from BAE Systems' Experience With an Enterprise Partnership,“ MIS Quarterly Executive, 2003, pp. 86-103. (can be downloaded from www.misq.org) Feeny, D., Willcocks, L., and Lacity, M., Business Process Outsourcing: The Promise of the Enterprise Partnership Model, Templeton Executive Briefing, Templeton College, Oxford University, ISBN 1 873955162, 2003, 44 pages. Willcocks, L., Hindle, J., Feeny, D., and Lacity, M., " Knowledge in outsourcing - the missed business opportunity," Knowledge Management, Vol. 7, 2, November/December 2003. Hindle, J., Willcocks, L., Feeny, D., and Lacity, M., "Value-Added Outsourcing at Lloyd's and BAE Systems," Knowledge Management, Vol. 6, 4, September/October 2003, pp. 28-31.