Shifting Vendor Management Focus to Risk and Business Outcomes

© 2015 Information Services Group, Inc. All Rights Reserved. Proprietary and Confidential. No part of this document may be reproduced in any form or by any electronic or mechanical means,

including information storage and retrieval devices or systems, without prior written permission from Information Services Group, Inc.

Bob Krohn, Partner, ISG

28 July 2015

Outcome-Based Pricing, Business Process as a Service, and their effect on Service Level Methodology

Managing Service Providers for Today’s Digital Business

© 2015 Information Services Group, Inc. All Rights Reserved 2

Challenges that we are seeing in the market

Where are you in your contract lifecycle? And what are your questions?

Contract Year 1 Contract Year 2 Contract Year 3 Contract Year 4 Contract Year 5

Transition, relationship, change management

Services and service levels

Pricing

Service integration, governance and asset management

Renewal/Termination

Service levels were OK

before but we need better

now . . .

How do I obtain flexibility in scale that matches my

business requirements?

How do we effectively migrate to

outcome-based pricing ?

How do SLAs change with

outcome-based pricing?


Poll question

Which one of these question relates to you?Feel free to choose more than one response!

1. How do I obtain flexibility in scale that matches my business requirements?

2. Service levels were OK before but we need better now . . .

3. How do SLAs change with outcome-based pricing?

4. How do we effectively migrate to outcome-based pricing?


The Evolution of Outcome-Based Pricing

S

F

CC

C

C

C

C

C C

C

C

Requires end-to-end control

Output-based pricing

Outcome-basedpricing

Seldom in Application Management

Only in projects

AND . . . The model is still rare!


Pricing Constructs

Prevalence of Outcome-Based Pricing ModelsService line Current pricing

modelPrevalence of outcome-based pricing

Other emerging pricing models

Application Development

Fixed Fees and Time and Material

Negligible for ADM only contracts

Insignificant, overwhelmingly fixed fees and Time & Material

Application Maintenance

Fixed Fees A small percentage of contracts have a gain-sharing component

Ticket-based application based maintenance is rising but prevalence is still in low single digits

ADM/BPO (BPaaS) Combination of Conventional Models – Fixed fees, Time & Material and FTE-based

A small percentage of contracts have gain-sharing component linked to business outcomes

Transaction-based pricing with the service provider managing most of the underlying apps and business processes


BPaaS Service Level Methodology

With the introduction of BPaaS pricing constructs, the associated Service Level Methodology will evolve, too.

BPaaS Service Level Agreements: Service Level Agreement used to define the business’s performance and reliability expectations for the end-to-end processes used to operate and manage core business functions. These SLAs are expressed in business terms and measured in business outcomes.

Example: Percentage of health care claims processed without error in predefined time period


Key Success & Inhibiting Factors for BPaaS Service Levels

Factors SupportingBPaaS Service Levels

Strong service integration function

Obligations shared among providers

Clear measurements Achievable Financially reasonable

Factors InhibitingBPaaS Service Levels

Ineffective service integration function

Disproportional obligations among providers

Unclear/subjective measurements Not achievable Unreasonable financial credits


BPaaS Service Levels – Key Points of Measure

Map the Processes Identify the Dependencies

Identify Failure Points

Define SMART SLAs / KPIs / OLMs

Link SLAs / KPIs / OLMs to E2E SLAs

Business OutcomeBilling Timeliness

Process #1 Process #1

Application

Database & Middleware

Operating System

Compute

Storage Network

OUTCOMES► Success and accuracy

PROCESSES & APPLICATIONS► Straight Through Processing – Number of re-

keying steps, queue pauses processes► Availability (incl. Change Mgmt.)

LOGICAL INFRASTRUCTURE► Query and procedure call level response► Service session response

PHYSICAL INFRASTRUCTURE► Availability (incl. Change Mgmt.)► Utilization & Capacity► Throughput (Input/Output)


Introduction to CAST and its role in measuring Service Levels in the Evolving Pricing

Constructs

CAST Confidential

Software is Eating the Business Process

10

Map the Processes Identify the Dependencies

Identify Failure Points

Define SMART SLAs / KPIs / OLMs

Link SLAs / KPIs / OLMs to E2E SLAs

Business OutcomeBilling Timeliness

Process #1 Process #1

Application

Database & Middleware

Operating System

Compute

Storage Network

OUTCOMES► Success and accuracy

PROCESSES & APPLICATIONS► Straight Through Processing – Number of re-

keying steps, queue pauses processes► Availability (incl. Change Mgmt.)

LOGICAL INFRASTRUCTURE► Query and procedure call level response► Service session response

PHYSICAL INFRASTRUCTURE► Availability (incl. Change Mgmt.)► Utilization & Capacity► Throughput (Input/Output)

Bad software cripples Good processes, yet companies measure everything but the software.

PRODUCTMEASURES

PROCESS MEASURES

Time & Duration

Effort & Budget

Function & Scope

Quality

RiskSECURITY RISK

PERFORMANCE RISKS

ROBUSTNESS – RISK OF OUTAGES

MAINTAINABILITY

INCIDENTS

DEFECT RATES

SYSTEM AVAILABILITY

PROJECT TRACKING

SCHEDULING

TIME TRACKING

BUDGET

REPORTING

EARNED VALUE

FUNCTIONAL TESTING

USER ACCEPTANCE TESTS

USABILITY

CAST Confidential

Industry standard measures of good software

11

Description Prevent

TransferabilityDetermines how easily a new team or team member can be productive when

assigned to work on the application

SME Dependency, ramp up delaysDelivery inefficiency, reduced outputTime-to-market delays

Changeability Determines how easily and quickly an application can be modified

Correction and evolution delaysLate delivery of new featuresInability to resume services

Robustness Determines the risk of failures or defects that could occur in production

Operational downtimeApplication outageInability to test source code updates

Performance Efficiency

Determines the risk of performance issues of an application

Application DegradationResponse time degradationDenial of Service, Logic issues

Security Determines the risk of security breaches for an application

Damaging Business & OperationsSecurity failures

Maintainability(SEI)

Determines the cost anddifficulty/ease to maintain

an applicationDrifts on maintenance costs

CAST Confidential

1. Identify outcomes that are critical to the business / business process

2. Map to KPIs / Risk Indices

3. Measure to establish baseline / benchmark against industry

4. Monitor overtime – before software is released into production

End User productivity

Customers satisfaction

Brand equity

Uptime / Availability

Cycle Time

Time-to-market

Business agility

SECURITY

Risk of Failures in Production

Risk of Performance

Issues

Risk of Security Breaches

Ease of Modifying and

Learning

RELIABILITY PERFORMANCE MAINTAINABILITY

Constructing Outcome-Based Measures

CAST Confidential 13

Standard, objective measurement creates visibility

Scorecard Service Providers

Outsourcer TQI Robustness Performance Security Transferability Changeability

TCS 2.59 3.16 2.34 3.01 1.99 2.44

CTS 2.81 2.78 2.78 3.12 2.34 3.03

Wipro 2.59 1.67 3.54 2.98 1.76 2.99

IBM 3.06 3.12 3.11 2.79 3.11 3.15

Amdocs 2.83 2.56 2.88 3.03 2.56 3.11

Infosys 2.90 3.76 2.89 2.97 2.55 2.33

VENDOR VENDOR VENDOR

Monitor Performance Overtime

VENDOR

CAST Confidential

Product Measures Lead to Cost Reduction and Improved Agility

14

Study of maintenance effort across 20 customers shows tight correlation between maintenance fix tickets and CAST TQI

Increase of CAST TQI by 0.24 = decrease in maintenance activity by 50%

Technic

al Q

ualit

y Index (T

QI)

2.2

2.4

2.6

2.8

3

3.2

3.4

3.6

0 50 100 150 200

Ticket Volume

CAST Confidential

Contact Information

Pete Pizzutillo

[email protected]

www.castsoftware.com

blog.castsoftware.com

@OnQuality

slideshare.net/castsoftware

Data & Analytics

Shifting Vendor Management Focus to Risk and Business Outcomes