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Information Technology Sourcing: More Than A Decade of Learning

Information Technology Sourcing: More Than A Decade of Learning. Mary C. Lacity. Visit to January 24, 2003. Presentation Outline. Research Methods One-to-one IT Sourcing: Overall lessons One-to-many Netsourcing The Big Yawn

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Information Technology Sourcing: More Than A Decade of Learning

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  1. Information Technology Sourcing: More ThanA Decade of Learning Mary C. Lacity Visit to January 24, 2003

  2. Presentation Outline Research Methods One-to-one IT Sourcing: Overall lessons One-to-many Netsourcing The Big Yawn Business Process Outsourcing: BAE SYSTEMS Case Study

  3. RESEARCH METHOD:Case Studies Thirteen year study with multiple coauthors: 90+ case studies, 130 decisions in US, Europe, and Australia Outsourcing: n= 98 decisions British Aerospace DuPont Inland Revenue Enron GM IRS Rigg’s Bank South Australia Swiss Bank Insourcing/Backsourcing: n= 18 decisions Continental Baking Brown Group MEMC Occidental Petroleum Ralston Purina Vista Chemicals Westchester County Netsourcing: n=10 decisions Corio EDS Host Analytics mySAP Zland Business Process Outsourcing: n = 4 decisions BAE SYSTEMS Lloyd’s of London

  4. Dupont • 1997 Signed $4 billion in contracts with CSC & Accenture • Outsourced IT infrastructure, applications maintenance, desktops • 3100 people transferred • Contracts in 22 countries • Contract is 30,000 lines long, 600 SLA • Decision process took 18 months • Transition period took 2 years

  5. RESEARCH METHOD:Case Studies Multiple stakeholders interviewed at each site... • Senior executives (CFO, COO, CEO, Treasurer, etc..) • Chief Information Officers (CIO) • Contract managers • Supplier account managers and executives • Key end-users • Consultants, internal and external lawyers, union leaders

  6. RESEARCH METHOD:Surveys CIO-level surveys of Outsourcing experiences: UK & US (1997, n=101 useable surveys) Scandinavia (1998, n = 40 useable surveys ) CIO-level survey of Netsourcing experiences & plans: 28 countries, (2001, n = 274 useable surveys)

  7. One to One IT Sourcing

  8. Case Study Outcomesn = 116 sourcing decisions (one-to-one model)

  9. Year Decision Was Made YES, most expectationmet NO, most expectation not met MIXED results Total 1984-1991 14 (48.3%) 12 (41.4%) 3 (10.3%) 29 1992 to 1998 41 (73.2%) 8 (14.3%) 7 (12.5%) 56 TOTAL # OF DECISIONS 55 (64.7%) 20 (23.5%) 10 (11.8%) 85 Success Rates Over Time CONTRACT DATE(n=85 outsourcing decisions with discernible outcomes)

  10. Customer Rating of Supplier PerformanceOne-to-One Outsourcing 1997 US & UK data Overall, suppliers are earning a “good” report card, but there were many opportunities for improvement.

  11. Proven Practices in IT Sourcing Selective Sourcing rather than total outsourcing Joint Senior executive/IT decisions Internal & External Bids Short Term Contracts Fee-for-service contracts

  12. Selective Sourcing N = 102 decisions with discernible outcomes

  13. Scoping Phase Evaluation Phase Negotiation Phase Transition Phase Middle Phase Mature Phase • Identify core IT • capabilities • Identify IT • activities for • potential • outsourcing • Measure baseline • services & costs • Create RFP • Develop evaluation • criteria • Invite internal and • external bids • Conduct due • diligence • Negotiate SLA • Create responsibility • matrices • Price work units • Terms of employee • transfer • Negotiate • mechanism for • change • Distribute contract • to users • Interpret contact • Establish post-contract • management infra- • structures & processes • Consolidation, • rationalization, • standardization • Validate scope, costs, • levels, service levels • Managed additional • service requests • Foster realistic expectations • of supplier performance • Publicly promote contact • Manage customer/supplier relationships • Benchmark • performance • Realign the contract • to reflect changes • in technology & • business. • Recalibrate • investment • criteria • Determine • if relationship • is extended • or terminated Managing Sourcing Decisions Through Six Phases

  14. Core IT Capabilities Business and IT Vision Business Systems Thinking Relationship Builder Contract Facilitation IS Leadership; Informed Buying Design of IT Architecture Delivery of IS Service Contract Monitoring Technical Architecture Technical Doer Vendor Development

  15. Scoping Phase Evaluation Phase Negotiation Phase Transition Phase Middle Phase Mature Phase • Identify core IT • capabilities • Identify IT • activities for • potential • outsourcing • Measure baseline • services & costs • Create RFP • Develop evaluation • criteria • Invite internal and • external bids • Conduct due • diligence • Negotiate SLA • Create responsibility • matrices • Price work units • Terms of employee • transfer • Negotiate • mechanism for • change • Distribute contract • to users • Interpret contact • Establish post-contract • management infra- • structures & processes • Consolidation, • rationalization, • standardization • Validate scope, costs, • levels, service levels • Managed additional • service requests • Foster realistic expectations • of supplier performance • Publicly promote contact • Manage customer/supplier relationships • Benchmark • performance • Realign the contract • to reflect changes • in technology & • business. • Recalibrate • investment • criteria • Determine • if relationship • is extended • or terminated Managing Sourcing Decisions Through Six Phases

  16. Strategic Sourcing Decision Framework Business Factors Economic Factors Technical Factors

  17. Scoping Phase Evaluation Phase Negotiation Phase Transition Phase Middle Phase Mature Phase • Identify core IT • capabilities • Identify IT • activities for • potential • outsourcing • Measure baseline • services & costs • Create RFP • Develop evaluation • criteria • Invite internal and • external bids • Conduct due • diligence • Negotiate SLA • Create responsibility • matrices • Price work units • Terms of employee • transfer • Negotiate • mechanism for • change • Distribute contract • to users • Interpret contact • Establish post-contract • management infra- • structures & processes • Consolidation, • rationalization, • standardization • Validate scope, costs, • levels, service levels • Managed additional • service requests • Foster realistic expectations • of supplier performance • Publicly promote contact • Manage customer/supplier relationships • Benchmark • performance • Realign the contract • to reflect changes • in technology & • business. • Recalibrate • investment • criteria • Determine • if relationship • is extended • or terminated Managing Sourcing Decisions Through Six Phases

  18. Unbridled Demand: Major Source of Cost Creep Example: Outsourcing Chauffeur Services at British Aerospace Before outsourcing, demand was constricted by 4 car fleet After outsourcing, demand is unbridled and supplier has increased fleet to 24 cars to meet demand.

  19. Scoping Phase Evaluation Phase Negotiation Phase Transition Phase Middle Phase Mature Phase • Identify core IT • capabilities • Identify IT • activities for • potential • outsourcing • Measure baseline • services & costs • Create RFP • Develop evaluation • criteria • Invite internal and • external bids • Conduct due • diligence • Negotiate SLA • Create responsibility • matrices • Price work units • Terms of employee • transfer • Negotiate • mechanism for • change • Distribute contract • to users • Interpret contact • Establish post-contract • management infra- • structures & processes • Consolidation, • rationalization, • standardization • Validate scope, costs, • levels, service levels • Managed additional • service requests • Foster realistic expectations • of supplier performance • Publicly promote contact • Manage customer/supplier relationships • Benchmark • performance • Realign the contract • to reflect changes • in technology & • business. • Recalibrate • investment • criteria • Determine • if relationship • is extended • or terminated Managing Sourcing Decisions Through Six Phases

  20. Relationship Management:Often Viewed as Dichotomy Customer Supplier

  21. Relationship Management: A Stakeholder Perspective Customer Senior Business Managers IT Managers IT Staff IT Users Trade Union Subcontractors Senior Managers Account Managers IT Staff Supplier

  22. Quotations From Participants "A good contract does not ensure a good relationship, but a bad contract does ensure a bad relationship." -- Bob Ridout, Chief Information Officer, DuPont “This is a commercial business transaction, not a partnership. Suppliers have to keep earning the business everyday.” – Global Alliance Manager, DuPont

  23. Year Decision Was Made YES, most expectationmet NO, most expectation not met MIXED results Total 1984-1991 14 (48.3%) 12 (41.4%) 3 (10.3%) 29 1992 to 1998 41 (73.2%) 8 (14.3%) 7 (12.5%) 56 TOTAL # OF DECISIONS 55 (64.7%) 20 (23.5%) 10 (11.8%) 85 Success Rates Over Time CONTRACT DATE(n=85 outsourcing decisions with discernible outcomes)

  24. Over Time: Deals are startingto look alike! Neoclassical Contracts: SLA Penalties for non-performance Variable Pricing Mechanisms for change Relationship Management: Boot camps Transition Phase Activities Problem Resolution Systems Joint supplier/customer teams in trenches

  25. Sources of Customer Learning:Institutional Isomorphism Customer’s own mounting experience:Customer’s Industry Contacts Incremental outsourcing Past outsourcing successes and failures Customer’s use of external consultants Customer’s outsourcing sources Technology Partners Incorporated ITTUG ($175 billion worth) Outsourcing Summit Gartner Group Sourcing Interest Group Michael Corbett & Associates Customer’s use of external legal firms Customer’s use of private & public Millbank & Tweed research Shaw & Pittman Gartner, Yankee, Cutter, IDC Over 100 books on Outsourcing Customer’s use of external benchmarkers: Gartner Group Compass

  26. One-to-many Netsourcing

  27. Netsourcing Business Applications Netsourcing is the practice of renting or "paying as you use" access to centrally managed business applications, made available to multiple users from a shared facility over the Internet or other networks via browser-enabled devices. Netsourcing allows customers to receive business applications as a service. Netsourcing is a delivery channel Netsourcing is a pricing model

  28. Wacky World of Alphabet … Netsourcing BSP SSP FSP ASP MSP VSP CSP xSP

  29. The Netsourcing Service Stack

  30. Business Process Outsourcing: Early Lessons,Future Directions

  31. Business Process Outsouring With BPO, the supplier owns and operates the resources, including infrastructure, applications, and people, to deliver a business process as a service to customers.

  32. BPO Survey: Size of Marketn = 120 Size of Market: Year 2000: $119.4 billion Year 2005: $234.0 billion US & Europe comprise 84% of market Source: Scholl, Rebecca, “BPO at the Cross Roads”, presentation At World Outsourcing Summit, Orlando Florida, 2002.

  33. BPO Survey: Size of Marketn = 120 Source: Scholl, Rebecca, “BPO at the Cross Roads”, presentation At World Outsourcing Summit, Orlando Florida, 2002.

  34. BPO Survey: Top Driversn = 120 Source: Scholl, Rebecca, “BPO at the Cross Roads”, presentation At World Outsourcing Summit, Orlando Florida, 2002.

  35. Prompted by M&A, fragmented, decentralized HR • Ten Year Contract • $1.1 billion over 10 years • 700 HR employees transferred to Exult • Exult delivers: • Accounts Payable Benefits • Payroll Regional Staffing • HR Call center • HR technology • Guaranteed cost savings to Bank • Bank took equity share in Exult & will share in future profits

  36. Xchanging Human Resource Services (XHRS) Xchanging Procurement Services (XPS) Xchanging Insurance Services (XIS) Xchanging Claims Services (XCS)

  37. Transforming Back Office to Front Office:and Enterprise Partnership for Human Resource Management Mary Lacity David Feeny Leslie Willcocks

  38. Xchanging Human Resource Services (XHRS) 10 year, £250million deal • Promised benefits to BAE: • 15% savings on baseline HR services • Service improvement to upper quartile by end of year 5 • £20 million investment in technology, facilities & experts, including web-enabled e-hr • 50% share in profits from external sales

  39. Research Method Face-to-face interviews with 15 people including: HR Director, BAE SYSTEMS Enterprise Relationship Director, BAE SYSTEMS SBU HR Director, BAE SYSTEMS CEO of Xchanging Member, BOD, Xchanging Managing Director, XHRS 3 transferred BAE managers, now: CFO, XCS Head of Service, XCS Head of Resources, XCS 6 practice directors (Service, Process, Technology, Environment, People, Implementation) Documentations such as financial reports, practice manuals, performance assessments, annual reports, memos.

  40. About Xchanging Xchanging provides human resources, procurement, customer administration and accounting services to over 200 customers including BAE Systems, Lloyd's and the London Insurance Market. Xchanging employs over 1,100 people. Xchanging takes responsibility for the entire back office, specific functions or a particular business process and transforms them into fit for purpose services. In short, Xchanging cost for profit. Founded by David Andrews in 1999

  41. About BAE SYSTEMS Prime contractor and systems integrator in the air, land, sea, space, and command and control market sectors. Defense, commercial, civil markets World-class capabilities in naval platforms, military aircraft, electronics, systems integration and other technologies. Astute Destroyer Eurofighter

  42. About BAE SYSTEMS

  43. About BAE SYSTEMS

  44. About BAE SYSTEMSStock Price Interim Financial Results Reported Sept 12 52 week high:£385.50 on Thursday, April 11, 2002 52 week low: £158.00 on Wednesday, November 13, 2002 Average Price: £194.10 (50-day)   299.37 (200-day)

  45. About BAE SYSTEMS January 1999, British Aerospace announced merger with Marconi to create BAE SYSTEMS Investors promised £275 million in annual cost savings within 3 years "The proposed merger with Marconi Electronic Systems is an important step in the consolidation of the industry in Europe and creates a strong and highly capable business with significant cost benefits." -- Sir Richard Evans, Chairman of the Board, BAE SYSTEMS  

  46. BAE SYSTEMS’ HR In 1999, Terry Morgan, Group HR Director charged with delivering 15% to 40% cost savings on annual HR spend of £25 million Group HR was small, focusing on senior pay & benefits, senior level development, organizational design 700 HR professionals in SBUs at 70 sites doing transactional activities such as payroll, benefits, recruiting, training, HR procurement Shared Services as solution to cost reduction…

  47. FROM DECENTRALIZED: Head Office SBU Managing Director SBU Managing Director SBU Managing Director SBU Managing Director SBU Managing Director Group HR SBU HR Director SBU HR Director SBU HR Director SBU HR Director SBU HR Director Transactional Activity/ Professional Services Transactional/ Professional Transactional/ Professional Transactional/ Professional Transactional/ Professional Head Office TO SHARED SERVICES: SBU Managing Director SBU Managing Director SBU Managing Director SBU Managing Director SBU Managing Director Group HR Transactional Activity/ Professional Services SBU HR Director SBU HR Director SBU HR Director SBU HR Director SBU HR Director

  48. Four Options forImplementing Shared Services • Do It Yourself • Management Consultancy • Fee-for-service outsourcing • Enterprise Partnership Early 2000

  49. Spring 2000 Enterprise Partnership David Andrews proposed that BAE SYSTEMS and Xchanging should form a fifty-fifty jointly-owned enterprise. The enterprise would be operated as a strategic business unit within Xchanging, giving Xchanging the responsibility and accountability for implementation and subsequent operations. But both BAE SYSTEMS and Xchanging would sit on the JointBoard of Directors to ensure continued customer involvement and oversight. The enterprise would initially behave as a traditional outsourcer by transferring BAE SYSTEMS HR assets and personnel to the enterprise governed by a ten-year contract. The enterprise, in turn, would implement the shared services concept and deliver HR services back to BAE SYSTEMS. But in the long run, the enterprise would further leverage the HR assets and personnel to attract external HR customers, of which profits would be shared 50/50 with BAE SYSTEMS.

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