it outsourcing contracts negotiation and governance to assure the effectiveness of benefits
DESCRIPTION
To assure that the intended benefits of an outsourcing project will be achieved, a solid negotiation and governance process will have to be implemented, along with a tight risk management process during all phases of the projectTRANSCRIPT
IT OUTSOURCING CONTRACTS :
NEGOTIATION AND GOVERNANCE TO ASSURE THE
EFFECTIVENESS OF BENEFITS
Alfredo Saad
20/06/2014 1
AGENDA
Outsourcing : Historical Background
Outsourcing : Macroeconomic Foundation
Outsourcing 2013 Market Profile
Outsourcing Market Growth until 2017
Business Drivers of the Outsourcing Decision
Achieved Effectiveness of Outsourcing Benefits
Benefits (In)effectiveness: Typical Profile of Extreme Scenarios
Outsourcing : Two Real and Opposed Cases in Brazil
Outsourcing : How to Assure an Effective Benefit ?
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OUTSOURCING : HISTORICAL BACKGROUND
Rigidly verticalized organization models which prevailed until the beginning of 2nd half of the 20th Century ...
They had the ownership and control of all human and material resources needed by its operation
Such self-sufficiency was understood as a pre-requisite for the success
This model brought the need for big and continuous capital investments to keep the leadership of their market
... had to be reexamined because new factors emerged
Continuous intensification of competition among companies
Technological advances increasingly accelerated
Mutant and volatile demands from the customers
Competitivity, flexibility, agility and capacity to innovate became key requirements
Permanent efforts aiming at resource utilization efficiency and cost reduction
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OUTSOURCING : MACROECONOMIC FOUNDATION
Causes-effects chain observed in the economic scenario in the 80’s
Growing inflation in US
Increasing interest rate as determined by Federal Reserve
Recession aggravation
Increasing of external investment resources
Increasing of dollar quotation
Diminishing of exportation goods flow
Increasing of importation goods flow
Growing impact over industry profitability and competitivity
Shareholder’s pressure asking for cost reduction and efficiency and productivity increase
Two of the market responses to this causes-effects chain were
Globalization
Outsourcing
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OUTSOURCING MARKET PROFILE IN 2013
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Total ITO & BPO 952 B US$
Segmented by area
IT Outsourcing (ITO) 68 % 648 B
Business Process Outsourcing (BPO) 32 % 304 B
Segmented by geography
North America 42 % 398 B
EMEA 34 % 319 B
Japan 10 % 101 B
Asia-Pacific except Japan 9 % 88 B
Latin America 5 % 44 B
Source :
Fersht, Phil & Snowdon, Jamie - State of the Outsourcing Industry 2013 – Executive Findings, HfS Research
20/06/2014
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Total ITO & BPO 952 B US$
Segmented by area 2013 % a.a.
IT Outsourcing (ITO) 68 % 648 B 4,7 %
Business Process Outsourcing (BPO) 32 % 304 B 6,0 %
Segmented by geography 2013 ITO % a.a. BPO % a.a.
North America 42 % 398 B 5,3 % 5,3 %
EMEA 34 % 319 B 3,3 % 6,3 %
Japan 10 % 101 B 2,9 % 4,4 %
Asia-Pacific except Japan 9 % 88 B 7,0 % 8,1 %
Latin America 5 % 44 B 8,7 % 7,4 %
Source :
Fersht, Phil & Snowdon, Jamie - State of the Outsourcing Industry 2013 – Executive Findings, HfS Research
OUTSOURCING MARKET GROWTH UNTIL 2017
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Source :
Fersht, Phil & Snowdon, Jamie - State of the Outsourcing Industry 2013 – Executive Findings, HfS Research
OPERATIONAL BUSINESS DRIVERS
Reduce operating costs
Standardize processes
Meet compliance / regulatory requirements
More effective operations at a global level
Transform / reengineer processes
BUSINESS DRIVERS OF THE OUTSOURCING DECISION
STRATEGIC BUSINESS DRIVERS
Gain access to talent
Gain access to new technology
Improve analytical capabilities
Proven / mature offerings from service providers
Force change into business operations
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ACHIEVED BENEFITS OF OUTSOURCING BENEFITS
OPERATIONAL BUSINESS DRIVERS
% of companies
which responded
Very
effective
Somewhat
effective
Reduce operating costs 35 % 52 %
Standardize processes 29 % 56 %
Meet compliance / regulatory requirements 23 % 63 %
More effective operations at a global level 29 % 53 %
Transform / reengineer processes 15 % 63 %
Source :
Fersht, Phil & Snowdon, Jamie - State of the Outsourcing Industry 2013 – Executive Findings, HfS Research
20/06/2014
9
STRATEGIC BUSINESS DRIVERS
% of companies
which responded
Very
effective
Somewhat
effective
Gain access to talent 20 % 61 %
Gain access to new technology 18 % 55 %
Improve analytical capabilities 13 % 56 %
Proven / mature offerings from service providers 9 % 53 %
Force change into business operations 17 % 61 %
Source :
Fersht, Phil & Snowdon, Jamie - State of the Outsourcing Industry 2013 – Executive Findings, HfS Research
ACHIEVED BENEFITS OF OUTSOURCING BENEFITS
BENEFITS (IN)EFFECTIVENESS: TYPICAL PROFILE OF EXTREME SCENARIOS
Latent conflict generated by :
Contractual obligations of both parties
defined ambiguously
Metrics of services quality defined
ambiguously
Customer expectations badly or simply non
administered
Ineffective communication to the end users
about the actual contractual obligations
Growing and mutual mistrust feeling that
the other party is obtaining an unjustified
advantage concerning :
The prices charged
The defined deadlines for projects
The amount and skill of allocated resources
Growing demotivation of both teams due to:
Difficulties to evidence benefits
Difficulties to propose and close new deals
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Solid contract governance by both parties
resulting in :
Administering permanently the expectations
and taking immediate corrective actions to
adjust issues identified
Involving the adequate hierarchical levels
depending on the nature of the issues
Growing and mutual confidence feeling
brought by the perception that both parties
pursue common objectives concerning :
Services quality
Customer satisfaction
Services delivery stability
Innovation in future solutions
Growing motivation of both teams due to:
Nurtured partnership mindset
Permanent ideas for new projects
Mutual perception about the effectiveness
of benefits achieved
OUTSOURCING : TWO REAL AND OPPOSED CASES IN BRAZIL
Customer : Telecommunications Operator
Contract operations in conflict since the
initial stages
Unstable delivery environment
Mutual contractual obligatons defined
ambiguously
Conflict resolution discussed at the wrong
management level
After contract signature the equity control
changed on the customer side
The new owner had a radically diverse vision
about outsourcing relatively to the old
controller
New corporate strategy made unfeasible the
continuity of the contract
A long renegotiation resulted in contract
cancellation and consequent re-insourcing
of the IT functions
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Customer : Manufacture Company
Customer global strategy defined that a
global IT partner would be selected
IT outsourcing is part of the broader strategy
to create a unique global image of the
customer organization
Relationship between the customer and
provider organizations is led by their top
global executives
Progressive geographical implementation
with solid governance by both parties
Provider is part of the customer strategic
planning and so is able to evaluate impact
and create new solutions for the IT
environment
New projects in permanent discussion
Two contractual renegotiations resulted in
additional cost reduction to the customer
and contractual term extension
OUTSOURCING : HOW TO ASSURE AN EFFECTIVE BENEFIT ?
Adequately implement each phase of the project, tightly managing their inherent
risks to avoid or at least minimize to acceptable levels the impact of their
materialization over the potential benefits to be achieved :
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Identification and priorization
of applicable business drivers
Definition of the sourcing
strategy
Definition of the
outsourcing model
Provider(s) selection
Negotiation of contractual
terms and conditions
Services transition
Contract governance