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| Management Briefings
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Coming of age: Dominic Trott, Pierre Audoin Consultants (November/December 2008)
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The public sector were once known as laggards in their approach to IT outsourcing but this is
no longer the case. A succession of reports and initiatives, channelled into spending policy, has
meant that what was perhaps an immature approach to IT outsourcing has been forced to do a
lot of growing up in recent years.
In particular, the local government sector has been faced with challenging targets for cost
savings and efficiencies. And once initial steps such as outsourcing infrastructure, applications
and business processes have been made, this area is being forced to innovate in order to
generate further savings.
Following the Comprehensive Spending Review period of 2004 (CSR04), during which
£22 billion of savings were generated within the UK public sector, CSR07 called for a further
£30 billion of savings to be made. With the upcoming Operational Efficiency Review, for which
‘back office/IT’ is one of three threads of investigation, this figure is set to grow even higher.
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Standards delivered: Lynda Cooper (August 2008)
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IT service management (ITSM) is the running of IT services to deliver value to the business – and given that services
operations can consume up to 80% of an organisation’s IT budget, it is essential that this is managed well.
Just as project management is used to manage projects, so service management is used to manage services. But it is
important to note that service management is not about designing and building the actual hardware, software, applications or
tools – this is done by a project. Instead, service management takes the technical product and manages it as a service that
can be delivered to the customer to support the business.
Focusing on outsourced IT service management, best practice is encapsulated in two main standards or frameworks.
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Knowledge for sale: Shamus Rae, KPMG (May 2008)
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Outsourcing and offshoring continue to develop as important business strategies. But while organisations are still trying to
master IT outsourcing (ITO) and grapple with business process outsourcing (BPO), along has come a new industry trend:
knowledge process outsourcing (KPO).
KPO, also referred to as ‘knowledge services’, is different to more traditional outsourcing offerings and approaches in that it
cuts into the main core competencies of many organisations. What’s more, while cost reduction seems to have been the prime
motivator of the ITO and BPO waves, ‘intellectual arbitrage’ appears to be the main driver with KPO. Various research sources suggest the KPO industry will be worth anything between $10 billion and $17 billion by the year
2010. So while the level of optimism on industry growth varies, few doubt the fact that the industry will grow at a staggering
rate.
The financial services sector accounts for a major proportion of the KPO industry. Based on KPMG’s recent study Knowledge
process outsourcing – Unlocking top-line growth by outsourcing the core, we expect the financial services KPO industry to be
worth more than $5 billion by 2010.
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Heart of the matter: John Dean, MLG Management Consultants (March 2008)
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There is genuine interest in the potential benefits that business process outsourcing can offer
companies eager to find ways of remaining competitive. However, in many ways BPO is still a
relatively new and immature field. Many vendors spin convincing tales of ‘best of breed’ delivery
capabilities and all the significant benefits they can help businesses achieve…well, caveat
emptor!
Yet there are undoubtedly many benefits to be gained from a successfully outsourced business
process – whether that process is the company’s IT infrastructure, its customer interaction
centre, one of its distribution or manufacturing facilities or its distribution fleet.
The oft-quoted adage of sticking to one’s knitting has its attractions. Running computer
departments or fleets of vehicles and warehouses isn’t a manufacturing company’s game and
there are specialists who can do this better/cheaper/faster for you. But companies can be enticed with the promised financial benefits to the extent that they lose track of the many risks
associated with divesting operational responsibility for a key process to another organisation.
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Poles apart?: Hugo Minney, Minney.org (January 2008)
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Return on investment is crucial in any outsourcing contract. But how do you use ROI to make the right buying decision?
Having worked on both the supplier and buyer side in IT contracts, one major stumbling block is that the salesperson and the
buyer involved may have completely different viewpoints – they may not even calculate ROI using the same units.
Take, for example, a decision to outsource IT services. There’s a cost involved: the capital cost of purchasing equipment and
legal fees; the cash cost of parallel running; the time cost in effecting the transition; the risk cost in understanding the
processes and matching the culture.
The service provider involved will have its own way of measuring the price of these inputs, both its own and the client’s inputs.
But the client may measure only its own costs using its own measures, or make some assumptions about the ways the
supplier is measuring.
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Doing business with an 800lb gorilla: David Butler, Triple IC (November 2007)
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Recently I was working with a very experienced and capable CIO, studying his outsource
contract. He was unhappy with the supplier’s performance. So I did the obvious thing. I looked
at the supplier’s performance against the contracted service level agreements.
I then felt obliged to tell this CIO that his supplier was regularly hitting and sometimes
exceeding the agreed SLA targets. On this basis alone, there was little to complain about.
Nevertheless the CIO wasn’t persuaded. “Whatever story the SLAs tell, I’m still not satisfied,” he
said. “I still don’t think I’m getting value for money. And, more to the point, neither do my CEO
and my CFO.”
The outsource supplier’s team were working flat out to ensure they met the agreed levels of performance. They didn’t respond
well to being told they were doing just that – but it wasn’t enough. And who could blame them?
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Future of outsourcing?: Simon Scarrott, Compass (September 2007)
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The worldwide growth in outsourcing means that ensuring value for money in outsource contracts – once the preserve of
senior managers – is now a key challenge for many corporate executives.
Traditionally, companies have considered contractual benchmarks as a vital means of establishing value, in terms of fair
market pricing in the context of industry and market standards. However, most benchmarking exercises offer only a limited
perspective of value; they tend to exclusively describe value in pure financial terms at a single point of the contract term –
rather than over its full term.
So while benchmarking is fundamental to ensuring competitive market rates, it is not, in isolation, a sufficient foundation for a
better and healthier outsourcing relationship over the long term.
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Source of success: Douglas Peden, Osborne Clarke (June 2007)
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There have never been more processes and services outsourced than there are at the moment,
yet there is still a fear of outsourcing. Concerns range from the problems of data security and
loss of strategic control to the cost of making redundancies and bad publicity.
When an outsourcing or offshoring deal fails, the problems can take many months and even
litigation to solve. As such, businesses need to consider a number of areas carefully before
progressing.
As with anything, it is vital to ask the right questions in order to check the viability of an
arrangement. It is also sensible, at the very start of the process, to identify the potential
problems you may encounter in outsourcing certain types of service, as well as the possible
solutions to them. All this could help you avoid disputes in the future.
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Made for sharing: Arun Aggarwal, TCS (April 2007)
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The instinct to ‘outsource everything’ to a single supplier can be appealing, but it is often
a less effective strategy. Thanks to an increasingly mature market and improved
management tools and techniques, the trend is increasingly towards multi-sourcing as
the model of choice for modern global business.
Multi-sourcing increases the complexity of the supply chain and relationships with
supplier organisations, so it’s not suitable for every organisation or process. However,
with careful implementation, it has the potential to reduce cost and risk, and provide
easier access to the best suppliers for a programme of work. The future of outsourcing
will truly be a shared one.
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Out with the new?: Iebe Ypma, Alastor Consulting (February 2007)
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Outsourcing used to be seen as a remedy for immediate cost, service or complexity problems.
This approach has often led to disillusionment. By year three of such an outsourcing arrangement,
customers no longer feel the contract is relevant to their changing business requirements, and the
cost benefits associated with the initial financial engineering may have ceased.
For longer-term success, an outsourcing deal needs to be: appropriate for the maturity of the function being outsourced and the organisation where the
function is deployed; flexible, to reflect changes in business needs, the available technology and the maturity of
the organisation being serviced; and innovation-friendly, to encourage innovation in cost reduction, scope, applications and
infrastructure.
This article focuses on the innovation issue.
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Surviving renewal: Bahl/Rajpal/Tedakapalli, Everest Research Institute (Nov 06)
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Stakeholders in the outsourcing market have a huge
opportunity and many challenges ahead of them because the
outsourcing market is undergoing significant changes. This
fundamental restructuring will have a direct bearing on the
way buyers and suppliers structure deals.
These changes are especially significant in light of the major
renewal trend now underway. Everest Research Institute
estimates that $118 billion of outsourcing business will be up
for renewal between 2006 and 2008. With buyers and
suppliers having already renewed $30 billion of that business
at the time of writing, this leaves a total of $88 billion worth of
business still up for grabs.
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Social skills: Andrew de Cleyn, LogicaCMG (September 2006)
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As outsourcing activity grows, companies are looking for more sophisticated ways to
manage their expenditure, to ensure they get the best return on investment.
A recent study by Warwick Business School has shown that well-managed outsourcing
arrangements based on mutual trust can create a 20-40% difference on service, quality,
cost and other performance indicators over outdated power-based relationships. The
survey shows that CEOs who neglect to actively manage their relationships with
outsourcing partners are missing out on a ‘trust dividend’ worth up to 40% of the total
contract value.
In trying to identify what makes for success in outsourcing, practitioners invariably
highlight ‘relationships’ – but there are few precise findings on how such successful
relationships should be developed. Good relationships don’t just happen: the overall
strategic business intention must determine the nature of the relationship and the contract.
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Dispelling the offshoring myths: Lisa Hammond, Centrix (July 2006)
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Many organisations have struggled to achieve lasting value from offshoring. Although it’s often presented as a ‘no brainer’,
successful offshoring relies on intelligent choices about what to offshore and how to do it. Key to this is having an
understanding of the truth behind common offshoring myths, to ensure your sourcing strategy delivers real and long-term
benefits for your business.
For many years, offshoring was seen as a tactic for reducing the cost of back-room functions such as payroll and IT, and for
much of that time it attracted little attention. This started to change in the late 1990s as companies began offshoring those
functions – such as manufacturing, IT applications development & maintenance and call centres – that have a greater impact
on customer service and top and bottom-line revenues. Suddenly, offshoring morphed into an item on the senior management
agenda.
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Hints and tips: Steve Emmett (May 2006)
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Outsourcing has been part of the business world for over half a century but despite its
perceived maturity there are always aspects that can be improved, particularly in the
pacesetting area of IT sourcing.
The art of making your outsourcing deal successful is like any other activity; it needs to
be thought through with care. Whilst the market is mature, most companies who
outsource do so for the first time with little experience and a view that they are only
trying to save money or focus on their core activity.
Talking to existing users, suppliers and independents will allow you to gain the
knowledge needed to avoid the common mistakes.
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After the ink is dry: L Campbell/C Hyatt/D Karabinos, EquaTerra (March 2006)
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Seeing the ink dry on any just-completed outsourcing deal is a cause for celebration. But
then the hard work starts. You are about to launch and administer a new service
provider relationship on a scale more complex and riskier than anything most companies
have ever done before.
A Conference Board study found that 97% of respondents who had experienced
outsourcing would outsource their operations again – but would pay less attention to
service levels and focus more on the contract and contract governance. This shows that
businesses must be aware of the need to develop professional and highly detailed
management capabilities that will help them achieve successful, effective long-term
sourcing relationships.
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Opening up outsourcing: LogicaCMG (January 2006)
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Your company is considering outsourcing for the first time, and you’ve heard that it’s the non-core processes that are
the top candidates. But you suspect that this would give rise only to low-level benefits, and ‘non-core’ processes sound
like ‘unimportant’ ones. Do you really have any of those? What processes really can be outsourced?
This article helps you to identify what can be outsourced, what it means for your business, and what kind of benefits
can be expected. Start-up outsourcing agreements can benefit from knowledge drawn from the most advanced
outsourcing deals.
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End game: Mike Conradi and Simon Savage, Stephenson Harwood (November 2005)
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Outsourcing agreements are complex services contracts and are usually intended to be
long-term arrangements. Nevertheless, all outsourcing contracts must anticipate the
possibility of early termination and not just expiry. They should contain adequate
provisions for termination and allow for an orderly transition of services, whether back
inhouse or to another supplier.
This means the parties involved must give a great deal of thought to termination
provisions and to how they can exit the arrangement. And this has to be achieved
without souring the relationship before the service provision has even started.
This article looks at some of the termination rights an outsourcing contract will typically
contain, and provides advice on issues an outsourcing customer should consider in
terminating an outsourcing contract.
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Offshoring grows up: Paul Morrison, Alsbridge Europe (October 2005)
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Offshoring is old news. It is now over five years since the offshore outsourcing of
services first hit the headlines in the UK and US, and decades since the first
multinationals made pioneering investments in locations such as India. But while the
novelty of offshoring and the accompanying media hype may have receded, the market
for offshore services has not been standing still, with new players, new types of deals
and new types of offshore activity. In short, offshoring is growing up – yet for the most
part, corporate understanding of offshoring remains incomplete and out of date.
Many executives are unaware of the trends that are shaping the maturing offshore
marketplace, and as a result are unaware of the risks and opportunities presented by
global sourcing. This article picks out the five most important trends shaping the
offshoring market, and their implications for decision makers: offshoring is no longer a
minority pursuit, but should now be a mainstream consideration for almost all
businesses.
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Outsourcing: the aftermath: Linda Berry, Capgemini (September 2005)
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Outsourcing is the fastest growing sector of the IT services market, and has evolved to
the extent that companies now outsource activities that were once the preserve of
inhouse operations. Outsourcing can enable companies to focus on their strategy, gain
service improvements whilst reducing cost, and increasingly tap into transformational
outsourcing services which provide a catalyst for organisational change.
But to achieve the true potential of an outsourcing agreement, it is essential that the
buyer and supplier have the right relationship, contract and commercial partnership from
the outset - at the very beginning of the decision to outsource.
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Transparent needs: Amy Chalfen, Geo (August 2005)
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Increasingly, outsourcing is one of the options companies consider when reviewing any business function. And the
areas where companies opt for an outsourced structure are not just peripheral, non-critical functions. Key products and
strategic implementation areas such as IT are a major outsourcing growth area.
There are two main benefits that outsourcing should bring – cost reduction and service improvement. Typical concerns
about outsourcing centre around the amount of control maintained by the end user. There is a fine balance to be struck
between cost and control when outsourcing to a third party; and there is an overarching need for transparency and twoway
communication between both supplier and the end user.
In a survey carried out at the National Outsourcing Awards in November 2004, 65% of users and 63% of suppliers
agreed that communication is the most important factor when outsourcing. Considering that even the least strategic
activity becomes critical when problems are experienced, transparency is vital for a successful outsourcing
relationship.
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For better or for worse: Mark Sukiennik, Orbys Consulting (April 2005)
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Outsourcing is no longer just a contract signed between two parties – it’s the start of a
long and complex relationship that needs to be nurtured and developed.
Successful outsourcing relationships not only require a lot of professionalism and good
management but also regular audits to keep them healthy and productive for both clients
and providers.
Typically, outsourcing customers and providers enter into agreements with optimistic
intentions and breathe a big sigh of relief when the contract is signed. The customer is
looking forward to quality service, fresh ideas and extraordinary responsiveness from a
supplier that intuitively understands their business and cares about its success.
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Look before you leap: Roy Barden, Catalise (April 2005)
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Offshore locations are an increasing part of organisations’ location and sourcing
strategies, especially in regard to back-office activities such as finance & accounting, IT
and HR.
The debate is even becoming political: offshoring was an issue for both candidates in the
2004 US presidential elections. A special report on offshoring in The Economist in
December 2003 found that the US accounts for about 70% of work offshored (despite
political attempts to discourage it and some restrictive legislation). The next most
significant country is the UK.
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Multi-sourcing: David Muir, Acuera (April 2005)
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Outsourcing continues to be the major source of growth in IT services, and has become
a mainstream business practice for companies of all sizes. According to research analyst
Gartner, outsourcing will account for 56% of the IT services market by 2007.
“Outsourcing is becoming the dominant way that enterprises buy IT services,” said Allie
Young, research vice president for Gartner’s sourcing group.
But both outsourcing buyers and suppliers face challenges in implementing effective
delivery mechanisms that achieve the cost reductions they seek and achieve the
appropriate levels of service for their customers: Gartner also found that 50% of
outsourcing deals in Europe fall short of expectations.
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