Understanding Misunderstanding

Insights from the 2006 Outsourcing Survey

John McCord

PA Consulting Group

© PA Knowledge Limited 2006. All rights reserved. JHMc Presentation1 June 29 2006 Page 2

Clients underestimate the scale of the outsourcing challenge – easy to source, harder to realize value

Insight

Clients’ assessment of the level of difficulty of various stages of the outsourcing lifecycle

Many find the early stages of sourcing the easiest…

…but 50% of clients found Benefits

Realization hard

© PA Knowledge Limited 2006. All rights reserved. JHMc Presentation1 June 29 2006 Page 3

Clients and suppliers have divergent views regarding desired outcomes and benefits of outsourcing deals…

Insight

Outcomes/benefits identified by clients & suppliers as being required from outsourcing

Suppliers?

© PA Knowledge Limited 2006. All rights reserved. JHMc Presentation1 June 29 2006 Page 4

Clients and suppliers have divergent views regarding desired outcomes and benefits of outsourcing deals…

Outcomes/benefits identified by clients & suppliers as being required from outsourcing

It is critical to ensure alignment with potential outsourcing partners on desired outcomes and benefits prior to signing the deal

Insight

© PA Knowledge Limited 2006. All rights reserved. JHMc Presentation1 June 29 2006 Page 5

… and success is rarely judged on ‘just delivering to defined service requirements’

While 64% of clients’ admit they are happy that their suppliers are meeting SLAs;

Less than half (48%) feel they are getting ‘value for money’

Only 22% believe their supplier delivered innovation

Client views on outsourcing supplier relationships and value-add

Insight

© PA Knowledge Limited 2006. All rights reserved. JHMc Presentation1 June 29 2006 Page 6

… and clients are less interested in cultural fit and strategic alignment

Insight

Figure 6: Key areas where it was felt more focus should be placed when selecting a supplier

With hindsight, clients place more emphasis on delivery capability and expertise, and less on culture & commercials

© PA Knowledge Limited 2006. All rights reserved. JHMc Presentation1 June 29 2006 Page 7

So how do these insights impact the sourcing lifecycle

Defining Strategy

Business Case

Requirements Definition

Issue RFP

Negotiation

Commercials and Contracts

Solution Design / Service Model

Relationship Management

Service Management Organization

Transition

Benefits Delivery

Innovation

Design Deliver

Business Transformation

The Outsourcing Lifecycle

Develop

ITO Sourcing

© PA Knowledge Limited 2006. All rights reserved. JHMc Presentation1 June 29 2006 Page 8

Expectations are expanding beyond cost …

Clients still look to outsourcing to reduce costs and enhance shareholder value, but there are many other reasons to outsource:

A driver for change and business transformation

Enables cost predictability with a high level of credibility

Enables focus on Core business

Drives consistency in delivery with reliable outcomes

Improves the organization’s ability to address to market changes

Encourages innovation

Drives the development of new processes

Enables access to specialist skills

Improves quality of service

© PA Knowledge Limited 2006. All rights reserved. JHMc Presentation1 June 29 2006 Page 9

… but emphasis should also be placed on delivery …

The outsourcing process is about communicating needs and capabilities to the market. The process requires speed but the needs are complex and changing. How do CIOs quickly but accurately communicate needs? Through a progression of output based written communications and face-to-face meeting.

What this means:

1. Tell the vendor “what” you want, let them say “how” it’s delivered

2. RFIs and RFPs are incremental steps - not definitive statements

3. Face-to-face negotiations are the important third stage

4. Push out only as much detail as necessary to get to next step

5. All communications are controlled through a single point

6. Consistent messaging is crucial

© PA Knowledge Limited 2006. All rights reserved. JHMc Presentation1 June 29 2006 Page 10

… and designing effective governance structures to make it last

It is important toinsure that the right people arespeaking to eachother in each organization andthroughout the relationship.

This means thatthere must be a goodservice managementstructure on both sidesof the deal

Company to Company

Performance / Satisfaction

Executive / VP

ServiceManagers

SupplierManagement

BP

Man

agem

ent

Account Management

Senior / VPManagement

Executive/ VP

OperationsManagers

Senior Business

Management

Regional / Business

Management

Execution

Executive / VP

ServiceManagers

Str

ateg

y

SupplierManagement

SupplierManagement

BP

Man

agem

ent

Bu

sin

ess

Man

agem

ent

Account Management

Senior / VPManagement

Executive/ VP

OperationsManagers

Senior Business

Management

Regional / Business

Management

Escalation Path

© PA Knowledge Limited 2006. All rights reserved. JHMc Presentation1 June 29 2006 Page 11

The outsourcing market continues to mature

Highlights of PA’s 2006 Outsourcing Survey

The value of the outsourcing marketplace continues to increase

A large percentage of company budgets are spent on outsourced services

Client – supplier relationships have become increasingly complex

Competent delivery of outsourced services is now considered the ‘norm’

Client expectations have grown beyond simply reducing costs

Boundaries are expanding – suppliers now entice clients with promises of business transformation

Conclusion

© PA Knowledge Limited 2006. All rights reserved. JHMc Presentation1 June 29 2006 Page 12

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