it outsourcing: devising a fast and sustainable diet · it outsourcing: devising a fast and...

Pillsbury Winthrop Shaw Pittman LLP

IT Outsourcing: Devising a Fast and Sustainable Diet

No Better Time for the Right Outsourcing Series

May19, 2009

1 | No Better Time for the Right Outsourcing

About the Presenters About Pillsbury Global SourcingThe most experienced firm in the business – architecting the largest service delivery projects and strategic alliances

Over 500 transactions across a premier customer base

Over 20 years’ experience in structuring and implementing complex delivery arrangements

More than US$450 billion in completed transactions

No Better Time

The only sourcing advisory firm offering integrated professional services (legal, sourcing, domain, financial & change management)

Guiding clients through the full sourcing lifecycle

Using straight-through processing for speed-to-value

Deploying a unique visual sourcing technique using ourpatented ValueChain method


Why outsourcing makes sense Now

Reduced execution risk

Favorable market engagement dynamics

Compelling business cases

“Better resource management, more products at the same cost, efficient customer service at minimum dollar all continue to make outsourcing a viable and profitable option." New Trends to Watch in 2009: Raising Efficiency with Near-shoring, HRO Today February 2009

“In an effort to make its outsourcing and IT services more affordable in a down economy, Hewlett-Packard Co. is changing its services pricing to a model that's akin to ordering a customized laptop. ” - As Recession Hits IT, HP Tries Variable Pricing on Services, CIO, March 10, 2009.

“It is a good time to look at outsourcing as a means to cut costs, launch new business ventures, and improve efficiencies.” - Top Three Outsourcing Initiatives for 2009, CIO, January 27, 2009.

“The prospect of quick cost savings and improved results lead companies to take a closer look at external solutions.” - Savings Spur Interest in Learning Outsourcing, HRO Today, February 2009.

“Top Indian tech firms such as TCS, Infosys, Wipro, and HCL are signing new outsourcing contracts at 15-20% lower billing rates than last year, as customers including BT, Bank of America and Citibank renegotiate existing contracts and award new projects at much lower rates.” - IT majors sign new deals at a discount, The Economic Times (India), March 6, 2009.

The secret is out . . . . . . No Better Time


Information Technology – Opportunities

Data Center & GreenRelieve data center capacity constraints

Leverage providers’ large-scale data center investments

OpEx in lieu of CapEx

Energize ITSM best practice deployments

Reduce real estate and energy costs

Embrace advanced automation to reduce incidents and costs

Enable achievement of enterprise green goals

(I,P,S)aaSCreate value from from emerging Infrastructure, Platform & Application “as a service” offerings

Low barriers to entry and exit

Fulfill the promise of “on demand”

Emerging enterprise-class service levels

Highly resilient

Transfer large swaths of operational effort and risk

ProductivityBenefits from labor arbitrage have been largely exploited

Productivity increases create lasting value

ITO - processes, tooling, virtualization and automation

AD/M - measurement, metrics, virtualization exploitation, Agile vs. CMM

Leverage OPM

IntegrationMulti-sourcing causes disintegration and friction loses

Operational and financial benefits are available through improved process linkages

Opportunity to leverage supplier best practice and OPM to minimize CapEx and build-run risks

{ }4 | No Better Time for the Right Outsourcing

Information Technology – Commercial Approaches

Given various technology advances, there are now multiple approaches available to reduce expenses and create value over the short, middle and long terms

Cheaper, Now! Disruptive Services Improved StructuresResponds to demands for cheaper ITservices. Begins to deliver improved financial results within 90 – 180 days

Incorporates, low cost low barrier to entry and exit solutions into the IT delivery fabric

Uses a horizontal delivery architecture to improve long-term leverage, reduce barriers to exit and minimize the friction from tower-based multi-sourcing strategies


Topics

1 Cheaper, Now! Creating Value – ASAP

2 Disruptive Services Creating Value – Differently

3 Improved Structures Sustaining Value


Information Technology – Cheaper, Now!Creating Value – ASAP

Responding to demands to lower expenses immediatelyMost seasoned outsourcing relationships have had some amount of margin expansion

Learning curve, lower cost of underlying technology, improved processes and tools, labor arbitrage

The marketplace is being responsive to customer requests to share some of the margin expansion with tradeoffs against length of commitment or performance metrics

There are several approaches① Sole source discussions between the incumbent supplier and their customer② Sole source discussions between the incumbent supplier and their customer/customer’s advisor③ Competitive go-to-market initiative with an advisor

00

Key:

Gross

Net

TimeB

enef

its

3

2

1

{ }



Time and Savings Model – Savings estimates based on TCV ranging from $50M to $250M using observed transaction margin ranges

Customer’s current price

Unadvised customer-revised net price

Market competition best net price

Advised customer-revised net price

Generally, a go to market strategy is only appropriate to overcome service delivery problems, delivery model issues or a supplier that is unwilling to negotiate price

Pric

e

1 Quarter

2 Quarters

3 –4 Q

uarters

~ 4.5%

~3.5 – 6.25% 1,2

1 A go to market strategy at less than ~$75M TCV is unappealing under most circumstances2 Projected net savings and assumes no costs to exit, but does include the cost of entry

~ 8.0 – 8.5%



Approach SpeedBenefit Advisory

FeesSwitching

CostsRight for the

Times?Potential Determination

Sole Sourced

(unadvised)Fastest

Middle to worst, but get

it fastestNone None None

Yes, but may not get

everything

Sole Source(advised)

MediumBest, but slightly delayed

Early and inexpensive

Modest: Fixed price, plus share

of incremental

savings

None Generally, yes

Competitive SlowestWorst to

middle and get it much later

After RFP and relatively expensive

Material: generally

T&MHigh Generally, no

These alternatives apply to traditional service delivery commercialization options, but there are new alternatives emerging …


Topics





Information Technology – Disruptive ServicesCreating Value – Differently

Everything-as-a-service (XaaS) driven byLarge scale, low cost compute and storage equipment

Virtualization technologyAutomation and management tools

World-class facilities

Results in a dematerialization of the customer’s infrastructure needs, creating the potential for

Reduced cost of delivering existing applicationsOpportunity for IT-driven innovation

Directly targets reductions in the quantity (not the cost) of labor required to deliver IT services

Ultimately, will require new IT operating and sourcing models to fully exploit

Can yield dramatic near- to mid- term expense reductions


Information Technology – Disruptive ServicesCreating Value – Differently

The Seemingly GoodOperational improvements

Better service performanceSame or more for lessFulfillment speed increasesCapacity limitations removedOn-demand potentialTrue scalability

Lightweight commercial transactionsEasy entryEasy exit

Financial upsidePay for what you use… when you use itOpEx instead of CapExCosts less than older models

The Potentially BadSuppliers you never thought about as being “industrial strength”

Service level and security concerns

Commercial, operational and integration issues

Requires a shift in buyer behavior away from one-off configurations

Supplier-centric, “point” contracts

The tactical will need to be re-factored into the strategic

Don’t let the drive for perfection get in the way of the valuable. Seize the opportunity to create value now and fix the “ugly” later. We have seen clients reduce their service-centric expense

forecast by over 50% (and $50M) when compared to traditional sourcing


Topics





Information Technology – Improved StructuresSustaining Value

ObjectivesReduce the power and stickiness of suppliersCreate competitionLower barriers to exitReduce cross-subsidizationIncrease transparencyUtilize best-of-breed delivery actorsAsset optimization

Horizontal multi-sourcing implementations have largely been Pyrrhic victories. Right objectives, but the wrong delivery architecture, plus the technology eco structure is rapidly moving on. New operating

models and commercial structures are needed…

OutcomesBroken processes, finger pointing and turf warsMore transactions, more managementService management and integration complexitiesMismatches in the lifecycles of equipment, software and servicesIncreased barriers to entryBarriers to exit – status quo at bestDefensive asset lifecycle managementHard, lengthy, high risk, deals

The historical state-of-the-art has been vertical (Towers) multi-sourcing



Facilities(Carrier and Service Provider Neutral)

Facilities(Carrier and Service Provider Neutral)

Hardware(Life Cycle Management)

Hardware(Life Cycle Management)

Software(Life Cycle Management)

Software(Life Cycle Management)

CommunicationsCommunications

Managed LaborManaged Labor

Everything-as-a-Service

Everything-as-a-Service

Service Management and IntegrationService Management and Integration

Services Definition and ConstructionServices Definition and Construction

Portfolio Management

The new state-of-the-art is horizontal (Layers) multi-sourcing



The outcomes of layered multi-sourcingReduces supplier stickiness by

Lowering the barriers to entry and exitDecouples the facilities from the managed labor provider’s services

Uses compute-based facilities that are neutral to managed labor providers and carriersDecouples assets from the managed labor provider’s services

Creates the opportunity to shift to potentially game-changing asset managementRemoves lifecycle mismatch impediments

Simpler, faster, lower risk, dealsSingle service manager and integratorSupports hybrid sourcing models: DIY, Outsourcing, Everything-as-a-Service

Improves alignment of commercial management levers with the needs of the customerEnables non-facilities-based service suppliers to compete (sweetening the options)Increases asset and services liquidity


Information Technology

Wrap up

Cheaper, Now! – Various options, each producing different outcomes

Disruptive Solutions – Leveraging technology advances to produce value

Layered Multi-Sourcing – Solving some of sourcing’s thorniest, longstanding issues


Upcoming Sessions

June 9 Renegotiations: Positioning for the Fast Path to Savings

June 30 Procurement & Real Estate Outsourcing: Short Term

Strategy with Long Term Results

July 14 M&A – Business Continuity and Cost Effective Operations through Outsourcing

it outsourcing: devising a fast and sustainable diet · it outsourcing: devising a fast and...

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