There is an increasing and continuing trend of organisations moving from in-house solution delivery to sourcing solutions externally. Organisations are divesting themselves of what they see as non-core functions. This is intended to improve operational efficiencies by using external suppliers’ perceived abilities to provide cost-effective, fit-for-purpose solutions quickly using the right technology. The responsibility and accountability for solution delivery and operation stills lies with the acquiring organisation. An organisation’s outsourcing zone of opportunity represents a challenge for both suppliers and for the acquisition function. Learn lessons from the experience of others to define exactly what you want of your outsourcing arrangement.

1. Getting Good And Staying
Good At (Out)Sourcing
Alan McSweeney

2. Increasing Trend In Outsourcing Non-Core Functions
•
Increasing and continuing trend of organisations moving
from in-house solution delivery to sourcing solutions
externally
•
Intended to improve operational efficiencies by using
external suppliers’ perceived abilities to provide costeffective, fit-for-purpose solutions quickly using the right
technology
•
Responsibility and accountability for solution delivery and
operation stills lies with the acquiring organisation
November 24, 2013
2

3. Acquisition Trends
•
Greater level of acquisition
•
Greater acquisition of services with lengthier service
relationships
•
“Under the Cover” acquisition/outsourcing in the form of
cloud/XaaS
− Cloud leading to ad hoc proliferation of outsourced services as
business functions bypass what is perceived as slow, expensive IT
November 24, 2013
3

4. Divestment Of Non-Core Functions
•
•
Non
Core
Function
Organisations divesting
themselves of what they
see as non-core functions
Application of Coase’s Law
on the Nature of the Firm
− A firm will tend to expand
until the cost of organising an
extra transaction within the
firm become equal to the
costs of carrying out the same
transaction on the open
market
− When it is cheaper to buy the
service externally it will
generally be bought
externally
November 24, 2013
Non
Core
Function
Non
Core
Function
Core
Organisation
Functions
Non
Core
Function
Non
Core
Function
Non
Core
Function
Non
Core
Function
Non
Core
Function
4

5. Divestment Of Non-Core Functions
Non
Core
Function
•
Non
Core
Function
Non
Core
Function
Shrinking
Core
Non
Core
Function
Non
Core
Function
Shrinking core
competency focus as
organisations move
from in-house solution
delivery to sourcing
solutions externally
Non
Core
Function
Non
Core
Function
Non
Core
Function
November 24, 2013
5

6. (Out)Sourcing Zone Of Opportunity
•
•
•
•
Outsourcing zone of
opportunity represents
a challenge for both
suppliers and for the
acquisition function
What is the size of the
outsourcing zone?
How do you identify
your outsourcing zone
and then take
appropriate action?
Fundamental question
as to the nature of the
organisation
November 24, 2013
Non
Core
Function
Non
Core
Function
Non
Core
Function
Non
Core
Function
Non
Core
Function
Non
Core
Function
Non
Core
Function
Non
Core
Function
6

7. (Out)Sourcing/Acqusition
•
Greater acquisition of solutions from external suppliers
rather than in-house
•
Aimed at improving operational cost-effectiveness and
efficiency
•
External suppliers seen as being able to provide solution
more quickly, at lower cost and using suitable technology
•
Acquiring organisation still needs to retain accountability
for solution
November 24, 2013
7

8. Questions For Acquisition Function
•
•
•
•
•
•
•
•
•
•
What value, if any, is outsourcing creating?
What are the measures for evaluating outsourcing success and value
and are they being achieved?
Who owns and manages the outsourcing relationship(s)?
How well are the efforts being managed?
What are the risks and are they being managed effectively?
What other new outsourcing opportunities should we pursue?
How are lessons learned from outsourcing experiences applied
elsewhere?
How do we decide what other services to outsource?
Does the approach to outsourcing help maximise value while
minimising risk?
Are standard methodologies and approaches used to manage
outsourcing selection and implementation?
November 24, 2013
8

9. Avoiding The Outsourcing Value Lost
Outsourcing Potential Value
Lost value can be 30%-60% of originally expected
Lost Outsourcing Potential Value
Outsourcing Value Achieved
Lost value due to unachieved planned, savings,
inadequate performance, rework and
additional costs and inefficiencies
Costs more than expected, delivers less
than expected
November 24, 2013
9

10. What Are The Real Costs Of Outsourcing?
•
How realistic are the costs and benefits of outsourcing?
•
How much is the desire to outsource leading to inaccurate
estimates, either deliberate or just wishful thinking?
•
How much is the desire to outsource at any cost causing
strategic misrepresentation - deliberate distortion of
actual costs?
November 24, 2013
10

11. Errors In Costing
•
Cost estimates are rarely accurate
− What we know about most projects is that they either or both
overrun on costs and deliver less than expected
− Cost overruns are generally caused by a mix of errors in the initial
cost estimates and deliberate distortions in order to cause the
decision to be made
November 24, 2013
11

12. Procurement ≠ Acquisition
•
Acquisition is not just about having a separate
procurement function that manages supplier selection/
tendering with narrow and singular focus on cost
•
Procurement focus leads to a disconnect between
selection and subsequent delivery
•
Effective acquisition means taking a much wider focus
than just a financial arrangement
November 24, 2013
12

13. All Too Often Procurement Throws A Solution Over
The Wall To Delivery
Procurement
November 24, 2013
Delivery
13

14. Beware Of The Externalities Of Procurement-Lead
Acquisition and Outsourcing
•
Externalities are costs that procurement-lead initiatives
give rise to but which are paid for elsewhere
•
Apparent cost-savings from procurement’s viewpoint lead
to costs during implementation and operation
November 24, 2013
14

15. It Is Not All About The Money
•
Successful outsourcing is not about getting the lowest price at all
costs
•
It is about getting the lowest price for a sustainable solution under a
reasonable contract from a skilled and experienced service provider
•
An outsourcing arrangement is not a once-off economic business
deal that automatically implements itself after the parties sign the
contract
•
It is an continuous commercial relationship with long-term economic
and strategic consequences and impacts for both the supplier and
the outsourcing organisation that depends on the choices the parties
make and their subsequent behaviour
•
An unwise choice can have serious and enduring negative
consequences
November 24, 2013
15

16. Outsourcing Transaction Costs
•
There are (hidden/overlooked) costs associated with sourcing a
service externally
−
−
−
−
−
−
−
−
−
−
−
−
•
Selecting the wrong supplier
Costs of writing contract
Costs of enforcing contract
Having a poor service contract that results in hidden cost and/or reduced
service
Overlooking personnel issues
Loosing control over the outsourced activity
Management, quality assurance and supervision overhead
Implementation and termination costs
Loss of flexibility
Loss of integration between applications and data
Data extraction costs
Security framework implementation
Effective transition to outsourcing requires full knowledge of costs –
current and future
November 24, 2013
16

17. Getting Costs and Benefits Right Is Very Important
•
Small error in costs will accumulate and become
substantial over the life of the contract
November 24, 2013
17

18. A Small Error Over Time Becomes A Big Error
•
Difference between what was expected and the actual
costs can exceed the entire original cost where costs are
poorly estimated and controlled
November 24, 2013
18

19. Outsourcing Death Spiral
Incomplete
SLAs/OLAs
No Service
Catalog
Insufficient
Management
And Oversight
No Defined
Future
Operating
Model Or
Architecture
No Defined
Outsourcing
Strategy
No Governance
Model
Unarticulated
Expectations
Constant
Renegotiations
Development
Of Parallel IT
Services
Oversimplification
Of Outsourcing
Process
Insufficient
Understanding Of
Current State Of
Services Being
Outsourced
November 24, 2013
Unanticipated
And Large OutOf-Scope
Services
Breakdown Of
Relationship
Incomplete
Contract
Backsourcing/
Insourcing/
Circumvention
of Arrangement
Invalid
Assumptions
Lengthy
Negotiations
High
Management
Resources And
Costs
Over-Dependence On
Service Provider As
Strategic Partner
Underestimated
And Unquantified
Resource
Commitment
Naive And
Simplistic
Expectations
19

20. Pitfalls Of Outsourcing
•
•
•
•
•
•
•
•
•
•
Lack of management commitment to getting outsourcing right
Limited or no knowledge of outsourcing methodologies and approaches
Lack of an outsourcing communications plan
Failure to recognise the business risks of outsourcing
No using external sources of knowledge and experience
Not allocating effective and skilled internal resources
Rushing through the initiative to get the outsourcing arrangement in place
at any cost
Not understand what it takes to make the supplier productive
Poor relationship management with supplier and within the organisation
Not communicating the operation of the outsourcing relationship to the
organisation
November 24, 2013
20

21. Myth Of Outsourcing “Strategic Partnership”
•
Don’t do business with friends
•
Don’t become overly friendly with those you do business
with
•
Outsourcing is a business relationship that will come to an
end
•
Keep a strong business focus at all times

22. Making An Explicit Decision On Where You Want To
Be On The Outsourcing Spectrum
I
it
plex
m
d Co
n
pe a
co
ed S
s
crea
n
Efficiency/
Utility
y
ng
urci
so
Out
of
Business
Enhancement
t
men
e
rang
Ar
Transformational
Make Me Money
Make It Better
Make It
Cheaper
Primary focuses on cost
control and cost reduction,
with the aim of
maintaining consistency in
service delivery
November 24, 2013
Concerned with organisational
productivity and with improving
performance leading to achievement
of organisational goals
Characterised by a greater partnership between the service
provider and the organisation that is focused on innovation
and new business, changing the way in which the
organisation operates and uses technology
22

23. Making An Explicit Decision On Where You Want To
Be On The Outsourcing Spectrum
I
it
plex
m
d Co
n
pe a
co
ed S
s
crea
n
Efficiency/
Utility
y
ng
urci
so
Out
of
Business
Enhancement
t
men
e
rang
Ar
Transformational
Make Me Money
Make It Better
Make It
Cheaper
Focus on Buying
November 24, 2013
Focus on Tactical
Sourcing with Some
Organisational
Restructuring
Focus on Strategic Sourcing With
Substantial Organisational Change
23

24. Change In Relative Importance Of OutSourcing
Objectives Over Time
Gain Access To
Talent and Capabilities
Drive Organisational
Culture Change
Improve Compliance
Capabilities
Improve Process
Efficiency
Align Support Function
with Strategy
You Evolve Over
Time Into
Looking At
Achieve This
Transform Processes
Gain Access to
New Technologies
Support and
Enable Growth
Increase Service
Flexibility and Scalability
Reduce Costs
-20
November 24, 2013
-10
0
10
20
You Start
Looking to
30 Achieve
40
This
50
60
70
80
90
100
24

25. Outsourcing Effectiveness At Achieving Business
Benefits
Very Effective
Somewhat Effective
Not Effective
Reduce Operating Costs
Meeting Regulatory
Requirements
Standardising Processes
Supporting More Effective
Organisation-Wide Operations
Gaining Access to
Capable Talent
Forcing Change Into
Business Operations
Transforming Processes
Gaining Access to
New Technologies
Gaining Access to
Analytical Capabilities
Providing Innovation
0%
November 24, 2013
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
25

26. Outsourcing Effectiveness At Achieving Business
Benefits
•
What is initially important is not what becomes important
•
Learn lessons from the experience of others to define
exactly what you want of your outsourcing arrangement
November 24, 2013
26

27. Important Supplier Selection Factors
Mission Critical
Important But Not Critical
Somewhat Important
Not Important
Financial Stability
Track Record Of Standard
Operational Services Delivery
Delivery Talent That Add
Values Beyond Standard Operations
Knowledge of Specific
Industry Processes
Ability to Support Change
Management and Governance Needs
Culture of Supplier's
Delivery Organisation
Ability ty Transform and
Reengineer Existing Processes
Global Delivery Scale
and Flexibility
Ability to Provide
Innovation
Ability to Support Business
Outcomes Rather Than FTE Pricing
Ability to Provide
Analytical Insight
Ability to Promote
Gainsharing Initiatives
Brand
November 24, 2013
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
27

28. Important Supplier Selection Factors
•
Use these factors to evaluate suppliers and look for proven
competence and referenceable delivery
November 24, 2013
28

29. Strategic And Operational Skills Of High Performing
Acquisition-Oriented Organisation
Governance
Service Delivery
Business Vision
Architecture
Internal IT Function Management
External IT Function Business Alignment
Informed Product and Service Acquisition
Business System Thinking
Architecture Planning and
Design
Contract Management
Effective Contract Enablement and Acceleration
Vendor Development
Relationship Building and Maintenance
End-to-End Systems and Technology View
November 24, 2013
29

30. Strategic And Operational Skills Of High Performing
Acquisition-Oriented Organisation
•
•
•
•
•
•
Define the systems, information and processes needed to deliver on
business requirements and optimally acquire and operate them
Define and manage the architecture blueprint for the evolving platform
that hosts operational systems and processes
Manage external supply and acquisition
Manage sourcing strategy
Understand the external services market and develop and maintain the
skills to select, engage and manage internal and external IT resources and
services
Identify the potential added value from IT service suppliers
November 24, 2013
30

31. Areas Of Importance For Outsourcing Organisations
During Outsourcing Implementation and Operation
Outsourcing Strategy
Management
Governance
Management
Relationship
Management
Value Management
Organisational
Change Management
Outsourcing Planning
People Management
Service Provider
Evaluation
Knowledge
Management
Outsourcing
Agreements
Technology
Management
Service Transfer
Service Transfer
Sourced Services
Management
Analysis
Initiation
Implementation
November 24, 2013
Threat Management
Ongoing
Outsourcing
Completion
Completion
31

32. Skills To Look For In Outsourcing Service Providers
During Outsourcing Implementation and Operation
Knowledge
Management
Threat Management
People Management
Service Delivery
Service Design and
Deployment
Service Transfer
Initiation
November 24, 2013
Contracting
Implementation
Performance
Management
Relationship
Management
Technology
Management
Ongoing
Service Transfer
Completion
32

33. Strategic And Operational Skills Of High Performing
Acquisition-Oriented Organisation
Business
IT
Supplier
Ecosystem
IT Needs To
Focus
Appropriate
Services on
Appropriate
Suppliers
IT Mediates Between the
Business and the Supplier
Ecosystem, Acting as a Lens
Focussing Business Needs on
Appropriate Suppliers
November 24, 2013
33

34. Lack Of Focus During Key Outsourcing Stages Leads
To Loss Of Value
November 24, 2013
Re
fre
sh
y
De
li v
ce
rv
i
Se
M
De
c
isi
on
in
Pr
in
cip
le
An
a
Se
a
le rke
ct
t R lyse
io
e
n
an sea
r
d
De ch
c
Ne isio
n
go
tia
Se
t
rv
ice ion
De
s ig
Tr
an n
sit
io
n
Loss Of Interest
During Key
Implementation and
Operational Stages
Value Gap Cause
by “Fire and
Forget” Approach
to Outsourcing
er
Level of
Focus,
Attention
and
Interest
34

35. Outsourcing Is Not Just For Christmas …
•
… It is for a good chunk of your (business) life
•
An overemphasis on the act of outsourcing rather than on
the long-term nature of the business relationship that will
follow will lead to trouble
•
The selection process and the tender are not ends in
themselves: they are means to an end
November 24, 2013
35

36. Outsourcing And Due Diligence
•
Perform due diligence as part of negotiation/service
design/transition stages:
−
−
−
−
−
−
−
−
−
−
−
•
Discover and become familiar with organisation culture and
Build trust
management style
Confirm any assumptions
Verify costs and business case
Identify additional risks not already documented
Validate the transition plan
Validate the infrastructure
Validate the operational approach
Identify any additional opportunities
Ensure no transaction-breaking reasons
Consider taking an M&A approach to implementing outsourcing

37. Lots of Scope To Get Acquisition Wrong
•
Inadequate management
•
Unarticulated end-user needs
•
Insufficiently defined requirements
•
Poor supplier selection
•
Defective contract definition
•
Deficient underlying technology selection
November 24, 2013
37

38. Outsourcing Relationship Management Officer
(ORMO)
•
•
•
•
•
•
•
Develop and manage outsourcing strategy
Oversees outsourcing projects and manage portfolio of outsourcing
arrangements
Continuously appraise the portfolio of outsourcing initiatives to
calculate their business value, avoid redundancies in effort, manage
risks and develop and report metrics
Conduct feasibility analyses for outsourcing initiatives across the
organisation
Ensure that there is consistency in outsourcing objectives and
business objectives
Conduct reviews/assessments/lessons learned and manage
knowledgebase
Ensure compliance with standard outsourcing methodology and
process to maintain a standard operational framework

39. Capabilities Of A High Performing Acquisition
Function
•
Acquisition Project Capabilities
− Capabilities and associated practices relating to activities concerned with to
establishing, executing, and ensuring the transition of an acquisition project
•
Acquisition Organisational Capabilities
− Consists of cross-project capabilities related to defining, planning, deploying,
implementing, monitoring, controlling, appraising, measuring and improving
processes
•
Acquisition Support Capabilities
− Capabilities that help implement generic practices and assist processes and
work products described in more than one other process areas
•
Acquisition High Skilled Capabilities
− Capabilities for quality and process performance, monitoring variation in
processes, evaluating the impacts of proposed process changes, and
systematically deploying processes across the organisation
November 24, 2013
39

40. Specific Acquisition Capabilities And Their
Relationships
Acquisition Project Capabilities
Solicitation and
Supplier Agreement
Development
(SSAD)
Acquisition
Requirements
Development (ARD)
Requirements
Management
(REQM)
Project Planning
(PP)
Acquisition
Organisational
Capabilities
Acquisition
Technical
Management (ATM)
Agreement
Management (AM)
Project Monitoring
and Control (PMC)
Organisational
Process Definition
(OPD)
Risk Management
(RSKM)
Organisational
Process Focus (OPF)
Acquisition
Verification (AVER)
Acquisition
Validation (AVAL)
Integrated Project
Management (IPM)
Organisational
Training (OT)
Acquisition High
Skilled
Capabilities
Quantitative
Project
Management
(QPM)
Organisational
Performance
Management
(OPM)
Organisational
Process
Performance (OPP)
Causal Analysis and
Resolution (CAR)
Configuration
Management (CM)
Process and
Product Quality
Assurance (PPQA)
Measurement and
Analysis (MA)
Decision Analysis
and Resolution
(DAR)
Acquisition Support Capabilities
November 24, 2013
40

41. Key Acquisition Capabilities
•
•
•
•
•
•
•
•
•
•
•
Agreement Management
Acquisition Requirements
Development
Configuration Management
Measurement and Analysis
Project Monitoring and Control
Project Planning
Process and Product Quality
Assurance
Requirements Management
Solicitation and Supplier Agreement
Development
Acquisition Technical Management
Acquisition Validation
November 24, 2013
•
•
•
•
•
•
•
•
•
•
•
Acquisition Verification
Decision Analysis and Resolution
Integrated Project Management
Organisational Process Definition
Organisational Process Focus
Organisational Training
Risk Management
Organisational Process Performance
Quantitative Project Management
Causal Analysis and Resolution
Organisational Performance
Management
41

42. Acquiring Acquisition Capabilities – Focus on Skills
That Add Value
Acquisition Skills and Capabilities
Initial Sets
Improving
Skilled and Experienced
Very Capable
Acquisition Requirements
Development (ARD)
Acquisition Technical
Management (ATM)
Organisational Process
Performance (OPP)
Organisational Performance
Management (OPM)
Agreement Management
(AM)
Acquisition Validation
(AVAL)
Quantitative Project
Management (QPM)
Causal Analysis and
Resolution (CAR)
Project Monitoring and
Control (PMC)
Acquisition Verification
(AVER)
Project Planning (PP)
Organisational Process
Definition (OPD)
Requirements Management
(REQM)
Solicitation and Supplier
Agreement Development
(SSAD)
Organisational Process
Focus (OPF)
Organisational Training (OT)
Configuration Management
(CM)
Integrated Project
Management (IPM)
Measurement and Analysis
(MA)
Risk Management (RSKM)
Process and Product Quality
Assurance (PPQA)
Decision Analysis and
Resolution (DAR)
November 24, 2013
42

43. Summary
•
•
•
•
•
•
•
•
•
•
•
•
•
Understand the size of the outsourcing zone
Identify your outsourcing zone and then take appropriate action
Beware of proliferation of “Under the Cover” acquisition/outsourcing in the form
of cloud/XaaS as business functions bypass what is perceived as slow, expensive IT
Get costs right by being realistic
Procurement ≠ Acquisition
Successful outsourcing is not about getting the lowest price at all costs
Avoid the outsourcing death spiral
Making an explicit decision on where you want to be on the outsourcing spectrum
Develop an approach to outsourcing due diligence
Learn lessons from the experience of others to define exactly what you want of
your outsourcing arrangement
Avoid lack of focus during key outsourcing stages
Understand and develop the capabilities of a high performing acquisition function
Appoint a Outsourcing Relationship Management Officer (ORMO)
November 24, 2013
43

44. More Information
Alan McSweeney
http://ie.linkedin.com/in/alanmcsweeney
November 24, 2013
44