engaging with the market to leverage your buying power

Engaging with the Market to Leverage your Buying Power

Walter AdamsonDigital Investor Pty [email protected]

Advanced IT Contract Management and Negotiation Conference, November 2003

©2003 Walter Adamson

Enhancing alignment and value for IT investments

Contents

Strategic Sourcing – what does it mean? What factors influence the decision-making

process? Assessing different models for streamlining

buying and effectively structuring procurement Effectively managing risk while delivering

business value and constructing back-to-back deals

Expanding the sourcing options to include offshore in-house.



Strategic sourcing – what does it mean?

Strategic sourcing requires a new question Tactical sourcing is inefficient, and often

ineffective A common cause for current disappointments Future sourcing will be more complex

1.1



Strategic sourcing requires a new question

Gartner - 30% of companies are unprepared

“What is the best source for every IT service” NOT “What do I have in IT that

seems appropriate for outsourcing”

“What is the best source for every IT service” NOT “What do I have in IT that

seems appropriate for outsourcing”

1.2



Tactical sourcing is inefficient and often ineffective

Bottom-up view of the role of IT Often aided by IT’s reaction:

– IT efficiency-focused in fear of CEO/CFO

– Over-segmented and fear of loss of control

– Often aided by ‘advisors’ who generate work

• Complicates relationships

• Hidden management costs

1.3



A common cause for current disappointments

1.4

The single most common mistake is that organisations did not identify, and then

build and retain, the strategic, management and complementary

operational skills needed to create and capture the potential benefits of

outsourcing.

Walter Adamson



Future strategic sourcing will be more complex

Strategic sourcing is a growth industry: US$68.5b business growing to $100b in 2007 More knowledgeable buyers New pressure for growth and innovation BPO a new global growth market Offshore in more complex forms

More complex, cross-functional relationships

1.5



Factors influencing decision-making

Three key dimensions:

Business-level decision-making New organisational models – outtasking Extended options – going global

2.1



Business-level decision

Benefits from the tactical approach exhausted: Cost , competencies , assets Focusing on contract yields no benefits

Future requires holistic strategy: Improve business risk, value chain, EVA More cross functional and “extended enterprise” Deliver value as a strategic management tool

2.2



New organisational models

Most advanced thinking is Cisco’s ‘outtasking’: Extending the organisation ‘deeply’ Cisco holds the keys to the overall data

architecture and systems interfaces Clear thinking about the customer value chain Clear thinking about core and non-core Sophisticated alliance relationships Clear performance metrics

2.3



New organisational models - 2

Key concept, mission critical can be outtasked:

2.4

Sourcing and Implementation Strategy

CONTENT Out-task – Type 1 Contract Sourcing

CORE In-house Out-task – Type 2

Mission-Critical Non-mission-critical



Extended options – going global

The global options cannot be ignored: Moving from tactical to strategic Moving up the value chain Moving across functions - BPO Rapidly improving offshore capabilities Not restricted to 3rd party outsourcing

More complex, cross-functional relationships

2.5



Assessing different models for structuring procurement

ManagementManagement BenefitsBenefits ROIROIContractContract

3.1

The funnel is often the other way around!



Strategic sourcing relationships3.2

Fee-for-service Contract/Relationship Risk/Gain Sharing

(new vision)Transformation

(market breakthrough)

(value-chain reengineering)

Effectiveness(process integration)

(service)

Efficiency(cost)

VALUE

REPEATwhat they know

RE-APPLYwhat they know

RE-INVENTwhat they know

Need moreflexibility to

cater foruncertainty



Multiple service provider3.3

(new vision)Transformation

(market breakthrough)

(value-chain reengineering)

Effectiveness(process integration)

(service)

Efficiency(cost)

VALUE

Traditional ContractualRelationships

Teaming & PreferentialRelationships

Advisory and Trusted Relationships

Boutique Fit for Purpose(No prior contract)

Relationship Best of Breed(Panel Contract)

Long-termCompetitive Contract

Fee-for-service Contract/Relationship Risk/Gain Sharing



Contracts reflect relationships3.4

Multiple relationships are needed: Different relationships suit different purposes and

responsibilities and measures and expectations Axiomatically no one IT service firm can provide best

of breed at all levels of the value creation and capture hierarchy

But not within the one relationship level !!



Managing Risk and Back-to-Back Contract Construction

Client Service Provider

Contract Terms and SLAs

4.1



A recent lesson in back to back#

Effective variations although not “in writing” Contract required variations “in writing” Actions of parties reflected new intentions Subcontractor failed to show that failure to

provide “in writing” terminated sub-contract “Agreement to vary” enforceable contract “Real intention” prevailed over written

#GEC Marconi Systems Pty Ltd v BHP Information Technology Ltd Feb 2003

4.2



Expanding Sourcing Options to include Inhouse-Offshore

Benefits of off-shore plus control of inhouse: “Inhouse Offshore” IHOS Capture economic value directly Smooths integration of offshore process Reduced relationship costs vs outsourcing Knowledge retention

IHOS not a panacea but complementary

5.1



Inhouse offshore risks

The risks are different to outsourcing: How to set up offshore - government, tax, legal Establishing management, performance goals Training, staff exchange and career management Systems interfaces and data management Finding a reliable local partner & advisor

5.2



Resources for IHOS

Manage the risk of setting up offshore: Investment capital Domain expertise Structured deals, risk offsets, and exits Local review and audit of process

London-based and other firms e.g. Ariadne Capital

5.3

Contact:

Walter [email protected]

+61 403 345 632

5/45 William St, Melbourne 3000

mailto:[email protected]

http://www.digitalinvestor.com.au/