The Sourcing Of Outsourcing

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  The Sourcing of Outsourcing Workshop This workshop is intended for delegates who are developing their sourcing strategies and techniques for outsourcing products and services, as well as those with greater experience, whose companies are in the initial years of planning and rolling out a new Outsourcing Program office. The Sourcing of Outsourcing Workshop, Ben Trowbridge, CEO, Alsbridge and William Peters, Partner, O’Melveny & Myers, sourcing, outsourcing, offshore, category sourcing, BPO
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  • 1. The Sourcing of Outsourcing Sourcing 2007: May 1
  • 2. Why is outsourcing happen? Micro Drivers • You have the opportunity to reduce costs by 20% to 40% • Increasing accountability and improving services • Access to World Class capabilities • Shifting from relatively fixed to variable costs Macro Drivers • Shifting focus to strategic business objectives • Transforming your business through innovation • Being agile and ready to respond to market change: M&A , growth, divestitures, etc. 1
  • 3. Global Trends Global Birth Rates Global Birth Rates ChinaPotential Player – Offshore IT services market in China will continue per 1,000 population: per 1,000 population: Eastern Europe: : China: : Potential Player – Offshore IT services market in China will continue China China 13.25 13.25 Eastern Europe to show aggressive growth over the next few years. BPO is a less mature Regional Player – to show aggressive growth over the next few years. BPO is a less mature India India 22.01 22.01 Regional Player – industry in China. English skills are being developed in government supported Large English- industry in China. English skills are being developed in government supported Philippines Philippines 24.89 24.89 Large English- programs to ensure further growth. Core competencies: low-end PC-based speaking educated programs to ensure further growth. Core competencies: low-end PC-based USA USA 14.14 14.14 speaking educated application development, application maintenance, QA testing, systems labor pool. application development, application maintenance, QA testing, systems labor pool. integration, data processing and product development. Capabilities to handle integration, data processing and product development. Capabilities to handle Size: Over 200,000 FTEs in the IT Outsourcing Industry. other European Size: Over 200,000 FTEs in the IT Outsourcing Industry. other European languages languages requirements. The Hidden requirements. Size: 44,000 FTEs in Multiplier Size: 44,000 FTEs in offshore outsourcing offshore outsourcing industry. industry. India: : No. 1 Player - The dominant leader IndiaNo. 1 Player - The dominant leader in BPO and IT Outsourcing. Core in BPO and IT Outsourcing. Core competencies: application maintenance & competencies: application maintenance & support, application development, contact support, application development, contact centers & financial processing services. centers & financial processing services. NASSCOM claims the outsourcing industry NASSCOM claims the outsourcing industry will employ 2.3 million by 2010. Size: Latin American: : Regional Latin AmericanRegional will employ 2.3 million by 2010. Size: 1,000,000 FTEs supporting a variety of Player – Increasing its 1,000,000 FTEs supporting a variety of Player – Increasing its processes. competitiveness in ITO and processes. PhilippinesNo. 2 Player - competitiveness in ITO and BPO. Labor arbitrage alternative Philippines: : No. 2 Player - BPO. Labor arbitrage alternative Scope: Primarily contact centers, for the U.S. market. Spanish Scope: Primarily contact centers, for the U.S. market. Spanish shared services and specialized BPO Malaysia: : Niche Player in shared Language support with marginal Language support with marginal MalaysiaNiche Player in shared shared services and specialized BPO niches. Surging demand due to cost difference between services and outsourcing. Prime niches. Surging demand due to cost difference between services and outsourcing. Prime excellent US accented English countries. Small English- capabilities: contact center, human excellent US accented English countries. Small English- capabilities: contact center, human language support and cultural affinity speaking educated labor pool. resources and administration support. language support and cultural affinity speaking educated labor pool. resources and administration support. with the U.S.A. Size: 200,000 FTEs Size: 40,000 FTEs in the outsourcing with the U.S.A. Size: 200,000 FTEs Size: 40,000 FTEs in the outsourcing in offshore outsourcing industry. industry. in offshore outsourcing industry. industry. 2
  • 4. 0 10,000 20,000 $ /p.a 30,000 40,000 50,000 60,000 0 10,000 20,000 $ /p.a 30,000 40,000 50,000 60,000 Brazil Brazil 16,100 16,100 14,800 14,800 Canada Canada 45,300 45,300 33,200 33,200 China China 11,200 11,200 8,400 8,400 Hungary Hungary 27,300 27,300 8,400 8,400 23,500 23,500 Average ITO and BPO Salaries by Location India India 12,500 12,500 Outsourced Labor Costs 3 8,900 8,900 59,100 59,100 Ireland Ireland 8,900 8,900 45,200 45,200 Malaysia Malaysia 23,600 23,600 18,100 18,100 Mexico Mexico 24,100 24,100 19,000 19,000 Philippines Philippines 14,200 14,200 11,500 11,500 Poland Poland 29,900 29,900 25,900 25,900 Source: Alsbridge Market Report 2006. Average Salaries at different levels of experience were analyzed for major cities in key offshore destinations. ITO ITO BPO BPO Average Average Average Average
  • 5. Labor Pool &Total Costs English-speaking graduates & post-graduates per year Labor Pool India 2,500,000 • The English speaking Indian, Philippine and Philippines 400,000 Chinese graduate pools and high unemployment China 490,000 rates are projected to provide an attractive Malaysia 75,000 environment for offshore operations. Mexico 100,000 • Non-English speaking requirements can be Non-U.S citizens supported from a variety of locations. Ireland 40,000 1,665,000 2,265,000 USA 600,000 Total Cost 90,000 Total cost of typical BPO&ITO functions 81,300 80,000 IT & Telecom • Differentials in direct labor costs and 70,000 overheads are the main drivers of total Facilities 60,000 employment cost savings. Overhead • Careful build-out of the new center and 50,000 Average Salary US $ transition planning can control start up 40,000 34,900 and long term costs. 30,000 • Local labor inflation will not reduce the 18,500 offshore advantage for the foreseeable 20,000 Source: Alsbridge future. 10,000 21,600 8,320 8,280 0 USA Asia Eastern Europe 4
  • 6. Lessons Learned from a Global 10 CFO Risk Monitoring and Mitigation as part of the process - but accept there are risks The Organization has to be primed/pushed - The Champion Walk before you run - but don’t be afraid to walk Governance is a shield to block progress It’s a Marathon - Not a Sprint e alu ivi ty/V duct High End Pro Knowledge Work iz ing axim Ongoing M Productivity Business Enablement Process Financial Improvement/ Accounting Technology Basic Transaction Skills Upgrade Processes Cost Arbitrage “We Came for Cost…We stayed for Quality/Intellectual Capital” 5
  • 7. Current Environment Many organizations are experiencing an urgent need to achieve cost savings and competitive equality or advantage by outsourcing Organizations often undertake outsourcing in response to executive directive and adopt outsourcing on a project-specific basis, without a comprehensive strategy for systematic decision-making and management of delivery of services The current trend is to multi-source, with the goal of reducing the organization’s overall costs and improving service levels by maintaining competition among third-party suppliers The goals of multi-sourcing are valid, but having numerous vendors increases the organization’s need for and the value of a comprehensive sourcing strategy 6
  • 8. Workshop Objectives Develop an understanding of the role and value of a sourcing strategy in the overall sourcing relationship lifecycle Examine the elements of a successful sourcing strategy Discuss how to plan, develop and implement an organization’s sourcing strategy Survey best practices with respect to sourcing strategies, vendor selection and contracting Examine how a sourcing strategy should be maintained and adjusted over time to help the organization achieve its changing business objectives 7
  • 9. Strategic Considerations Common Reasons to Outsource Tactical Strategic Objectives Considerations • Access management & organization processes Governance Technical Operations • Improve automation • Value lever Scope of Services Product Development • Lower cost Industry Leadership Business Process • Achieve economies of scale Project Management • Reduce balance sheet assets • Alter cash flow structure Product Management • Improve responsiveness to change • Scalable resource pools • Effective resource skill deployment • Access higher skills Risk-Adjusted • Improve effectiveness • Sourcing objectives Financial Impact • Reduce cost • Improve financial structure Net Benefit Striking the Timeline Balance Risk 8
  • 10. Strategy Elements Process This is the ‘what’: what do you want your processes to look like, what is the required output and what are the required service levels? This is the ‘how’: how will the processes be delivered? How do you organize the Sourcing business to provide those processes, how do they integrate with the other business processes and how should they be organized? Supplier Do you choose niche suppliers, best of breed, one or many suppliers, an established player or a start-up. What relationship do you want with the supplier? How do you want to structure the deal? Should it be a fixed-price contract, or are Commercial you looking to develop a partnering structure – whereby both parties share risk and reward? Are your systems stable or are you looking to implement new systems in the Systems foreseeable future? Do you do this before, as part of, or after the outsourcing/shared services implementation? Transition Are you prepared to handle a ‘big-bang’ transfer of responsibility or do you want to plan a phased implementation? Is this going to be by process or business unit? How is the new operating environment going to be managed and governed? What Operations is the relationship going to be with the service provider – whether in-house or outsourced – and how is the performance going to be monitored and controlled? 9
  • 11. Role of Sourcing Strategy Pre-Contract Contracting • Sourcing strategy development • Contract development • Business alignment • Due diligence & contract negotiations • Organization assessment • Transition planning • Cost & risk analysis Co • Management organization • RFP development & issues nt ra • Final service provider selection ct ct • Proposal review in • Contract execution tra • Service provider selection g on e-C Pr y er liv De Re -S e ou ic rv rc Re-Sourcing ing Se Service Delivery • Termination / expiration • Transition & transformation • End of term planning • Service delivery • End of term assistance • Ongoing management • Transfer to new service provider • Change control 10
  • 12. What is a Sourcing Strategy? A strategy (not single-project solution or action plan) that is founded on the organization’s fundamental business objectives and that provides a consistent framework for making sourcing decisions A long-term, conscious plan for decision-making, execution and management of internal and external service providers A framework that helps prepare for, plan and execute sourcing decisions and actions that support the organization’s business objectives. It is not, however, a plan setting forth how to achieve specific business goals Elements of a sourcing strategy include strategic design and management of sourcing, which are continuous functions essential to the organization’s current and future operations, and provider selection, contract negotiation and service transition, which are finite activities for specific IT or business functions A successful sourcing strategy must be founded upon clear, succinct business objectives that are widely understood throughout the organization (e.g., stabilizing and reducing costs of basic operations; continually increasing efficiency, flexibility and cost-reduction; positioning organization for future growth and expansion) A successful sourcing strategy must have buy-in from key stakeholders within the organization A successful sourcing strategy must provide a disciplined approach to consideration and evaluation of available sourcing options and assessment of risks and benefits of each option 11
  • 13. Strategy Requirements A successful sourcing strategy must be broad in scope, taking into consideration various solutions that may be suitable for any given sourcing decision Possible service delivery solutions include: • Internal delivery • Offshoring • Lift-and-shift outsourcing • Transformational outsourcing • Multi-sourcing • Prime contractor as coordinator of multiple service providers • Joint venture • Captive service provider A successful sourcing strategy must include pre-defined measurement criteria that are both objective (e.g., financial risk/benefit analysis) and subjective (e.g., ability to focus internal resources on core functions; PR; morale) that are applied to determine whether each proposed solution is viable and supportive of the organization’s business objectives A successful sourcing strategy must result in executable action plans and must include management/governance structure A successful sourcing strategy must be flexible to encourage and accommodate innovation and overcome the “instant obsolescence” of contracts A successful sourcing strategy is cyclical and dynamic; it must be designed as repeatable with respect to new sourcing decisions, but must also be updated continuously with respect to internal changes within the organization as well as changes in market offerings and other external circumstances 12
  • 14. Questions & Answers Why is outsourcing happening? Global trends Outsourced labor costs Labor pool and total costs Lessons learned from a Global 10 CFO Current environment Strategic considerations Strategy elements Role of sourcing strategy What is a sourcing strategy? Strategy requirements 13
  • 15. Developing a Plan Sourcing Drivers Sourcing Drivers Vision & Plan Vision & Plan • Cost, cost and cost • Cost, cost and cost • Reason for outsourcing • Reason for outsourcing • Revenue • Revenue • Executive Sponsor • Executive Sponsor Scope • Employee upheaval • Employee upheaval • Deal construct • Deal construct Location & Configuration • Customer perception • Customer perception • Business Case • Business Case Deal Structure • Control and flexibility • Control and flexibility • Risk mitigation Plan • Risk mitigation Plan • Product // Service growth plans • Product Service growth plans • Internal & external • Internal & external • Service expectations • Service expectations communications communications Converting Drivers to a Vision & Plan requires: Defining the scope of the project and business case Analyzing location & configuration combinations Structuring deals to support Business Strategy 14
  • 16. Scope of Sourcing Strategy 15
  • 17. Deal Structures Retain internal Credible Internal offshore Insufficient control? vendors? experience / scale for management? captive? Ownership Recommendation Activity Yes Captive No Yes Yes Yes Provider Yes No No No Provider / Hybrid (captive option) No No Captive Yes 16
  • 18. The Sourcing Matrix BPO IT Selective Outsource Total Outsource Joint Venture Shared Services • “Many variations” • Execution responsibility • “Many variations” • Execution responsibility • BTO/Market Facing • • Client execution • • Leverage capabilities Leverage capabilities • BTO/Market Facing Client execution • Shared ownership • No Capx • Shared ownership • • Requires CapX • No Capx • Shared Risk & Reward Requires CapX • Infrastructure established • Shared Risk & Reward • Infrastructure established Access to partner skills • • Complete control • Contract flexibility • • Access to partner skills Complete control • Contract flexibility • Relationship Alignment • • Accountability • • Disciplined execution Disciplined execution • Relationship Alignment Accountability • Cost controls • • HR build-out • Cost controls HR build-out • Competitive Market • Competitive Market • • Minimum transformation • Relationship Alignment Minimum transformation • Relationship Alignment • • Relationship Alignment Relationship Alignment Onshore Offshore Near Shore 17
  • 19. Strategy Groundwork Team: Creating the organization’s sourcing strategy will require leadership as well as input and buy-in from many different disciplines within the organization • Sourcing champion • Team leader • Critical stakeholders • Subject matter experts Appropriate business unit members Financial expert HR advisors Legal advisors (internal and external) Third party consultants 18
  • 20. Strategy Groundwork Business Objectives: The sourcing strategy must serve the organization’s business needs. Therefore, the team must evaluate the organization and identify and articulate its broad business goals, which should encompass the organization’s: • Core values • Future vision • Short-term, mid-term and long-term business objectives • Critical competitive considerations • Expected or required near-term results Sourcing Status: The team must understand the organization’s current status regarding strategic sourcing 19
  • 21. Strategy Groundwork Decision Making: The team must understand how decisions are made within the organization and build and present the sourcing strategy to incorporate that process • Determine how ready the organization is to change. Examine the organization’s business culture, financial considerations, regulatory environment and contractual obligations to help assess the organization’s context for sourcing decisions • Identify key stakeholders and decision makers within the organization • Determine how best to educate and obtain buy-in from these individuals 20
  • 22. Strategy Groundwork Analysis: Many aspects of the organization’s service environment require analysis in preparation for formulating a sourcing strategy. These include: • Critical functions – core vs. non-core • Current internal capabilities and competencies, relative to market offerings • Current costs of services and projected costs for outsourcing similar services • Timing requirements, including time to market requirements and time benefits available through using established competencies of service providers for certain functions • Investment approach: how much investment is the organization willing to fund? What is its required pay-off horizon? The team needs to develop ROI analysis and parameters to support the sourcing strategy. • The organization’s appetite for risk 21
  • 23. Strategy Groundwork Market Assessment: Evaluate the services available from third party providers • Identify available services: how well do market offerings match the organization’s requirements? • Consider the maturity, stability and evolutionary trend of available services • Identify suitable suppliers, based upon whether they have the capability and experience to offer services that organization requires • Identify relevant risks and associated costs. Determine the likelihood and consequences of transition or service delivery problems, security and privacy requirements, the organization’s ability to in-source or re-source services subsequently, etc. 22
  • 24. Strategy Groundwork Analyze gaps • Between organization’s current state and ideal state • Between organization’s current capabilities and requirements • Between organization’s objectives and its capabilities • Between expected business goals and time required to achieve them • Between marketplace offerings and organization’s requirements • Between required services and their availability, maturity, quality and stability 23
  • 25. Strategy Groundwork Measurement: Develop criteria for determining and measuring the success or failure of sourcing relationships • Examples Cost Quality Speed Skill Improvement Productivity Responsiveness Flexibility Change Management Commit
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