Align Vendor SLAs with Long Term Value

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Align Vendor SLAs with Long Term Value

Steven Hall
Partner & Managing Director, ISG

Steven Hall, Partner & Managing Director

Mr. Steven Hall is a Partner with ISG (formerly TPI) and leads the
Manufacturing/Telecom Vertical, Cloud Computing Business Unit and the ADM
Service Line. TPI is the global leader in sourcing advisory. Steve brings extensive
experience in strategic outsourcing to ISG’s clients. Steve’s experiences include all
aspects of the outsourcing advisory space, including IT Sourcing Strategy,
Application Development Maintenance (ADM), Service Level Agreements (SLAs), IT
Governance, offshore delivery, project management and implementation of various
software development methodologies. His knowledge derives from practical
experience implementing global models and advising large multi-national
corporations in their sourcing strategies. Steve co-authored Managing Global
Development Risk, A Guide to Managing Global Software Development.

Mr. Hall has extensive experience leading strategy engagements, implementing
software projects using a global team and establishing global sourcing models, such
as Build-Operate-Transfer (BOT) agreements and dedicated development centers.
He regularly helps clients assess their outsourcing capabilities and advises them on
best practices.

Steve’s advisory career has included support for industry leaders in the telecom,
airline, financial, energy, and software sectors. During his career with ISG he has
developed multi-supplier sourcing strategies, identified and developed SLAs for
multiple clients, negotiated multiple large-scale outsourcing agreements, designed
and implemented IT Governance structures, and analyzed a wide-variety of
financial and operational sourcing scenarios.
Copyright © 2012 Information Services Group, Inc. All Rights Reserved 2

The Power of One
ISG brings together three market leaders to create an unrivalled technology
insights, market intelligence and advisory services company.

The world’s leading
sourcing data and
advisory firm.
the power
A premier independent of One
technology advisory
serving the The premier independent
public sector provider of business and IT
benchmarking, performance
improvement, data and
analytics services.

Business Optimization Solutions for Every Function
With comprehensive expertise across service areas, our consultants bring an
extensive set of tools and methodologies to bear for your optimization efforts.

IT
Service areas
Infrastructure Cloud Solutions
Applications ERP Solutions
Desktop Services Global Delivery
Network Services IT Security

Business support
Service areas
Finance & Accounting Facilities Management
Human Resources Document Management
Procurement Mergers & Acquisitions
Contact Centers Insurance Operations
Shared Services Banking Operations


Number of ADM Contracts Awarded by Contract Type and Year

For the last three years ADM Only engagements have exceeded the number of Bundled ADM
awards by a 2 to 1 ratio, but through the first half of 2011 this gap has narrowed.

ADM Only Bundled ADM
215

177

137
113

84 83
66 67

2008 2009 2010 1H2011
Source: TPI Research

Multi-Supplier strategies are new norm. Most clients will
typically have 2 to 3 ADM Service Providers.

Average ACV of ADM Contracts Awarded by Contract Type and Year (US$M)

Average ACV of ADM Only contracts continued a trend of rising ACV through 2010 and
surpassed the recent historical range of $19 million to $21 million. The average through the
first half of 2011 is below the 2010 high point, but it remains above 2008 – 2009 levels.

ADM Only

$24.0
$21.0 $21.7
$19.0

2008 2009 2010 1H2011


Number of ADM Only Contracts Awarded by Forbes® Rank and Year

Non-G2000 companies were responsible for the bulk of activity during 2010, followed by the
top 500 companies. There was a decrease in the number of contracts in 2010 for both these
categories, and non-G2000 companies continued to account for about 60 percent of all
stand-alone ADM awards in 2010.
2008 2009 2010 1H2011
123

103
ADM outsourcing adopted
globally and impacting mid-
markets at increased levels.
69 67

50 48
45

16 19
14 16 14
5 4 5 4 5 3
1 1

G1-500 G501-1000 G1001-1500 G1501-2000 Non-G2000


Number of ADM Only Contracts by Service Provider Type and Region, 2008-1H2011

The India heritage firms have won more ADM Only contracts than any other class of service
provider, outdistancing the Big 5 Americas by approximately 70 percent.

Big 5 Americas Big 5 Europe India Heritage Niche/Tier 2
267

Indian Heritage firms
dominate the Application
outsourcing space 157
129
112
102
80
59 53 57 59
50 47
27
11 13
1

Americas Asia-Pacific EMEA Market Total


Average ACV of ADM Only Contracts by Service Provider Type and Year (US$M)

There were a couple of large transactions facilitated by Big 5 Americas firms that influenced
the rise in average ACV in the first half of 2011.

2008 2009 2010 1H2011

$51

$29 $30
$24 $23 $24
$22 $21 $22
$19 $19 $19 $21
$17 $16
$12 $13 $13
$11 $12

Big 5 Big 5 India Niche/ Market
Americas Europe Heritage Tier 2 Average

Bigger deals still tend to go to the Big 5 Americas’ firms

POLL QUESTION 1
How many ADM vendors does your organization
or your client work with?

1-3 vendors
More than 6 vendors
27%
29%

I don't know
4-6 vendors
12%
32%

Shifting $s to New Development is Top Priority

Cost savings remains the #1 Goal for moving to a global delivery model – but
organizations are really trying to shift costs from Run the Business (RtB) to Change
the Business (CtB)


There are challenges shifting to a Change the Business Model

► High defect rates and poorly constructed code results in higher maintenance
costs (Technical Debt)
► Poor documentation results in extended knowledge transition periods
► Lack of standards and ITIL processes result in poorly defined scope for
maintenance activities
► Lack of clear measurements to determine size of portfolio (e.g. Function Points
or Use Case Points) results in over-estimating maintenance effort

The goal is to increase Productivity and Improve Software Quality…

Broader adoption of software tools to provide automated function points
counts, provide technical insights, and increase software quality are critical
to successfully moving to CtB model.


Four Levers to Improve Application Productivity
Resource Levers
Reduced Headcount / Managed Attrition / Increased Skills / Increased Longevity
Financial Levers Operational Levers
Improved SLA Driven Managed
Rate Card Improvement
Application Services
Spend is the Reduction of Rework /
Rate Card Conformance Goal Increase in Quality
Reduced Vendor Supplier Role & Cost
Utilization Optimization
Increased Location $$ Supplier / Contract
Economies Rationalization
Increased Delivery Time Improved Operating
Model Efficiency Processes

Application Levers
Application Rationalization / Increased Quality / Improved Maintenance Efficiencies

POLL QUESTION 2
Do your outsourcing/customer SLAs include metrics
on the technical quality of code being delivered?

Never
9% Ad hoc
I don’t know
11% 35%

At the end of a
release
27%
At every build
18%

Balancing Functional and Structural Quality Lowers Mx Costs

Functional Testing ensures Structural Quality ensures the
the Business Requirements resiliency and long-term
and core functionality works maintainability of the code
as expected (improves overall TCO)

• Defect Injection • Technical Debt
• Defect Detection • Code Quality Index
• Test Coverage • Structural Quality lowers the
Built on Base of Quality long-term maintenance costs
processes (CMMi) of applications

In a multi-supplier environment, all parties must be incented to
lower long-term application support costs!

The key SLAs are driven through Primitive Metrics

Primitive Metric Description Sample SLA
Describes the conformance to internal quality standards and ISO 9126, SEI, CISQ, standards,
Quality KPIs set by the customer organization. best practices

Defect Injection Rates
Defects Describes a non-conformance to a baseline requirement Defect Detection Rates
Structural Quality

Describes the total development time from start of a task to the Milestones on time
Schedule end of the task based on a standard unit of measure Schedule Performance Index

Describes the amount of effort expended to complete a specific Productivity Metrics
Effort task or work product using a standard unit of measure (FPs/Developer, Complexity Matrix,
+/- 10% of estimate)
FP Counting – IFPUG 4.1
Describes how big the application or work product is using a
Size standard unit of measure SLOC Counting – IEEE
Use Case Points

Describes the cost associated with a project, application, +/- 10% of Budget
Cost development phase or category of work Cost Performance Index

Describes the number of resources, skills, and experience levels Retention rates
Staff assigned to an engagement activity. Experience and Skills

Describes the volatility of an item during a software Work Order Effectiveness
Change development phase or period of time.  Degree of Change


POLL QUESTION 3
Do your outsourcing/customer SLAs include metrics
on the technical quality of code being delivered?

I don't know
Yes 10%
26%

No
36%
Sometimes
28%

There are also multiple disruptive trends impacting outsourcing

Disruptive Trends

Business SaaS
Intelligence/ Cloud
Analytics Computing BaaS

Social Media Mobility Web 2.0
Computing
Pace of Executive
U.S. Policies
Commoditization Changes

Global Global Political Talent
Economics Ramifications Demographics

Mobile / Cloud Computing will change the notion of sourcing locales … Virtual
Sourcing Models will evolve over time and change how we interact.

Implement a Managed Service Model
There are multiple operating models used when implementing a managed service in the
ADM environment. Though the operating models are important to the overall strategy,
each contain three (3) basic components that support the managed service model.
Attributes of an ADM Managed Service Agreement
• Defined Services (SOWs) and SLAs –
Statements of Work specify the “What” not
the “How”. Defined Service Levels with
measured performance goals aligned to the
Services

• Defined Pricing - Fixed Price models
w/variable component that allows ramp-up
and ramp-down of costs based on volume
and need

• Defined Risk Model - Manage overall
sourcing risks via Product Quality risks (is it
supportable in a production environment),
Contract terms, Skill mix, Onsite/offshore
ratios, geographical locations, etc.

Top 5 ADM Success Factors – P1

1. Clearly define the ADM Services into three (3) main categories and,
from a cost perspective, manage these categories separately
• Maintenance
• Minor Enhancement
• Project Based work

2. Define a retained organization that is aligned with the strategy
• Business liaisons – coordinate between business and IT leaders
• Program/Project Managers –retain to manage large programs
• Architecture - client driven
• Business Analysis – understands business and requirements
• Service Delivery Managers - manages the sourced relationship
• Developers & Testers – support retained applications and some subject
matter experts


Top 5 ADM Success Factors – P2

3. Define end-to-end Service Level Agreements to incent suppliers to
work with each other in a multi-supplier environment

4. Embrace CMMi – process makes a difference
• Service Levels and Quality goals are often aligned with process maturity –
the more mature organizations can be contractually obligated to deliver
higher quality code
• Process adherence drives repeatability and productivity improvements –
incent Service Providers to operate at CMMi Level 3 or higher with
committed productivity improvements
• Conduct on-going operational assessments to ensure process adherence

5. Use Key Performance Indicators (KPIs) and dashboards
• Earned Value Analysis (EVA) using Schedule and Cost performance index
• Defect injection and probability statistics for software quality
• Structural Quality, regression testing, defect detection, and test coverage
ratios

Summary

1. ADM Outsourcing market continues to expand – wide adoption at
G2000 and mid-market levels

2. Indian Heritage Service Providers are winning a large % of new business

3. Challenges shifting cost from RtB to CtB will continue to impact sourcing
models and provide opportunities for software vendors

4. Mega-trends such as cloud computing, social networking, and data
analytics will have broader impacts on ADM outsourcing

5. Implementing best-practices, including structural quality, provides
roadmap to successful implementation of global models


CAST Application Intelligence Platform (AIP)
Overview

Market Leader in Software Analysis & Measurement

Ambitious Introduce fact-based transparency into application development and
Mission sourcing to transform it into a management discipline

 Broad market presence in Europe & North America
Rock Solid  Strongly endorsed by software industry gurus and long term investors
Foundation  $100 million of investment in R&D, driven by top talent in computer
science and software engineering

 Pioneer and recognized market leader in Software Analysis &
Market Leader
Measurement (SAM) since 1999

Cool Vendor in Application Services – 2011
“IT services providers need to care because they will soon see a growing
number of their deliveries measured by CAST metrics.”
- Helen Huntley, Research VP, Gartner

Analyzing, Measuring and Benchmarking IT Software Assets

Key Application Software Characteristics Software Analysis & Measurement Services
Risk Drivers Software Quality Gate
• Robustness • Parallel process to system testing
• Performance • Pre-production structural analysis
• Security of mission critical software
Cost Drivers
• Transferability
• Changeability Application Assessments
• Maintainability • Investigation of troubled projects,
persistent application issues
Alerts, trending, • Pre/post M&A due diligence
root cause analysis • Deep analysis of cost/risk drivers

Sizing Metrics for Productivity Tracking Benchmarking to Like Applications

• Automated Function Point Changes Due to a Sequence of
• Unique repository
Function Change Requests of structural
Points 40 1
35
2 3 4 5
quality metrics
# Function Points

• Technical 30
25 • Compare to
20
sizing 15
10
similar apps at
• Effort 5
0
industry peers
0 50 100 150 200
estimation Cumulative Effort (Staff Hours)

CAST Inserts Actionable Visibility

CAST Application Intelligence Center CxO & VP, …
Dashboard, reports
CAST Application
Intelligence PlatformTM
 AI Management Studio
 Knowledge Base
 Approx one thousand rules and
best practices PM, QA, Architects…
 Decade of software engineering  Std enforcement
expertise  Early ID of violations
CAST Application Analysis Engine  Drill down to root cause

CAST Native CAST UA 3rd party
Analyzers (28) scripts analyzers

Delivered Source Code: Dev Teams, Suppliers
 CICS, IMS, COBOL, DB2 z/OS, PL/I  Arch. visibility / Quick wins
 J2EE, .NET and all Major RDBMS  Software engineering expertise
 Web Apps, BI, EAI, C/C++, VB, PB  Continuous training/coaching
 Siebel, SAP, PSFT, OBS, Amdocs

Tangible and Measured Value

 Mitigate business risks with improved structural quality
 Better applications for higher business resiliency and continuity
 Risk-proofed projects more likely to deliver business benefits on time
 Make IT and suppliers more productive
 Eliminate waste in ADM
 Prevent coding errors in development: 10x savings in rework per coding error
 Keep technical debt from growing: up to 10% saving in maintenance cost
 Benchmark then optimize resources: maintenance savings potential
 Better reuse of frameworks and components: up to 10% of dev budget
 Reduce waste in operations
 Improve efficiency of large complex transactions & batch processes: up to 5% mips
 Reduce troubleshooting and rollover costs: lower Ops staff overtime
 Apply consistent measurement & KPIs for superior visibility
 Up to 10% of ADM budget, esp. ADM outsourcing

“Applying the principles of lean manufacturing to ADM can increase productivity
by 20 to 40 percent while improving the quality and speed of execution.”
- Ranjit Tinaikar, Principal, Head of NA IT Management Practice

Market Leader and Pioneer

250 Global Leaders Rely on CAST

SIsUse & Promote CAST
SIs Resell CAST Industry Groups Engage CAST

Key Influencers Recognize CAST

Contact Information

Lev Lesokhin Steve Hall

l.lesokhin@castsoftware.com steven.hall@isg-one.com

www.castsoftware.com www.isg-one.com

blog.castsoftware.com considerthesourceblog.com

@OnQuality @isg_news

slideshare.net/castsoftware

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Align Vendor SLAs with Long Term Value

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