Everest Group expert, Eric Simonson, will discuss how buyers can capture hidden value by understanding and identifying their company’s outsourcing solution as one of four basic outsourcing models.

1. Today’s webinar is brought to you by
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Today’s webinar Upcoming webinar
Vanilla, Chocolate, or Rocky Road: What Flavor Key Market Developments in Q1-2010: Market
of Outsourcing Do You Want? Vista Report Briefing
Synopsis: Date & Time:
Everest expert, Eric Simonson, will discuss how Thursday, May 13, 2010
buyers can capture hidden value by understanding 9:00 AM CDT/10:00 AM EDT
and identifying their company s outsourcing solution
company’s Speakers:
as one of four basic outsourcing models. Eric Simonson, Managing Principal- Research,
Everest Group
Anand Ramesh, Research Director, Everest
Group
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2. Q&A
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3. Introduction
Eric Simonson
Managing Principal,
g g p ,
Research
Everest Group
esimonson@everestgrp.com
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4. Vanilla, Chocolate, or Rocky Road:
What Type of Outsourcing Do You
Want?
April 27, 2010

5. Everest serves the outsourcing and offshoring market
through a unique portfolio of offerings
Consulting Research
Comprehensive portfolio of services that spans Central source of strategic intelligence, analysis,
the sourcing lifecycle and insight
Deep industry and functional expertise
p y p Recognized for fact-based analysis and insight into
g y g
Approach that joins corporate strategy and emerging issues
experience-based insight Recognition as market authority in Global Sourcing
and location-related topics
Flexible delivery model
Broad range of options for engaging with Everest in manner which best meets the needs of a situation or
organization
Support can range from targeted inquiries to full support for critical initiatives
Everest advantage
Served over 25% of the Global 250 Proven methodologies for approaching complex
Extensive touch points across the sourcing value projects
chain
h i Recognized thought leadership – Total Value
R i d th ht l d hi T t lV l
Deepest primary research agenda on Global Equation (TVE), Joint Design, NASSCOM India
Sourcing BPO study, and other industry-leading innovations
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6. As an industry, outsourcing is still working to identify
what types of solutions are optimal
Historical context Current state
IT infrastructure began with a There are a wide array of solutions
“complete transfer” model
The positioning of these alternative
This shaped much of the solutions is often unclear and confusing
industry’s belief system regarding – even to those whom develop them
how to define a “solution” (e.g.,
scope, flexibility, pricing models, Many concepts are being used to
delivery models) describe the future direction of
outsourcing, often implying that the
BPO and offshoring spurred the concept is the best or only option.
growth of outsourcing i the l
h f i in h last Examples i l d
E l include:
decade and challenged many Platforms
industry beliefs – often in subtle Transaction pricing
ways which were/are not fully Non-linear growth
recognized
i d Cloud
Cl d
Although the design of the solution is important, the associated
g g p ,
management model for capturing the value is equally important; pricing
models must then reflect the nature of the solution
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7. Three discussion topics
1. Solution design 2. Intended approach
for capturing value
3. Pricing models
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8. Four basic solution types in outsourcing
Description When applicable/common
Managed service Solution is pre-built and Generally point solutions (e.g.,
common across buyers y p y ,
payroll, managed data back-up)
g p)
which are modular and limited scope
Plug & play
Transfer and sell Solution must be tailored to each Solution is technology-centric and
back buyer, but supplier’s experience
y , pp p p
previous investments by supplier in
y pp
Purchase provides a robust template technology add significant value
transformation Buyer willing to change to new
model to take advantage of these
investments
Pure lift & shift Solution is similar to current state, Limited change is appropriate
but with labor arbitrage and/or Environment already optimized
Near-term cost incremental process Desire near-term cost savings,
savings improvements but limit change in the near-term
Guided General direction of solution is Nature of required change is not fully
optimization known, but will evolve in the known, so solution must be easy for
Co-manage/ near- and medium term (e.g., supplier and buyer to change
transform p
process model refinements, , Buyer committed to actively
y y
business requirements change) managing the solution in partnership
with supplier
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9. Examples of solution types
Finance & accounting Information technology
Managed service Collections Managed data back-up
Plug & play
Transfer and sell Shared service center Traditional asset-heavyy
back transfer with transaction model for IT infrastructure
Purchase pricing (includes assets and data
transformation
center services)
Pure lift & shift Department transfer with Remote infrastructure
FTE pricing management (RIMO)
Near-term cost
savings
Guided Shared-service center Large scale application
optimization optimization with FTE modernization
Co-manage/
Co manage/ pricing
transform
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10. Example of multiple solution models of IT
infrastructure outsourcing
EXAMPLE – DATA CENTER
C
Traditional Infrastructure Outsourcing (IO) Infrastructure Management Outsourcing (IMO)
Infrastructure Tower Application Hosting Infrastructure Managed Remote Infrastructure Mgmt.
Outsourcing Services Services (IMS) Outsourcing (RIMO)
Transfer of responsibility Assumption of delivery of Assumption of operational Transfer of responsibility for
for entire IT towers (e.g., several cross-tower responsibility by supplier delivery of Remote
Data Center) including functions related to of certain end-to-end Infrastructure Management
management and operations and support of functions related to the (RIM) tasks to an external
operations an application (e.g., SAP) physical IT infrastructure supplier
Example: Data Center Example: SAP hosting Example: Managed Example: Server
Outsourcing Back-up Service Monitoring Outsourcing
Management
Outsource function
Operations
Remote
Outsourced
application
services
ed
Software Outsourced
labor/task
Hardware
Data center Data center Network Data center Data center
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11. Three discussion topics
1. Solution design 2. Intended approach
for capturing value
3. Pricing models
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12. Capturing value from outsourcing – two primary
management models
Most natural
alignment
Monitor and Traditional three-level approach for
Managed service
measure “governance”
Focuses on managing the contract
and supplier performance Plug & play
Governance team represents
business users, but is Transfer and sell
separate/centralized back
Mindset: hold the supplier Purchase
accountable (their problem now) transformation
Joint Focuses on finding ways to Pure lift & shift
transformation improve the solution, regardless of
which party is “responsible” Near-term cost
savings
Intentionally strives to challenge
the status quo via new initiatives
Many responsibilities closely Guided
tied/embedded with business users optimization
Mindset: leverage the supplier to Co-manage/
help improve results transform
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13. Traditional three-level governance models utilize
defined structures and processes to monitor
performance and resolve issues
Strategic
egic
Strate
High-level
High level performance reporting
ponsibility
Functional direction/strategy
(e.g., Supplier scorecard)
Tactical priorities to support strategy
Major project status
Approval of plans/budgets
Plans/budgets for review
Decisions on out-of-scope changes
Out-of-scope change requests
Resolution of issues
nance Resp
Managerial
l
Escalated issues
Managerial
Summary performance reporting (e.g., Tactical direction
service levels met/not met) Prioritization of projects
M
Project status Decisions on out of scope changes
out-of-scope
Govern
Out-of-scope change requests Resolution of issues
Plans/budgets for input
ational
Escalated issues Operational /
Tactical
Opera
Detailed performance reporting (e.g., Operational priorities
specific service level metrics) Performance enhancement plans
Issues Resolution of issues
Service Delivery
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14. Joint transformation enables optimization of end-to-end
processes that “de-risks” delivery and identifies
opportunities the change scope
Existing step
Original end-to-end process Originally transitioned to supplier
Added by buyer (shadow)
Eliminated post-services integration
Transitioned to supplier post-services
integration
Process after initial/typical transition
Buyer:
B -11 + 4 = - 7
11
Supplier: +11
Process after joint transformation
Buyer: - 11 + 1 -5 = -15
Supplier:
pp +11 - 2 + 5 = +14
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15. Joint transformation can drive tighter integration
between suppliers and buyers, helping both achieve
their near and long-term objectives
Drive organizational changes
needed to effect the transition
Achieve the business Enforce accountability for the
case actions required to capture benefits
Track cross-process impacts of the
changes
Joint transformation
Enhance visibility
and control
Optimize value from Strengthen alignment with the
supplier business
Extend leverage of supplier’s
capabilities
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16. Three discussion topics
1. Solution design 2. Intended approach
for capturing value
3. Pricing models
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17. Three approaches to pricing in an outsourcing
relationship
Economic Model Continuum
Input Output Outcome
Hybrids Hybrids
model model model
Labor Payment
Business
Material Process Invoice
Outcomes
Facilities Claim
Pricing Mechanisms
Per unit of Per unit of process or Value
Input business activity Share
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18. Each of these approaches have clear value and risks,
that need to be assessed for applicability
Pros Cons Commonly used when…
Simple and easy to Does not create natural Transaction volume is
understand incentives for supplier unknown / not validated
Input model Ease of market price improvement Transaction volume is not
comparability Not closely tied to business closely tied to supplier’s
need/outcome cost drivers
Does not provide useful Output is not defined
consumption data
Closely tied to buyer’s Not directly tied to desired Transaction
business activities; only business outcome volumes are known
Output model pay for consumption May not provide strong Supplier’s cost drivers are
Encourages productivity incentive for suppliers to aligned with revenue units
and efficiency innovate Detailed consumption data
Enhanced visibility into Can be more difficult to is needed for buyer’s
consumption pattern budget and benchmark internal cost allocation
Closely tied to desired Difficult to isolate supplier Desired outcome and
business outcome contribution and quantify accountability can be clearly
Outcome model Properly aligns buyer impact on outcome defined and captured
and supplier interests to Supplier’s ability to achieve contractually
encourage partnership, outcome may be restricted by Innovation / improvement is
innovation, and buyer’s process, system, etc. critical to success
continuous improvement Impossible to benchmark
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19. Broadly, the use of output-based pricing is on the rise
Predominant pricing
Process (varies by solution type) Pricing trend
F&A Input-based
Input based Increasing shift to Output based
Output-based
HR Output-based Output based with more nuances
Procurement Output-based Output-based (combined with value-
share)
IT Infrastructure Output-based Output-based
IT – Remote IT Input-based Input-based
Infrastructure
IT – Input-based
p Early signals in adoption of Output-based
y g p p
Applications pricing
Dev and Maint.
Source: Everest Research Institute (2008)
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20. Summary of key messages
Choose the solution based upon an intersection of:
Preferred type of solution
Experience and preference of supplier with the solution type (different than scope of
service)
Solution design and the management model for capturing value must be aligned
Pricing models are impacted by the solution and how value will be measured
In contrast to traditional outsourcing philosophies (e.g., tightly define scope), in some
situations outsourcing is more effective with active changes to scope, processes, and
incentives which help focus the efforts of the supplier and buyer on the most relevant
sources of value
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21. Q&A
Attendees will receive an email with a link to download today’s webinar presentation. To access a
recorded audio version of this webinar, please contact Mark Williamson,
mark.williamson@everestgrp.com
For advice or research on outsourcing, please contact Everest:
Eric Simonson, esimonson@everestgrp.com
For background information on Everest, please visit:
g ,p
www.everestgrp.com
www.everestresearchinstitute.com
Thank you for attending today
To ask a question during the Q&A session
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Cli k the question mark (Q&A) button located on the floating tool bar in the bottom right of your
ti k b tt l t d th fl ti t l b i th b tt i ht f
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Be sure to keep the default set to “send to a Panelist”
Then, type your question in the rectangular field at the bottom of the Q&A box and click the send
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