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| Management Briefings
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Portfolio investment: Eric Simonson, Everest Research (October 2008)
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As companies increasingly adopt IT outsourcing (ITO) and business process outsourcing (BPO), they are becoming more
sophisticated in the way they select the right supplier for the work being outsourced. And as well as ensuring their existing
suppliers perform successfully, organisations are also starting to determine which set of suppliers are best suited to meet their
future as well as current needs.
This kind of ‘supplier portfolio strategy’ has three typical benefits: simplicity of managing outsourcing efforts; deeper relationships with a core set of suppliers; and financial savings from limiting investments in managing multiple relationships.
In terms of simplicity, the increased adoption of ITO and BPO inevitably creates more outsourcing relationships, so naturally
executives are starting to ask “Can we use fewer suppliers?”.
This question is motivated not just by the number of service providers – in large enterprises, often several dozen – but also the
recognition that outsourcing is complicated, and having fewer suppliers can help simplify business.
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Behind closed doors: Jean-Luc Bressard, Vector Advisory Partners (September 08)
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The recent high-profile UK data privacy breaches by several agencies of her Majesty’s
Government have highlighted the importance of securing data before moving into an outsource
or offshoring contract.
Behind this lies the European Parliament Directive designed to give all citizens of the European
Union privacy rights, particularly in relation to the processing or their personal data. But this
primary legislation has thrown up some serious challenges in its application and interpretation at
localised levels.
National enabling legislation has indeed led to confusion and discrepancies between member
states’ interpretation of the directive – making a multi-geography offshoring or outsourcing
programme rife with complexity in terms of data privacy compliance.
The issue is further compounded by the need for the service provider to ensure that client confidentiality (distinctly different
from data privacy) is also maintained.
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Seven deadly issues...: Amanda Vaughan & Tony Haigh, Analysys Mason (June 2008)
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Ask the question, ‘why do we outsource?’, and generally people will answer ‘to save money’ or ‘to achieve a better service’.
The view, perpetuated by outsource suppliers, that businesses should avoid involving themselves in non-core activities
because they are outside their area of core competence can also be supported to some extent.
Other arguments in support of business process outsourcing (BPO) in particular, are based on keeping an organisation nimble.
By outsourcing its IT, a company only has to pay for what it needs at that point in time – transferring large fixed costs to
changeable variable costs. The company can also adapt its IT processes at much shorter notice following latest best practice.
Given these drivers, there are seven key issues that businesses should consider when outsourcing. This article reviews the
pitfalls involved in each, and how to avoid them.
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Fighting failure: John Regan, BluePhoenix Solutions (April 2008)
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Outsourcing IT application development and testing work is increasingly becoming the
norm for many of Britain’s largest companies. However, not all of these deals deliver the
desired benefits for either the company outsourcing the work or the service provider.
So where do the problems lie, and what can be done about them? One reason why IT outsourcing deals fail is that when large UK companies enter into
business with other firms, they are used to being the dominant partner. They generally
set the terms under which business is conducted and also feel they have the upper hand
if any disputes ever arise.
But large outsourcing deals are different. The scale of the work makes it impossible for one side to be dominant if any
financial benefits are to be achieved.
For example, a problem recently arose between a major UK bank and its IT supplier. The two companies had a clause
in the contract between them which clearly stated the supplier had to provide an additional service at an already agreed
price. However, on reflection the supplier decided for various reasons that it was not prepared to carry out this
additional service.
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Reaping the rewards: Malcolm Swallow, EquaTerra (February 2008)
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Outsourcing is increasingly becoming an everyday tool for organisations looking to gain advantage in today’s competitive
environment. It is one of the options available as companies look to adopt strategies that enable them to deliver the same
service or output – cheaper, better and faster.
Outsourcing is not a phenomenon that will come and go; it has effectively been around for many decades and will be with us
for the foreseeable future. The UK, in particular, has not only seen some of the largest outsourcing contracts in the world but is
also one of the most diverse and mature outsourcing markets.
Outsourcing, in some form or another, is now part of most UK organisations and the exploitation of this business model is
becoming a core skill.
With this comes changing market dynamics. New entrants, the rise of niche players, global sourcing, business process
outsourcing and multi-sourcing are some components of this change that are having a dramatic impact on the range of
solutions available to client organisations.
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Winning and losing: Eleanor Winn (December 2007)
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Why do some outsourcing arrangements fail? And which factors have the greatest influence on
their success?
A report from sourcing consultancy Quantum Plus and international law firm Bird & Bird
published last year examines these questions. The report – based on interviews with
experienced practitioners in customer and service provider organisations in both the public and
private sectors – highlights the fact that companies can make an important difference to the
success of their outsourcing by maintaining strong relationships throughout the lifetime of a
contract.
Continuity of personnel, strong governance and alignment of expectations are also key
hallmarks of success.
In fact, the survey confirms what outsourcing practitioners have always known – that while companies contract with companies,
it is the relationship between people that leads to success or failure.
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Sourcing vs subscription: Sukhendu Pal & Lisa Hammond, Centrix (October 2007)
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Sourcing is the process by which companies procure the right products and services for the best value. Using this approach,
the buying company analyses what it’s buying, what the market conditions are, and who can provide those goods or services.
Historically, the buyer then uses this information, together with innovative contracting techniques, to find the best prices
available in the marketplace.
Companies today have many sourcing options. At one end of the spectrum are the various ‘insourcing’ alternatives. A
company can, for example, make a particular capability in a traditional business unit, or it can source it from a separate part of
its business. It can also establish a captive offshore operation (such as HSBC’s processing centres in India). In all of these
cases, the company owns and operates the source.
In the middle of the spectrum are joint ventures. A company can draw on managed services programmes for some capabilities
it needs, tapping an external service provider to take over an internal function, or it can partner with other companies to create
a mutual capability. In each case, the ownership and operations are shared.
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Buying power: Chris Thornton, Orbys (July/August 2007)
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Outsourcing suppliers used to have an enviable amount of power. Back in those early days of
outsourcing in the 1990s, with no experience to guide them, customers often became locked
into five-year, 10-year or even longer mega-deals. The deals they signed were too rigid to adapt
to the inevitable business changes, but the consequences of pulling out of a soured relationship
could be punishing.
Those early entrants to the outsourcing world have now emerged – perhaps a bit battered
round the edges – with a far clearer picture of what they want from an outsourcing partner and
deal. The balance of power has shifted firmly towards the customers’ side. They are making
smarter choices, and they are forcing suppliers to be smarter in the services they offer and the
approach they take to working with clients.
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Art of apps management: Dominique Raviart, Ovum (May 2007)
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Companies are increasingly awarding their application management contracts in a pragmatic manner. They consider
application management based on whether or not they have the right skills internally; on the type of work they want their
internal IT staff to perform; and on how much they need to save on their maintenance budget overall to fund the
implementation of new applications.
This pragmatic approach is fine as far as it goes, but is not good enough: users need to retain their pragmatic approach and
enrich it with a governance point of view. They should consider the following questions: what is the role of my internal IT staff with regard to application services?; how do I break my application management contracts into manageable pieces?; what application strategies should I put into place?; and how do I ensure co-ordination and standardisation between contracts?
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You can't outsource what you can't measure: Rupert Booth (March 2007)
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Benchmarking is a valuable management tool for measuring and improving performance. Its
application is extremely broad and can cover: identifying opportunities – benchmarks can be used to identify ways in which the company can
be improved by asking ‘How are we doing?’, and identifying where activity costs are too high, or
performance is lagging; identifying solutions – benchmarking can be used to focus on solutions to particular problems.
These can be highly specific, such as the answer to a long-standing production problem; and identifying best practice – this type of benchmarking holds particular promise. It is more
specific than asking ‘How are we doing?’ yet does not confine itself to seeking solutions to
specific problems. The aim is to identify best practice in an important process of the company
and incorporate this into a process of continuous improvement.
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Home cooking or takeaway?: Alan Woodward, Charteris (January 2007)
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Most of us like to go out for an Indian or a Chinese meal. Yet deep down we know that home
cooking is usually healthier and better for us, and ultimately a lot more cost-effective. The time
has come for UK organisations to start applying similar reasoning when they develop software.
You are probably aware of the opportunities for software development to be ‘offshored’ –
meaning that the job of writing the software is outsourced to a development firm located away
from the UK mainland, typically in India, China or Eastern Europe.
Usually, you don’t need to look any further for the reason for offshoring than the organisation’s
balance sheet. Because in theory – but often only in theory – software development carried out
in these offshore locations is cheaper than getting the job done in the UK. The cost differential
is based on nothing more dignified than the fact that software developers in India, China and
Eastern Europe are willing to accept much smaller salaries than their counterparts in the UK
and US.
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Supply on demand: Ean Evans, Catalise (December 2006)
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IT leaders are often tasked with the dual challenges of cutting the cost of service delivery while
maintaining or improving quality of service. Outsourcing and offshoring are often seen as key
instruments in achieving these goals.
But as companies begin the outsourcing journey, they face several challenges. These include
deciding which IT activities should remain inhouse and which should be outsourced, learning to
manage relationships with one or multiple service providers, and deciding on appropriate
performance metrics and service level agreements.
Companies who implement an IT demand-supply organisational model as a stepping stone in
this journey will have more success in their subsequent outsourced supplier relationships. In
particular, this approach helps companies avoid two of the major causes of failed outsourced
deals – namely, outsourcing a ‘problem’ area; and outsourcing too much function – leaving the retained organisation without
the skills and competencies required to manage the relationships with suppliers and meet business needs.
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Procurement: BPO's new baby: Rachael Stormonth, NelsonHall (October 2006)
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Just two years ago, if you spoke to a senior procurement executive about business process
outsourcing (BPO) for procurement the chances are they would not be familiar with the concept.
Yet today it is becoming a hot topic: some high-profile contracts are being signed and
procurement officers are increasingly asking questions about procurement BPO. These
questions typically centre on what it entails, who are the major service providers, what are the
common commercial arrangements, what are the most significant risks and who are the early
adopters.
Back in 2004, NelsonHall research indicated that while it was a very small market, outsourcing
of some aspects of the procurement function would boom, with take-up accelerating from 2007.
In line with these predictions, we have seen some interesting contract awards in 2006, with
more to be announced.
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Divorce or marriage guidance?: Eleanor Winn, Quantum Plus (August 2006)
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The high-profile decisions by organisations such as JP Morgan Chase, Sainsbury and, most recently, Powergen to bring their
outsourcing arrangements back inhouse before their contracts reached full term have given rise to a spate of seminars,
conferences and articles about ‘insourcing’. Is this the next trend in the sourcing marketplace?
When faced with a troubled supplier relationship, lower-than-expected levels of service and failure to realise the predicted financial
and business benefits, bringing it all back inhouse certainly looks appealing. But given that the move to outsource will have
involved a level of financial and emotional investment, as well as integral organisational change within the retained company,
should people be jumping aboard the insourcing bandwagon, or should they instead work on their existing relationship?
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Outsourcing: a game of three parts: Simon Lindley, Orbys Consulting (June 2006)
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Outsourcing has matured significantly over the last few years. Much has been written and
plenty of lessons have been learnt about the dangers of poor outsourcing agreements.
Problems still arise and major headlines are made by ‘legacy’ deals that were made on the golf
course or on a CEO’s handshake, without proper attention to contractual terms such as suitable
exit provisions and protection over change control. And some organisations may still blindly
accept suppliers’ standard terms or fail to take adequate support on the contractual
requirements – but thankfully most now take suitable care over the development and
negotiation of the contract.
So outsourcing is now a proven route to deliver value and all the problems are being managed?
Not quite…
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The power of relationships: Andrew de Cleyn, LogicaCMG (April 2006)
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A recent study by Warwick Business School shows that well-managed outsourcing
arrangements based on mutual trust can create a 20-40% improvement in service,
quality, cost and other performance indicators over outdated power-based relationships.
The study also 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‘. Yet there are few precise findings on how successful
relationships should be developed. Such relationships don‘t just happen: overall
strategic business intention must determine the nature of the relationship and the
contract.
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Devil's in the detail: Robin Johnson, A & IT Consultants (February 2006)
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Key strategic decisions are never easy to make, and implementing them can prove to be even more demanding. If your
organisation is thinking about outsourcing its IT function or has just begun an outsourcing exercise, then the following
are some points worth considering:
1. Do you have a viable business case for this ‘investment’?
Unless you intend to select a partner with revenue sharing as the objective, then most outsourcing strategies are for
cost-saving purposes. In the early stages of this process, you will not know the true costs of the exercise. As you work
through the process and the details emerge, you should ensure that business case reviews are performed to confirm
the ongoing viability of the strategy.
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Testing times: Adam Ripley, IS Integration (December 2005)
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With the proliferation of outsourcing, there is little doubt that it has become the business
byword of the last few years. Organisations of all sizes are realising the benefits of using
suppliers to handle processes such as technology, HR, finance and procurement. Lured
by the cost savings and the ability to harness external expertise much more
economically than providing that experience inhouse, more organisations see
outsourcing as the cure-all for business ills.
Yet this is not necessarily the case. The rush to outsourcing over the last few years has
been followed by a number of monumental outsourcing disasters. This has served a
purpose in the sense that organisations now realise they shouldn’t be blinkered by the
promises of cost savings – outsourcing is a tricky and subtle process and needs to be
broached as such.
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When the honeymoon is over: Simon Lindley, Orbys Consulting (July 2005)
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Over the last couple of years the outsourcing market has turned a corner. A widespread
perception of failure has been replaced by a growing acceptance that business process
outsourcing (BPO) can really deliver on its potential benefits, from reduced cost to
supporting business growth through effective access to key skills. Organisations have a
level of confidence in negotiating outsourcing contracts that is enabling many more to
achieve strategic objectives via a BPO arrangement.
Indeed, in a recent independent study undertaken by Benchmark Research on behalf of
Orbys Consulting, 29% felt the contract exceeded expectations, 61% believed it was in
line with expectations and only 9% said it fell below expectations.
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Getting to the point: Hemal Thaker, CAST (May 2005)
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The trend to transfer software development to specialist outsourcing partners is well and truly established, and
outsourcing arrangements are now sufficiently common for their relative strengths and weaknesses to become known.
Experience shows that outsourcing can work well, provided that the right work is outsourced to the right people, and
that the agreement is managed in the right way. But outsourced development invariably fails if the outsourcing party
selects the wrong project, the wrong supplier, or establishes insufficient monitoring and contractual arrangements.
Anecdotal evidence suggests that of the 21% of outsourcing contracts terminated over the last 12 months, the majority
were cancelled due to insufficient service levels – not cost.
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Why do deals go wrong?: Ross McKean, Baker & McKenzie (April 2005)
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The promise of cost savings and access to the market-leading processes and skillsets
offered by suppliers continues to fuel the growth of outsourcing. However, levels of
dissatisfaction among companies who have outsourced are cause for concern for any
business contemplating such a move.
In a November 2004 survey commissioned by Proudfoot Consulting, more than a third of
the British managers interviewed said that outsourcing had either been a complete failure
or had delivered fewer benefits than expected. Jean Thevelin, the European president of
Proudfoot, said: “Our survey is further evidence that some firms are rushing into
outsourcing, seeing it as some sort of panacea for under-performing business functions.”
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Meeting in the middle?: David Conkleton, Parity (April 2005)
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Anyone who has seen the press reports over recent years criticising the outsourcing
market and its major suppliers might well steer a wide berth or enter into a new
outsourcing relationship with some trepidation. But underneath the hyperbole (after all,
bad news sells papers) there are many significant and often unquoted success stories.
These success stories (as well as the oft-quoted failures) have been driven primarily
through FTSE 100 tier-one corporates or large government/public sector institutions. The
scale and complexity of these organisations offers the best ‘bang for buck’ for the major
outsourcers, and the greatest opportunity to leverage their capability and subsequent
transformational benefits for clients.
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