Large Scale IT Outsourcing Lessons Learned

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Large Scale IT OutsourcingLessons Learned

• AFCEA Professional Development Forum

Tracey Laurence 04 February 2003
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Agenda

• Life Cycle of a Deal
• Key Decisions/Components/Steps
• What works, What doesnt, Lessons Learned
• Public and Private Organizations
• Summary

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Life Cycle of a Deal

• Why Outsource, When What
• Preparing for Outsourcing
• Competition, Negotiations, Due Diligence
• Constructing the Deal
• Transition Transformation
• Governance Collaborative Management
• Adapting to Changes

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Why Outsource, When What

• WHY
• Cost Reduction
• Move Fixed Cost to Variable Cost
• Move CAPEX to OPEX
• Drive Standardization
• Transfer/Share Risk
• Increase flexibility elasticity
• Deal with the Explosion of Skills
• Gain/Increase Control
• Increase focus on and value to Business/Operations

The key is to decide what you want to achieve and
Maintain the Aim
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Client Organization Before Outsourcing
Business Alignment
IT Strategy Architecture
Impact Importance to Business
Enterprise Application Services
General Application Services
Infrastructure Services
Time Effort, Management Focus
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Client Organization - After Outsourcing
Business Alignment
IT Strategy Architecture
Where and Why avings
Impact Importance to Business
Enterprise Application Services
Knowledge Management
General Application Services
Project Management
Infrastructure Services
Global Best Practices
Time Effort, Management Focus
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Why Outsource, When What (Contd)

• WHEN
• You DECIDE what you want/need to achieve
• You have STRONG EXECUTIVE leadership in place
• Youre COMMITTED to seeing it through
• Decision through transition
• Anytime
• Understand that there will be some period of
  disruptive change
• STRONG EXECUTIVE leadership will minimize the
  period and negative impact turn it into a
  positive event

Typical Organizational Change Curve
Maximize the Climb
Minimize the Depth
Minimize the Time
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Why Outsource, When What (Contd)

• WHAT (Scope/Functions)
• Infrastructure (Desktop, Compute,
  Network/Telecom, Helpdesk, Security)
• Operations Support
• Engineering
• Architecture
• Secure non-secure
• Applications (Productivity, Collaborative,
  Business, Operations)
• Maintenance Support
• Development Implementation
• Architecture
• Business Process
• Transactions
• Customer interactions to back room
• Required applications infrastructure

Scope -gt Contract -gt Behaviour
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Why Outsource, When What (Contd)

• WHAT (Components)
• Capital / Leases
• Retained
• Refresh
• Cutover
• Software
• Processes Tools
• People
• Management
• Service Delivery Technical Staff
• Support Staff
• Facilities

Scope -gt Contract -gt Behaviour
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Preparing for Outsourcing

• Who Makes the Decision
• Organizational Alignment/Buy-In
• Building the negotiating team
• Scope
• People
• Financials
• Timeline

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Preparing for Outsourcing (Contd)

• WHO MAKES THE DECISION
• Primary driver of O/S generally outside of IS
• Very few internal IT people are behind it
• Fear of loss of jobs
• Fear of change
• Fear of loss of control
• Were unique
• Our users needs are unique
• Leads to belief of already best in class (cost,
  process, technology)
• Service Buyers are often unsure of complexity so
  the negative influence frequently bubbles up
  can lead to decision for wrong reasons

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Preparing for Outsourcing (Contd)

• ORGANIZATIONAL ALIGNMENT/BUY-IN
• Many large organizations have de-centralized and
  often disparate IT groups outside of CIO
• Buy-in from most groups is key internal selling
• Same fears will exist everywhere even
  centralizing is tough
• Uncovering true costs, duplication and
  disconnects drives compelling argument
• Participation at all stages from all groups will
  be key in maintaining alignment
• BUILDING THE NEGOTIATING WORKING TEAM
• Should form nucleus of on-going Governance -
  continuity
• Procurement specialists, Finance, Contracts
• Hand picked Subject Matter Experts for all
  in-scope functions and groups
• Best operational or engineering staff do not
  always have best skills for outsourcing
  preparations or on-going Governance
• Solid representation of retained functions
• Outside expert consultants recommended

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Preparing for Outsourcing (Contd)

• SCOPE
• One of the two toughest decisions
• Understanding demarcation of responsibilities and
  impact of decisions is key to creating a
  successful deal you want to drive the right
  behaviour and provide mutual incentives to do so
• Architecture drives platform, future usability,
  scalability
• Engineering drives volume of assets capacity
  and potentially maintainability environment
• Operations and maintenance can drive availability
  and health of environment (e.g. proactive
  monitoring maintenance)
• Retained functions are co-delivery agents NOT
  vendor management (Governance) often confused
  at the middle management/working levels
• Many organizations trending toward the desire for
  a utility based model
• Implies more end to end scope
• Requires well thought out financial structure

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Preparing for Outsourcing (Contd)

• PEOPLE
• The other tough decision
• If you want the best in service, put the best in
  scope
• Ensure you secure substantially equivalent terms
  and conditions for transferring employees
• Dont tie the hands of the outsourcer too much
  and remove their flexibility
• This will be a tremendous change for individuals,
  recognize it and be prepared to address it
• Once announced (when is often debated),
  demonstrate positives, communicate status
  frequently, maintain service focus

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Preparing for Outsourcing (Contd)

• FINANCIALS
• Up to 30 of costs can be hidden
• Identifying, collating and correlating costs to
  services will be an iterative process
• You wont get them all some intelligent
  extrapolation and interpolation will be required
  document all assumptions and data sources for
  trace-ability and audit-ability
• Building a reasonable and CREDIBLE base case will
  be key to successful negotiations the
  outsourcer will do reasonableness test
• TIMELINE
• Will vary by organization depending on barriers
  and complexity
• Absolute minimum of three months of focused
  effort (full time team) to prepare before RFP
• More likely closer to six
• If longer, then organizational alignment is
  likely a problem

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Competition, Negotiations, Due Diligence

• Competition
• Keep the playing field even provide realistic
  base cases
• Spend time with the potential providers
  leadership (both corporate and deal level)
  ability to partner will be key
• Be open, honest and fair
• Ensure there is enough detail in proposal that
  service and solution is realistic
• Negotiations
• Ensure procurement specialist engaged at all
  stages from objective setting, decision and
  preparation through signing
• Pay close attention to both parties behaviours
  throughout negotiations
• Can have competitive negotiations to a point of
  final down-selection
• If both parties walk away a little unhappy then
  likely a successful outcome a win-lose will
  drive poor behaviour and the wrong results
• Negotiators should form basis of on-going
  Governance - there will be ambiguity
  understanding of intent is key

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Competition, Negotiations, Due Diligence (Contd)

• Due Diligence Reverse Due Diligence
• Openness to allow both parties to gain
  familiarity, comfort and confidence in each
  others environments and solutions show me
• Be challenging but respectful
• Due Diligence (Outsourcer performs on Client)
• Technologies, Tools and Processes
• Service Levels - current
• In scope contracts
• Demographics of workforce (depersonalized)
• Client should provide chaperoned access to staff
  not on negotiating team
• Reverse Due Diligence (Client performs on
  Outsourcer)
• Technologies, Tools and Processes
• Treatment of People
• Behaviour
• Other Client References
• Outsourcer should provide chaperoned access to
  staff not on bid/negotiating team

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Constructing the Deal

• Demarcation of responsibilities and scope will
  drive the deal construct, pricing structure and
  ultimately behaviours
• Retained engineering volume based billing
• Outsource end to end function service based
  billing
• Blended rates may drive cherry picking
  banding can mitigate
• Ensure financials will drive outsourcer to
  continuous improvement and complete
  transformational changes to achieve operational
  efficiencies and excellence (i.e. baked in
  productivity and price performance)
• Seven years is typical for initial terms some
  are at ten few less than that harder to make
  work
• Transactional work relatively easy to define and
  bound
• Variable work (i.e. projects) is tougher to
  quantify and predict resources typically always
  managed in a job jar outsourcer will have to
  deliver service levels so potential for
  contention on-going
• Ensure Service Level Agreements are key to
  business/operation focused with a bite not
  crippling or punitive

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Transition and Transformation

• Both organizations must participate and work as a
  team (HR, Contracts, Finance, Technical Service
  Staff) openness
• People transition is CRITICAL define key
  milestones and penalties to ensure smooth cutover
  (i.e. offer letters timely and accurate, first
  paycheques on time and accurate, etc.)
• Both HR organizations must work as a team
• Outsourcer will need to introduce standard tools
  and processes client needs to place emphasis on
  service results rather than religious
  discussions around tools
• Outsourcer must clearly describe end to end
  service processes (and tools) intake, execution
  through to closure and measurement (metrics are
  key)
• Service model aimed at responsiveness and
  throughput rather than letter of contract
• One of the toughest yet most CRITICAL functions
  to both parties is Asset Management
• Initial inventory
• Automation
• Evergreening assets and inventory
• Attribution to purpose and process

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Transition and Transformation (Contd)

• Client can clean up environment prior to
  outsourcing to drive a better business case
  responsible management client should minimize
  investment to do so the outsourcer will invest
• Financial treatment of transition costs by
  outsourcer can allow investment to be spread
  mitigate extraordinary expense by client (unless
  client can provision)
• Sensible implementation plans good for both
  parties minimize cost and disruption
• Tool rollouts coincident with refresh where
  possible
• Risks identified with reasonable mitigation
  without being prohibitive
• Recognize that processes will need to be adapted
  by retained functions to realize full benefits
• Execution and implementation will be key for both
  parties avoid unnecessary constraints or
  barriers Strong Programme Management and
  regular collaborative reviews by lead executives
  from both parties is key
• Can take up to 18 months depending on scale and
  scope

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Governance and Collaborative Management

• Strong leadership and continuity from both
  parties is key in early stages
• Behaviour must be driven from the top
• Continuous and open communication is CRITICAL
• Emphasis must be on commonality and agreement,
  isolate and clearly define where there is
  disagreement and develop focused plans to resolve
  open issues do not let those pollute other
  conversations/interactions compartmentalizing
  issues is key
• Clear and documented agreements shared
• Shared action registers
• Sharing and understanding each others challenges
• Maintaining a balanced view
• Regular service and ops reviews
• Keep service and commercial discussions separate
  selected Governance to deal with commercial
  issues

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Adapting to Changes

• No deal is constructed perfectly
• No business/operations environment is static
• The end customer, business/operation real needs
  must be kept paramount
• Urgent service requirements must be attended to
  first sort out the commercials later (look for
  evidence of this behaviour during Reverse Due
  Diligence)
• Scope may be added -gt likely need to revisit
  billing structure and may need to amend
  contractual structure
• Dramatic scale changes (/- 50) should trigger
  automatic revisit variability factors no longer
  hold
• Note Keep overarching Master Agreement Terms and
  Conditions separate from the discrete Statements
  of Work and separate from the Financial schedules
  changes become easier to manage

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Summary

• Clear objectives alignment/buy-in
• Continuity of leadership through transition and
  first 18-24 months tenacity, focus and
  perseverance
• Behaviour is key at every stage
• Skill set for Governance is different than that
  needed to deliver hand pick
• Dont get caught in performing to the letter of
  the contract do the right thing (then fix the
  contract)
• Quality, high performing environments generally
  the lowest cost/best value (little to no backlog,
  no rework, fewer failures)
• Delivering on transition transformation is key
• Understanding maintaining asset inventory
• Tool and process deployment
• Dont manage the nickels and dimes at every step
  keep the big picture in mind
• Deliver new, conspicuous value at a steady pace
  addresses dynamism and make the CIO win
• There will be rough spots be prepared to work
  through them
• It is all about getting people through change
  (in-scope, retained, and end customers)

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