Optimising TCO

1. Optimising TCO Resourcing IT Projects for Success Darren Capehorn – 17th November 2010

2. My Background – some highlights! • Joined Lloyds Bank in 1986. • 1991 - Lead designer of a customer and account database solution - the largest online DB2 installation in the World. • 1997 - Lead designer Lloyds and TSB IT integration. • 2001 - Lead architect on a message based money transmission system – at the time the largest WMB solution in the World. • 2005 - Business Unit Architect for LTSB Money Transmission. • 2005 – LTSB Bank representative at APACS developing the business and technical proposition for UK Faster Payments. • Joined Lloyds Bank in 1986. • 1991 - Lead designer of a customer and account database solution - the largest online DB2 installation in the World. • 1997 - Lead designer Lloyds and TSB IT integration. • 2001 - Lead architect on a message based money transmission system – at the time the largest WMB solution in the World. • 2005 - Business Unit Architect for LTSB Money Transmission. • 2005 – LTSB Bank representative at APACS developing the business and technical proposition for UK Faster Payments. 2

3. In 2007 left Lloyds TSB to start an IT Banking Practice DELIVERY TRACK-RRECORD TECHNICAL KNOWLEDGE BUSINESS KNOWLEDGE 3

4. Company background • Evolution of a ten year old Integration Services company. • Led by three directors (formally leading services at STG) • Tom Kelleher – Commercial Director • Ben Hallifax – Operations Director • Darren Capehorn – Director of Banking Practice • Offices based in Wimbledon • 35% growth 2010 • IBM Premier Business Partner • Specialists in relating technology to business problems, and understanding what this really means. 4

5. Parameters dictating IT delivery strategy • Three parameters influence a company’s IT strategy:- ‘Budgets are being cut – just give me something which does the job’ COST TIME QUALITY ‘If I can have a solution tomorrow I will gain market advantage’ ‘I want to invest in a scalable, robust, flexible architecture. • Traditionally acknowledged that these 3 parameters conflict: • Cheap solutions = poorly architected = costly to maintain. • Quick delivery = gain market advantage BUT Requires higher calibre resources = increasing costs. 5

6. BUT CEOs demanded Better, Cheaper, Faster • Over the years there have been several initiatives and approaches to meet this demand through improved IT effectiveness by improving process, control and/or delivery approach. • Some I’ve enjoyed over the years..... Integration Technologies Capability Maturity Model (Integration) SSADM Use of Off-Shore Providers Rational Unified Process Use of Packaged Solutions JSP (Fast) Function Point Count SOA 6

7. The reaction to the use of Off-Shore providers? • Few IT initiatives have polarised opinion so much – particularly when it comes to complex IT delivery: We’d never offshore Payments – It’s too complicated I can get six off-shore resources for the price of one – It must improve TCO Since off-shoring my Payments IT budget is all consumed keeping the lights on! These providers are CMM level 4 or5 – they must be better at IT than we are. 2009 saw the highest rate of IT Project failures for a decade It works for Internet Banking – why can’t it work for Payments? I’m a CIO – why do I feel the need to attend code walkthroughs? 7 • This presentation is our experience of why companies are not getting the optimum TCO after off-shoring. 7

8. Factors impacting TCO • Total Cost of Ownershipencompasses more than delivery cost and will be impacted by:- • High cost of supporting and maintaining poorly architected application (up to 4X cost of initial build). • Missed opportunities to re-use well architected components. • Business revenue lost through delayed delivery of revolutionary products. • Fines incurred through late delivery of regulated / mandatory enhancements. • Lack of time to train and mentor during delivery increases costs and risk of subsequent support and enhancement. 8

9. Can we assess the effect of Off-Shoring on TCO? • COST - IT does not produce ubiquitous widgets, so it is difficult to compare the cost of delivery before and after change. • QUALITY - Seldom is the cost of support, maintenance and enhancement traced back to a root cause of poor architecture, design or delivery in the initial delivery. • TIME- The impact of late delivery is generally accepted as a ‘given’, so the cost benefit of earlier delivery is not understood. • The impact remains based on gut-feel and experience, though often supported by decline in customer satisfaction about the effectiveness of the IT department. • In the absence of ‘science’, perhaps it is fairest to conclude that off-shore introduces some risks and that failure to mitigate these means that few companies are optimising their TCO whilst using this model. 9

10. Top Ten Risks of Off-Shoring* • The secret to optimise TCO is to understand and mitigate these risks, which broadly fall into three categories: • Hygiene Risks: • Data Security / Protection (2) • Cultural Differences (8) • Commercial Risk: • Unrealistic expectation of labour arbitrage (1) • Supplier Failure (5) • Underestimation of cost of scope creep on ‘fixed price’ contracts (6) • Capability Risk: • Process maturity to support off-shoring (3) • Loss of business knowledge (4) • Lack of industry / regulatory oversight (7) • High turnover of key personnel (9) • Cost of knowledge transfer (10) • * - Source – The Ministry of Commerce – The Peoples Republic of China** • ** - Although they may have copied it! 10

11. Hygiene Risks – Some observations • Cultural Differences – Most commonly includes: • Communication issues • Note - regional accents are an issue in both directions. • The issue is magnified by poor telecommunications • Consider investing in technology to reduce impact. • Accept the need to have off-shore resources onshore (about 20%) • Interface protocol and procedures can also help mitigate the issue (e.g. Have conference calls run through written status reports). • Lack of Openness (e.g. Poor status reporting). • This is generally not subterfuge/deceit but often caused by communication issues described above. • However, if resource capability is over-sold then ‘fear’ can drive this behaviour (which is not unique to off-shore resources). • Create relationships which break-down the barriers (e.g. Technical surgeries, site visits to put names-to-faces). 11

12. Commercial Risks – Some observations • Unrealistic Expectation of Labour Arbitrage: • Business cases assume a >40% real term cost saving per person. • In reality it is more like 15% in year 1. • Improving this figure in year 2 depends on addressing the capabilityrisks. • Supplier Failure: • Most contracts outsource to a single off-shore provider – which is essential to optimise supplier capability. • But it limits the options if suppliers fail to deliver. • It can also limit the customer’s ability to independently gauge project costs. • Retain sufficient independent knowledge to enable alternative delivery options and /or to challenge estimates. 12

13. Capability Risks – Some observations • Loss of business knowledge: • In old or poorly documented systems this resides in the heads of the programmers who are being replaced. • Lack of industry / regulatory oversight: • An ever increasing burden on stretched budgets (especially in Payments). • High turnover of key personnel: • Rapid growth of off-shoring has created a vibrant labour market for keypersonnel. • Cost of knowledge transfer: • It takes a long time to become highly capable (a ‘key resource‘). • BUT there high risk this investment will be wasted through staff turnover. 13

14. So what are the attributes of a High Capability resource? • Technology • Bigger teams • Complex industry • Core to enterprise • Heavily regulated Collaborative Delivery IT PARTNERSHIP Mentoring Processes & Governance Low Risk Solutions Payment Solutions Communication Technology IT SOLUTION DELIVERY BUSINESS KNOWLEDGE IT Discipline Leadership Domain Knowledge Strategic Insight 14

15. The Need for High Capability resources in Payments? • Payment Solutions demand more highly capable individuals: RISK ASSESSMENT: Capability Key = HIGH Impact = HIGH Probability = HIGH = MEDIUM = LOW Relative Team Size / Mix Impact = MEDIUM Probability = MEDIUM Impact = LOW Probability = MEDIUM Design Architect Study Build Test Support Phase 15

16. Impact on TCO of losing high capability personnel • As observed above: • Key resources hold the business and industry knowledge • Key resources are most likely to leave. • Training this knowledge into the next ‘key resource’ is costly and time consuming. • BUT Crucially, impacts which are often ignored: • The Time to deliver solutions will be impacted. • The Quality of delivered solutions will suffer. • Support Cost for the solution will rise • And... these poor solutions can become the template for future ‘best practice’. • All factors which will impact TCO. 16

17. Summary steps to Optimise Total Cost of Ownership • Assess how mature the organisation is to support off-shore development (e.g. Does SDLC have sufficient governance steps for remote team-working? • Remediate the organisation to mitigate potential hygiene risks (e.g. Invest in appropriate communication technology). • Recognise the impact on TCO if ‘high capability’ resource is lost and be prepared to retain these roles through alternative models (e.g. In-house or through optimised on-shore SME provision). • As part of the high capability resource model, ensure that the organisation retains sufficient knowledge to address the commercial risk (e.g. validate project costs). • If off-shoring has already hit these issues then consider remediation activities to regain control and realise the TCO savings(e.g. Recruitment, training). • BUT... Used smartly and appropriately Off-Shoring will reduce TCO. 17

18. Discussion......