november 2004 outsourcing from the strategic point
TRANSCRIPT
November 2004
Outsourcing from the strategic point of view for Nordic companies
Speech at First Baltic IT Cruise 2004-11-22
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Jan Book – IT Management Consultant and Strategic Advisor to business and IT executives
Partner in the IT Management company Informatics Strategic Advisors
Advisor to business and IT executives in strategic IT-matters like IT-strategy, CIO for hire, IT-sourcing, Cost cut / Efficiency, Quality assurance, Investments, Value management, Organisation
30 years of experience from the IT industry and application in end user industries
Over 20 years of experience from Nordic and international consultant companies like Enator, SIAR Bossard, Gartner Group and Booz Allen Hamilton.
Extensive experience from Nordic and International assignments for clients in Banking, Retail, Energy, Telecom, Public sector and a variety of manufacturing industries like Packaging, Paper & Pulp, Food, Chemicals, Automotive, Assembly, Construction materials and Medical supply.
Bachelor degree from the University of Lund Sweden in Economics and Information technology.
Background and experience
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Informatics Strategic Advisors gives advice to Business and IT executives in strategic IT matters
Informatics business concept and profile
Business profile
Business driven – Business perspective, change capability and IT knowledge
Specialist competence – within IT-management and change management
Integrity – IT supply independent, finding pragmatic IT solutions
Flexibility – Situational advisory, strategic analysis and change leadership/implementation coaching
Efficiency – Build the capability of optimizing value IT and commodity IT simultaneously
”Assist management in companies and organizations by enhancing business value and efficiency by IT ”
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Content
Nordic business and IT situation - IT challenges and trends
The IT outsourcing market
Informatics view on IT Sourcing
Development of a forefront sourcing agreement
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The business climate for many Nordic companies is tough due to strong exposure to export business and international competition
Cost cut programs because of fierce competition and weaker financial climate
Structural changes because of an increasingly competitive business climate – higher awareness and preparedness for change
Outsourcing of production and commodity services to “low cost countries”
Short term profit improvement requirements
Business Challenges
Cost efficiencyFlexibility
Innovation and time to market
Nordic business climate and challenges
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The IT situation for Nordic companies is in many cases characterised by weak trust in IT value
Backlash from big investments in the 90ies: Y2K, ERP, eBusiness, CRM – where is the business value?
Weak trust in the value of IT – fewer major forefront initiatives
Efficiency/cost cut programs – where only the cost side is considered
Application architecture dilemma – stuck in the middle with incomplete ERP-based architectures
Cost efficiencyDemonstrate valueBalance long term
investments
Nordic IT situation and IT challenges
IT Challenges
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There is no automatic correlation between IT spending and value – Only the companies that have a clear strategic intent and high managerial skills will succeed
100
80
60
40
20
0
-20
-40Ret
urn
s o
n s
har
eho
lder
Eq
uit
y -
%
1000 10000
IT Budget/employee (log)Source: Butler Group
IT returns related to investment level
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After the hype IT is increasingly regarded as a commodity which makes no difference for business competitiveness
Digital (IT) infrastructure, the most recent infrastructure investment wave, has now grown mature
Investments in IT infrastructure will slow down and competitive advantage will even out like for earlier infrastructure areas
Focus will be on – Follow rather than lead– Minimize investments– Reliability
Productivityin the society
Time
Railways
Electricity
Analoguetelephony
DigitalInfrastructure
Example of infrastructure investment waves 1850-2000
?
Utilization of economies of scale and low cost country leverage are two concrete examples of this trend
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Low cost country leverage is basic for making IT services with high personnel intensity more efficient
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18
20
25
25
29
40
45
49
49
50
50
52
58
59
61
63
99
0 20 40 60 80 100 120
Brasilien
Ungern
Thailand
Tchec rep
Spain
Mexico
Italy
USA
Australia
Dubai
Finland
Austria
Sweden
France
Belgium
UK
Germany
Switzerland
Example of comparable IT service with high personnel intensity:Hourly rate for PC support in different countries
- As a complement to efficiency enhancement by introduction of standard products
Source: Recent global IT service procurement project
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Content
Nordic business and IT situation - IT challenges and trends
The IT outsourcing market
Informatics view on IT Sourcing
Development of a forefront sourcing agreement
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The Nordic outsourcing market has grown dramatically in the last few years – but the success story is not complete
Many big outsourcing contracts recently – e.g. Ericsson, ABB and SAS
Big international players like HP, IBM, Atos Origin, Accenture and Capgemini are dominating
Financial backlash from contracts won during the “recession” years
In many cases clients are dissatisfied with how they have managed to control their outsourcing partner
Business Process Outsourcing is growing
Offshoring is also growing
Trends on the Nordic outsourcing market
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Companies have outsourced all aspects of IT service provision … while retaining key policy setting activities
Source: IDC, 2002
% of respondents
IT Activities Outsourced
IT Activities NOT Outsourced IT Activities NOT Outsourced
Policy and standards
Governance
Mission critical applications and infrastructure
Support and maintenance of core process control systems
Policy and standards
Governance
Mission critical applications and infrastructure
Support and maintenance of core process control systems
53%
48%
36%
22%
20%
8%
4%
0% 10% 20% 30% 40% 50% 60%
Application development
Infrastructure
IT help desk
All of IT
Application management
Specific IT functions
Hardware support
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Cost saving, gain access to outside expertise and service-level improvement, are the key drivers of IT outsourcing
Most important reasons for outsourcing
Source: The Conference Board Survey on Outsourcing Trends, 2003
77%
70%
61%
59%
56%
Cost savings
Gain access to outsideexpertise
Improve service
Focus on core business
Gain access to bettertechnology
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To minimize these risks, companies look for service providers who can show a strong responsiveness and customer service – providers that have a proven track record
Source: IDC, 2002% of respondents selecting the characteristic
Top characteristics sought in an outsourcing provider
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Responsiveness and customer service
Guarantees and service level agreements
Ability to enable future business strategies
Expertise within your industry
Price
Trusted, strategic relationship with your company
Short implementation/transition period
Provisioning of best-of breed technology
Joint relationship/stake in the business
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Offshoring/Nearshoring is emerging…
Offshore companies from India are dominating in the Nordic area, e.g. Tata Consulting, HCL
Few companies are yet using “nearshoring” from the Baltic countries and Eastern Europe
Global delivery models from the big international companies are the most common – front-office in client country and – back-office in low cost countries. – e.g. IBM, Accenture, Capgemini, Atos Origin
Offshore “barriers” are – Language problems (e.g. public sector)– Organizational resistance– Loss of control– Questionable performance– Weak outsourcing experience
Offshoring/Nearshoring status
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…and 1/3 of the top 100 companies in the Nordic area plan some kind of offshore-activities
CIO´s in Sweden's 100 largest companies were asked about outsourcing to “low-cost countries”
– 1/3 of the companies are planning outsourcing, partly or wholly, to offshore countries
but…
– Only around 20% have experience from “off-shoring”
– Most positive to off-shoring were the manufacturing industry
Source: Informatics CIO-survey, 2004
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According to Gartner Group very few offshore countries have acceptable conditions
Rating of sample of offshore countries
Poor Fair Good Very good Excellent
Source:Gartner Group 2004
Overall climate
Data/IP-security
Cultural compatibility
Political stability
Cost
Education system
Infrastructure
Labour pool
Government
Language
RussiaHun-gary
PolandCzechRep.
IrelandNorthIreland
SouthAfrica
IsraelChinaIndiaCriterion
Overall climate
Data/IP-security
Political stability
Cost
Education system
Infrastructure
Labour pool
support
Language
RussiaHun-gary
PolandCzechRep.
IrelandNorthIreland
SouthAfrica
IsraelChinaIndiaCriterion
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Content
Nordic business and IT situation - IT challenges and trends
The IT outsourcing market
Informatics view on IT Sourcing
Development of a forefront sourcing agreement
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As IT is maturing the perspective on IT is undergoing a dramatic change
IT support for competitive uniqueness
IT support for core business processes
IT support for admin business processes
Infrastructure
2000
”All IT isstrategic”
2010
”Information supplyfor competitive
differentiation isstrategic”
Commodity
”The value of IT is
questioned”
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Today certain IT areas are of strategic importance and others are merely commodity
Business neutral/Standardised IT
Business critical IT Highest
business value
LowestIT-cost
Best support forthe business model
Increased maturityand standardisation
Critical borderline Enhance cost efficiency by
– Standardisation– Consolidation– Sourcing– Low cost country
leverage
Strengthen the business model with critical information support
– For competitive differentiation– For operational cost efficiency
The borderline between business critical and business neutral parts of IT in the company
Companies that exploit the differences get a dual effect - higher business benefit at lower costs
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The impact of current IT trends on the internal IT unit is value climbing
1. Capture the value of economies of scale and offshoring
– Simplify services/reduce complexity/standardize– Use economies of scale for ”hard” IT services and
offshoring for ”soft” IT services– Force IT suppliers to blended services– Enhance procurement/supplier management – Plan competence shifting
2. Focus integration/information supply, IT controlling and Information security
3. Move closer to the business/add value to the business model
– Support increased cost efficiency in the business– Support increased differentiation in the business– Support in capturing the sleeping values of ERP
Businessmodel
Sourcingmarket
1.
2.
3. Customerrelation
Technologymanagement
Structuremanagement
Principles of value climbing in the IT unit
Enhancement
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The impact on IT suppliers is increased proactiveness and understanding of the specific business situation
Drive voluntarily a continuous strong cost reduction – Propose simplification and consolidation – Explore automation in the service delivery – Explore low cost country consulting/blended services
Get more ”specific-customer-in” (rather than “generic-product/koncept-out” to all customers)– Be updated on the customer business model – Inspire with solutions that enhance business cost efficiency respective business differentiation
for the right parts of the business
Be business driven – demonstrate how proposed solutions can have an impact on current business challenges – Enhancement of on shore production/administration of the business – Control of offshore production/administration of the business
Be prepared on tougher negotiations going forward
Enhancement of IT supplier to ”real” partnership
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Content
Nordic business and IT situation - IT challenges and trends
The IT outsourcing market
Informatics view on IT Sourcing
Development of a forefront sourcing agreement
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There are different models for outsourcing - Selective sourcing/ multi sourcing has been the most common model in recent major deals…
Affär
IT-enhet
Affär Affär
IT-unit
BusinessBusiness Business
InternalIT-supplier
Selective/Multi sourcing(Best-of-Bread)
Main contractorBest-of-Breadconsortium
AffärBusiness
Totaloutsourcing
Maturity/Evolution of sourcing model
…however the Main contractor model is gaining ground
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The target sourcing model includes establishment of efficient sourcing areas with built in competition potential
Businesscentric
Technologycentric
IT Service integration / Main contractor
Business integration and buying competence
Off shoring vendor
Project AMCentralserver
hosting
Data &telecom
Localoperation
Target sourcing model CLIENT EXEMPLE
Competitivesourcing situation/
dual sourcing
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The forefront sourcing agreement contains ingredients like main contractor ship, competitive/dual sourcing modules and utilization of blended services
A typical modern forefront sourcing agreement
Sourcing Agreement key characteristics
Main contractor with Service integration responsibility– Services in scope: Helpdesk, Application management
and selected Infrastructure management servicesCompetitive sourcing modelAnnual cost reduction by 8-10% through transformationExtended suppliers responsibility for indirect damagesBlended service deliveries with on shore front-office and off shore back-office - “Floating” delivery centre model – “striving to find the cheapest location over timeHigh degree of formal control
– Process & Governance model standardisation – ITIL etc– Quality requirements – CMM 5
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Informatics offers a comprehensive program that achieves a successful outsourcing arrangement with speed and control - while minimizing risk
SourcingStrategy
Vendor negotiation
Sourcingstrategy
• Current supplier portfolio• IT supply market potential• Business expectations & requirements
• Assessment of IT -market• Detailed IT - service requirement• Future business scenario
IT- service QuotationsSupplier shortlist Final
contract
• Negotiation strategy/price• Detailed Business req.• Legal/contractual requirementsProcurement &
Vendor selection
Assessment of current ITsuppliers/IT performance
Develop sourcing strategy
SourcingStrategy
Vendor negotiation
Sourcingstrategy
• Current supplier portfolio• IT supply market potential• Business expectations & requirements
• Assessment of IT -market• Detailed IT - service requirement• Future business scenario
IT- service QuotationsSupplier shortlist Final
contract
• Negotiation strategy/price• Detailed Business req.• Legal/contractual requirementsProcurement &
Vendor selection
IT sourcing activities
Develop service requirementsRequest for informationRequest for quotationVendor offers/presentationsEvaluation, reference visits
Develop service level requirements
Make due diligence Drive commercial/contractual
negotiations
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Summary
Nordic business and IT situation - IT challenges and trends
– Cost efficiency is a permanent focus in IT units despite of stronger business climate – The potential is in economies of scale and low cost country leverage
The IT outsourcing market
– Many traditional major sourcing deals in the last few years – but now Offshoring/Nearshoring is emerging and 1/3 of the top 100 companies in the Nordic area plan some kind of offshore-activities
Informatics view on IT Sourcing
– As IT is maturing the perspective on IT is undergoing a dramatic change. The impact on the IT unit is exploration of economies of scale and low cost country leverage together with value climbing
Development of a forefront sourcing agreement
– The forefront sourcing agreement contains ingredients like main contractor ship, competitive/dual sourcing modules and utilization of blended services