OUTSOURCING STRATEGY SURVEY 2009-2010 Capgemini - Outsourcing... · Outsourcing Strategy Survey 2009-2010 7transformation consulting brand of Capgemini Group Capgemini Consulting

OUTSOURCING STRATEGY SURVEY 2009-2010

A Capgemini Consulting survey on Shared Services and Outsourcing

October, 2009

Sourcing Transformation

Outsourcing Strategy Survey 2009-2010 2

Capgemini Consulting is the strategy and

transformation consulting brand of Capgemini Group

Introduction ........................................................................................... 3

Executive summary .............................................................................. 4

Background ........................................................................................... 6

Processes currently outsourced and future plans .......................... 10

Why organisations outsource and which risks they see ................ 16

Business Case ..................................................................................... 21

Select and prepare for the partnership ............................................. 24

Change management .......................................................................... 30

Demand organisation ......................................................................... 35

List of participants .............................................................................. 38




Introduction

As a consequence of the

changing business

environment, including the key

impact of the credit crunch, we

are seeing organisations re-

evaluate their sourcing

strategies. In some cases, this

is because of a short term need

to save additional costs, in

others, because a more

favourable deal structure can

now be negotiated.

We are also seeing

organisations postponing the

sourcing strategy decision and

execution. Sourcing of a

business or IT process can help

operations run more efficiently

and can result in cost savings.

Despite these benefits, many

initiatives have been put on

hold because of economic

uncertainty.

We know that a changing

environment delivers complex

challenges in defining the right

sourcing approach. That is the

main reason why we

investigated the incentives for

sourcing, with a specific focus

on the sourcing strategy

process.

In writing this report, we

combined the outcome of

interviews with our latest

insights in trends and issues in

different industries. As this

survey was executed during the

credit crunch, we found some

specific effects on sourcing

strategies. We did not,

however, directly investigate

these effects.

As a full-service consulting

organisation, Capgemini

Consulting wants to understand

what is happening in the market

to be able to provide the best

possible advice and support to

our clients. Many surveys cover

the specifics of the outsourcing

or shared service operation, not

many describe how the

sourcing strategy was

developed and what made it

successful.

That is why we are pleased to

share with you the results of our

survey on sourcing strategy in

different industries. This report

covers a wide spectrum of

perspectives related to the

sourcing strategy approach and

we believe it benefits anyone

and every organisation, from

sourcing pioneer to sourcing

expert.

We would like to thank all the

executives who contributed to

our survey and provided their

valuable insights and time. We

trust that you will find this report

interesting and useful as you

continue on your journey,

defining the right sourcing

strategy for your organisation.

Also I would like to thank

Marjorie Powner and Satish

Paul from our BPO practice and

Professor Dr. Ir. Andrzej

Hajdasinski from Nyenrode

Business University for their

valuable contributions.

Stefan Westdijk

Sourcing Strategy Leader

Netherlands

Authors:

Joost Aarts

Robin Adriaans

Fleur Baarspul

Erik van Daalen

Marjolein Dijkshoorn

Oedger Meijborg

Stefan Westdijk




Executive summaryThis report highlights the

importance of sourcing strategy

in the evolution of an

organisation‟s development.

Capgemini Consulting captured

the views and experiences of

almost 40 executives from a

number of large national and

multi-national companies, with a

view on future decision making

and successful development

and implementation of sourcing

strategies for our clients.

Our findings below explore the

whole cycle of the sourcing

strategy and show that success

is particularly dependent on

choosing the right sourcing

mode. Capgemini‟s Global

Sourcing of Services (GSS)

cube© has been used to

distinguish the different

sourcing modes, using three

dimensions (location, ownership

and management style).

More information about the

GSS cube© can be found in our

Point of View on Sourcing

Strategy document.

The outcome of our survey

suggests the following

recommendations, which

particularly apply to

organisations within our target

industries (Financial Services,

Energy & Utilities, and

Manufacturing):

o Organisations will benefit

from considering a

combination of sourcing

modes to realise their

sourcing strategy. This can

give insight to the benefits

and concerns of each

sourcing mode and may

result in ideas to support risk

mitigation.

o 54% of the participants will renew the contract with the existing supplier. The main reasons for organisations to retain their current supplier are that the costs related to changing supplier could be prohibitive and the loss of knowledge or experience could increase risk or impact quality.

Outline on the Global Sourcing of Services (GSS) cube©

OutsourcedIn-house

Offshore

Onshore Light

Tight

Ownership

Location

Management

Style




o Organisations should update their business case regularly, this will ensure decision-making in future phases is based on sound information and also that the benefits of the original decision are realised.

o Organisations will benefit from working in real partnerships with their suppliers, introducing, for example, bonuses for high performance, rather than penalties for low performance, in their contractual terms. Working in partnership also ensures alignment, coordination and control of both supplier and business needs.

o Organisations should use benchmarking tools to assess the performance of their suppliers and use the outcome of that analysis to decide, for example, whether to renew their existing contracts or find a new supplier.

o Change management and implementation are the most critical elements of the programme during transition or migration. The involvement of senior management and stakeholders of the business should be high, especially in the early phases. Delaying employee involvement can cause problems later in the process.

o Due to pressure to differentiate from competitors, organisations are entering into more strategic partnerships, for which knowledge transfer

and innovation are important drivers. The full added value of innovation by outsourcing is not yet discovered, but this is just a matter of time.

o Organisations experience

difficulties in defining the

relationship with the internal

or external supplier. This is

explained by the fact that

sourcing is all about the

involvement of people,

entering a partnership and

the transformation of

processes. In our opinion, it

requires specific skills to

formalise these aspects in a

contract.

o Organisations should also

involve vendors from the

early phases to provide

support with defining

requirements, delivering

accurate market information

and managing expectations.

o Organisations should focus

frequently (at least once

every quarter) on the

evaluation of service quality.

o Organisations should align

demand and supply within

one function to ensure

control of both aspects of the

service.

There was no significant

relationship between specific

industries and sourcing

strategies. Our analysis of the

results does not show a notable

preference of any of the

industries for IT sourcing or

business process sourcing. The

sourcing maturity level depends

on the organisation itself and is

not primarily related to an

industry.




BackgroundAbout Sourcing

There are many definitions of

sourcing. For the purpose of

this survey, sourcing can be

defined as delegating business

functions to a separate

business unit or third party. A

sourcing strategy is the

definition of what an

organisation wants to do with

the tasks, functions or

processes that are not

differentiating that organisation

from its competitors.

Selecting the right sourcing

mode means finding the right

combination of ownership

(owned or not owned), location

(onshore or offshore) and

management style / governance

model (tight touch or light

touch). These three elements

have been captured in a cube

of sourcing options or modes.

This cube is called the Global

Sourcing of Services (GSS)

cube©.

Outline on the Global Sourcing of Services (GSS) cube©

OutsourcedIn-house

Offshore

Onshore Light

Tight

Ownership

Location

Management

Style

The GSS cube© distinguishes eight different sourcing modes divided

over three dimensions: location, ownership and management style.

Location describes where the function is executed (onshore or

offshore)

Ownership demonstrates who executes the function (in-house, e.g.

shared service centre, or outsourced)

Management style depicts the level of management attention that is

required for the process (light or tight management)




Manufacturing55%Financial

Services24%

Energy & Utilities

21%

Figure 1 : Participating industries

Based on the GSS cube‟s three

dimensions, sourcing can take

different forms. The sourcing

strategy with the least impact

from the perspective of

ownership, location change and

intensity of management is a

Shared Service Centre (SSC).

Today companies either choose

to optimise existing SSC or set

up new SSCs in competitive

markets. Evaluating the

geographical scope and

location strategy can be

lucrative, whether this is

outsourcing or cross-border

shared services, as potential

sourcing strategies. This could

take the organisation in the

direction of the highest impact

sourcing strategy from an

ownership, location and

management perspective:

outsourcing to an offshored

third party where management

attention is not critical. More

information about the GSS

cube© can be found in our Point

of View on Sourcing Strategy

document.

Why this survey

Most of the surveys conducted

by firms like Gartner, Forrester

and others focus on IT sourcing

and in general do not describe

the differences between

industries. In addition to IT, this

survey deals with business

processes, such as Finance &

Administration (F&A), Logistics

and Procurement. We were

also very interested in the

differences between industries.

Whilst we focussed on all

dimensions of the GSS cube in

the survey, the dimension

management style was not

explicitly questioned. Aspects

of management style are,

however, covered in the

chapters about partnerships,

risk and change management

below.

We interviewed chief

information officers, chief

operation officers, chief

financial officers, SSC

managers, sourcing strategy

managers and divisional

managers of 38 large national

entities or multinationals, mainly

with a head office located in the

Netherlands. The interviews

were held in Q4 of 2008 and Q1

of 2009.

As mentioned above, we were

very interested in the

differences in approach,

sourced processes and

selected sourcing modes

between industries. Figure 1

shows the distribution of the

industries participating in the

survey. Three organisations

participated who could not be

classified as Energy & Utilities,

Financial Services or

Manufacturing.




We used the sourcing strategy

approach of Capgemini as a

guide to structure our

questionnaire and our survey.

In this five-phase closed loop

process, organisations should

continuously go through the

cycle in order to define and

execute the right sourcing

strategy.

Outline on the Sourcing Strategy Approach

Capgemini‟s Sourcing Strategy Approach focuses on the process from

defining potential sourcing strategies to implementing the selected

strategy and managing the delivery. It comprises 5 phases, in a closed

loop, because efficiency and business dynamics may require a change

of sourcing mode.

1. Analysis and Definition -

scoping and evaluating all

sourcing modes

2. Scenario Planning and

Business Case - analysing

the most beneficial sourcing

modes in more detail

3. Selection and Preparation

- preparing the organisation

for change to the preferred

sourcing mode

4. Transition or Migration -

full implementation of the

right sourcing strategy

5. Delivery or Operations -

monitor, control and manage

the sourced process




Figure 2 : Relation between chapters and approach

We have clustered our results

according to the different

phases of the sourcing strategy

process. The first chapter will

provide an overview of selected

sourcing modes and strategies

in general, which processes

were outsourced, moved into a

SSC and what are the sourcing

strategy plans.

The other chapters each link to

a different phase of the

sourcing strategy:

1. Processes currently

outsourced and future

plans

2. Why organisations

outsource and which

risks they see

3. Business case

4. Select and prepare for

the partnership

5. Change management

6. Demand organisation

In this survey we sometimes

use the terminology insourcer

and outsourcer. The outsourcer

delegates processes and/or

tasks to the insourcer. The

insourcer is also referred to as

supplier or vendor. With

insourcer we do not mean

insourcing which refers to

companies assigning processes

within the company that were

outsource d before.

1. Functions currently outsourced and future plans

2. Why do organisations

outsource and what risks do

they see

3. Business case

4. Select and prepare for the

partnership

5. Change management

6. Demand organisation

1. Processes currently outsourced and future plans

2. Why organisations outsource

and which risks they see




Processes currently outsourced and future plans

In this chapter we provide an

overview of the currently

outsourced processes and

selected sourcing modes which

were revealed by the survey.

We provide these results per

industry: Energy & Utilities,

Financial Services and

Manufacturing. We also asked

our participants for their future

plans. All the results are shown

with a distinction between

business processes and IT

processes.

Furthermore, we measured

whether and how the activities

of Capgemini‟s sourcing

strategy approach were

executed by our participants.

The approach contains generic

activities which many of the

organisations do carry out.

Our results show a difference in

time spent between outsourcing

and SSC initiatives and the time

industries spend on average on

a sourcing strategy approach.

IT processes more sourced

than business processes

IT process outsourcing is more

mature than business process

outsourcing. IT is perceived as

a „commodity‟ which is highly

available in the market. The

maturity of the supplier market

is considered high and because

of competition organisations are

convinced pricing is accurate.

IT is also linked to innovation

and different IT domains require

specific knowledge.

Figure 3 : Overview of outsourced processes

and selected sourcing mode

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Design

Marketing

Procurement

Production

Logistics

Finance & accounting

HR

Facilities

business processes

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Testing

Desktop management

Infrastructure management

Application development

Infrastructure

IT processes

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Testing

Desktop management

Infrastructure management

Application development

Inf rastructureIT processes

Outsourced onshore

Outsourced of fshore

SSC onshore

SSC of fshore

Not sourced




Innovation is defined as

invention plus cooperation plus

coordination plus collaborationi.

All variables are predominantly

present in successful IT

sourcing projects.

Offshore sourcing modes

were less selected than

onshore modes

Many organisations select a

combination of sourcing modes

for one or more of their IT

processes. Most common was

outsourced onshore in

combination with offshore. Over

25% of the organisations

selected this combination of

sourcing modes for application

development and testing.

Onshore sourcing is preferred

to offshore sourcing. Apparently

organisations prefer the ability

to control above low labour

costs. In addition, one

participant mentioned that

offshore sourcing modes also

brought political issues: “setting

up an SSC offshore is a touchy

subject which we want to

avoid”. Although costs are the

main reason for sourcing,

organisations do not strive for

the lowest possible costs.

Organisations are aiming for an

optimum of lowest costs,

political stability and control.

Facilities, HR and F&A are the

most mature sourced

business processes

Facilities, HR and F&A are non-

differentiating processes. In

general the long term

sustainable competitive

advantage of these processes

is limited. Given the maturity of

the supplier market these

processes tend to be

outsourced more than other

business processes.

Logistics is also a business

process which is outsourced in

a high number of cases. The

ability of suppliers to offer

economies of scale plays an

important role in these

decisions. The least sourced

business processes are design

and marketing activities. The

low result can be explained by

the perceived strategic nature

of these processes.

Maturity determines the

number of sourcing

strategies in place

The maturity of the supplier

market, and of the organisation

itself, both impact the number of

processes sourced. The more

mature the supplier market the

higher the chance a sourcing

strategy is already in place for

this process within the

organisation. The more mature

the organisation, the more

sourcing strategies it is likely to

have in place or already

replaced with a new strategy.

Adoption of sourcing

strategies per industry

There is no relationship

between specific industries and

sourcing strategies for certain

processes. Our analysis of the

results does not show a notable

preference of any one of the

industries for IT sourcing or

business process sourcing. All

industries source all type of

“Setting up a shared

service centre offshore

is a touchy subject

which we want to

avoid”




processes. We expected

differences between industries

to be able to distinguish an

early adopter. Since no industry

shows an evidently higher

average of sourced processes,

we have to conclude that

sourcing maturity level primarily

depends on the organisation

itself, and is not related to an

industry.

However, if we break down

industries, we can see

differences. In addition, if there

are a number of organisations

in an industry which outsource,

the number of suppliers

increases and further cost to

serve decreases, hereby

influencing sourcing maturity.

Preferences of the industry

for a certain sourcing mode

Financial Services

organisations did not select

SSC as sourcing mode either

for IT nor for business

processes. This can be

explained by our belief that

Financial Services

organisations are more mature

and have redefined sourcing

strategies, resulting in a shift

from SSC to outsourcing.

Figure 4 : Selected sourcing mode per industry

0% 20% 40% 60% 80% 100%

Manufacturing

Finance

Energy & Utilities

business process sourcing

Outsourced

SSC

Not sourced

0% 20% 40% 60% 80% 100%

Manufacturing

Financial Services

Energy & Utilities

IT sourcing

0% 20% 40% 60% 80% 100%

Manufacturing

Financial Services

Energy & Utilities

business process sourcing




0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

70,0%

Current situation

Future situation

SSC

Outsourced

Figure 5 : Future situation

Forecast of the processes to

be sourced within the next

five years

Future sourcing plans indicate

that, whilst the number of

outsourced processes are likely

to increase, the number of SSC

processes will remain

unchanged. This is not because

no new SSCs will be

established. Our results show

that there will be an increase of

new SSC initiatives and

simultaneously a decrease of

SSCs, due to the shift from

SSC to outsource for those

more mature organisations.

With regard to the selection of

the sourcing location, the

percentage of plans for moving

offshore is less than 10%. Two

important remarks should be

made about this. Especially for

IT, the location might appear

onshore to the outsourcer, but

the insourcer might balance

onshore, nearshore and

offshore locations and work with

the client as a unified team.

Those participants, who

mentioned offshore as potential

future sourcing mode, were

referring mainly to HR and F&A,

as IT is already moved to

offshore locations in most

cases. Some other processes

(e.g. Cleaning Services) can

only be executed onshore due

to the nature of the process.




Sourcing strategy approach

All organisations perform

activities to define, select,

prepare, implement and

execute their sourcing strategy.

Participants were asked which

activities were executed and

how much time and attention

was spent. Attention was

measured by time spent for

monitoring and supervising

activities.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% a

cti

vit

ies o

f S

ou

rcin

g

Str

ate

gy a

pp

roach

execu

tred

Figure 6 : Executed activities per phase

Time spent on defining a

sourcing strategy

When we look at the time which

is spent to create a sourcing

strategy, there is a difference

between outsourcing and SSC.

The average time spent on

outsourcing initiatives (20+

months) is almost twice as

much as the time spent on SSC

initiatives (11+ months ). This

seems to be influenced by the

involvement of Procurement

leading to long contract

negotiations. Especially during

the selection and preparation

phase, fewer activities are

performed as supplier selection

and contract negotiation are not

necessary for an SSC.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Analysis and definitionScenario Planning and Business CasePreparation and SelectionTransition or MigrationDelivery or Operations

% a

cti

vit

ies o

f S

ou

rcin

g S

trate

gy

ap

pro

ach

execu

tred

Energy & Utilities

Financial Services

Manufacturing




Conclusion and our

perspective

IT outsourcing is still more

mature than business process

outsourcing. Also onshore is

more preferred in comparison to

offshore. Organisations are

aiming for an optimum of lowest

costs, political stability and

control.

The sourcing maturity links to

the individual organisation and

does not seem to depend on

the industry. Facilities, HR and

F&A are the most mature

sourced business processes.

Future sourcing plans indicate

the number of outsourced

processes to increase. The

number of SSC processes will

remain unchanged. The

average time spent on

outsourcing initiatives is almost

twice as much as the time spent

on establishing an SSC.

We expect organisations to use

a combination of sourcing

modes to realise their sourcing

strategy. In a multi-mode

sourcing solution, global

resources, cost-efficient

processes and extensive

experience in diverse

geographies, disciplines and

industries, are bundled to

achieve cost reductions,

streamlined processes,

innovation, competitive

advantage and growth. In such

a solution most of the

operational processes are

brought to an offshore location

and the more tactical and

strategic processes are

delivered onshore or nearshore.




Why organisations outsource and which risks they see

The long-term impact of the

credit crunch is uncertain for

many organisations, but is the

sudden economic downturn a

good reason to re-evaluate your

sourcing strategy? Have the

reasons and risks for sourcing

changed due to current events?

Why do organisations choose

outsourcing/SSC? And are

there differences between

industries?

This chapter provides an

overview of the reasons and

risks. It also gives insight into

the differences and similarities

between industries.

Reasons for sourcing

Reasons for outsourcing are

similar to those for setting up an

SSC. The differences we found

are related to the readiness to

outsource.

Outsourcing and transforming

the processes at the same time

is perceived as high risk. One

interviewed manufacturer

mentioned “We only outsource

a process if stability of the

process is ensured; don‟t

outsource your mess for less”.

Cost reduction remains the

most important reason for

sourcing. In line with other

surveys this shows that

organisations still associate

sourcing with cost effectiveness

As a result of the current

economic downturn,

organisations feel the pressure

to reduce costs and reduce

working capital. Many

organisations are turning to

sourcing for achieving short

term cost savings or other

financial benefits.

Figure 7 : Reason (above 5%) for outsourcing and SSC

“Don’t outsource your

mess for less”

0% 5% 10% 15% 20% 25% 30% 35%

Increase flexibility

Headcount reduction

Improve business focus

Improve quality

Cost reduction

0% 5% 10% 15% 20% 25% 30% 35%


Headcount reduction


Improve quality

Cost reduction

Outsourcing Shared service centre Reasons




Figure 8 : Reasons (above 5%) by industry

Reasons - industries

compared

Manufacturers indicate that they

use both sourcing strategies to

focus more on their core

business, which results in cost

reduction and improved

business focus. Products are

tangible and the pressure to set

new product standards is high.

Some of the Manufacturing

organisations even mentioned

they are driven by customer

pressure to improve standards

and, therefore, source

processes.

Financial Services

organisations indicate that cost

reduction and headcount

reduction are important reasons

for sourcing. Headcount

reduction was mentioned as a

reason for an SSC more often

in comparison to other

industries.

Energy & Utilities organisations

indicated that the most

important reason for

establishing an SSC is to

improve quality. They find this

more important than cost

reduction and improved

business focus. The Energy &

Utilities industry also see

outsourcing as a gateway to

knowledge and competence.

0% 10% 20% 30% 40% 50%

Increase efficiency

Obtain knowledge


Headcount reduction


Improve quality

Cost reduction

0% 10% 20% 30% 40% 50%

Because others outsource / have a SSC

Increase efficiency

Obtain knowledge


Headcount reduction


Improve quality

Cost reduction

Manufacturing

Finance

Energy & Utilities

Outsourcing Shared service centre Reasons

0% 5% 10% 15% 20% 25% 30%

Degree of support needed

Clear definition of what is …

Continuity

Loss of control

Industrial unrest

Loss of confidentiality

Impact on organisation

Loss of knowledge

Loss of quality

Dependency on external …

Manufacturing

Financial Services

E&U




Figure 9 : Risks (above 5%) for outsourcing and SSC

Risks of sourcing

Overall, the perceived risks of

outsourcing correspond to

those of an SSC. We did,

however, find four key

differences.

o Organisations choose their

sourcing strategy based on

risk mitigation. The

perceived risks of

outsourcing are related to

the commercial relationship

between the insourcer and

the outsourcer.

Organisations anticipate on

a possible lock-in with the

supplier. The tangible

benefits of the outsourcing

deal may be outweighed by

the costs and perceived

risks associated with

outsourcing.

o By selecting an SSC,

organisations want to ensure

proximity to the business,

avoiding dependency on

external suppliers and loss

of knowledge. As a participant mentioned, “Speed and flexibility is crucial to us. In this case,

the cost reduction created by

outsourcing was insignificant

compared to the impact of

not delivering to our

customer on time”.

o Organisations have a strong

focus on quality when setting

up an SSC. As mentioned

before, organisations see an

SSC as a vehicle to improve

quality. At the same time,

they perceive loss of quality

as the highest risk. In the

preparation of an SSC the

key question is - how do

organisations ensure the

desired quality level?

o Loss of business alignment

is only perceived as a risk

when establishing an SSC.

We did expect to find that

loss of business alignment

was also perceived as a risk

of outsourcing. This was not

the case. Whilst, by

outsourcing a process, the

distance between service

provider and customer

increases. It seems that

organisations do not

perceive this distance to be

a major issue.

“Cost reduction was

insignificant compared

to not delivering to our

customer on time”

0% 5% 10% 15% 20% 25%

Loss of business alignment


Loss of knowledge

Loss of quality

Dependency on supplier / SSC

0% 5% 10% 15% 20% 25%



Loss of knowledge

Loss of quality


Outsourcing Shared service centre Risks




Figure 10 : Risks (above 5%) by industry

Risks - industries compared

Manufacturing organisations

perceive dependency on the

supplier and loss of knowledge

as high risks of outsourcing. As

mentioned before,

manufacturers have a strong

drive to reduce costs and

improve business focus. Loss of

knowledge and dependency on

the supplier are perceived as

road blocks to achieving these

goals.

Financial Services

organisations perceive the loss

of business alignment as a high

risk of establishing an SSC, far

higher in comparison to the

other industries surveyed.

Financial Services

organisations are service

providers and see information

and employees as valuable

assets. Processes within

Financial Services

organisations are also highly

interwoven, in particular HR and

IT processes. These processes

have to be disentangled which

could cause loss of business

alignment between the

organisation and the SSC.

Energy & Utilities organisations

mainly bring in external

suppliers to obtain knowledge,

not to improve quality. In

comparing the reasons and

risks of sourcing in both the

SSC and the outsourcing

modes, we found a correlation

between the reasons for one

sourcing mode and risks of the

other. Improving quality, for

example, is the most important

reason for establishing an SSC

but the potential for reduced

quality is perceived as the

highest risk of outsourcing.

Gaining knowledge, for

example, is an important reason

for agreeing to outsource

services but losing knowledge

is seen to be a high risk when

establishing an SSC.

0% 5% 10% 15% 20% 25% 30%

Degree of support needed

Clear definition of what is …

Continuity

Loss of control

Industrial unrest



Loss of knowledge

Loss of quality

Dependency on external …

Manufacturing

Financial Services

E&U

0% 5% 10% 15% 20% 25% 30%

Increase of support needed

Loss of control




Loss of knowledge

Loss of quality

Dependency on external supplier

0% 5% 10% 15% 20% 25% 30%

Increase of support needed

Loss of control




Loss of knowledge

Loss of quality


Outsourcing Shared service centre Risks




Conclusion and our

perspective

The reasons and risks

associated with each sourcing

mode have not been changed

by current events. Cost

reduction remains the most

important reason for

organisations to (out)source.

The survey results show

expected quality from

outsourcing is lower than

moving to an SSC. This might

be perception as outsourcing is

often managed through

performance contracts unlike

SSCs.

Many differences between

organisations are caused by

their business strategy. Do they

have a „customer intimacy‟,

„product leadership‟ or

„operational excellence‟

strategy? In our opinion, the

right reasons for choosing

whether to use the outsourcing

or SSC mode are those which

best align with your business

strategy. It helps to consider

several sourcing modes, in the

analysis and definition phase,

when identifying the right

sourcing strategy. Some

organisations take multi-

sourcing to the extreme leading

to complex onshore and

offshore multivendor relations.

Although only a small number

of participants mentioned

innovation as a reason for

outsourcing, we expect this

number to increase in the

coming years. Due to pressure

to differentiate from

competitors, organisations are

entering into more strategic

partnerships, for which

knowledge transfer and

innovation are important

drivers. In our opinion, the full

added value of innovation by

outsourcing is not yet

discovered, but this is just a

matter of time.




Business Case The business case is a crucial

deliverable and a milestone

document in the scenario

planning and business case

phase, when the sourcing

strategy is translated to a

tactical level. The most

beneficial sourcing modes are

analysed in more detail both

qualitatively and quantitatively.

We asked our participants

about their business case and

the required return on

investment. We also questioned

the components within their

business case.

Pay-back period

Overall we see that more than

80% of the organisations

surveyed aim for a pay-back

period of less than 4 years. The

majority of the participants are

aiming for a pay-back period of

between 2 and 4 years. In the

Financial Services industry, we

see organisations aiming for

longer term pay-back period.

Figure 11 : Pay-back period

Components of the business

case

90% of the participants

mentioned cost reduction as the

major driver within their

business case, followed by

headcount reduction (58%) and

cultural impact (42%).

Other components mentioned

include:

o strategic objective

o added value of the sourcing

party

o customer satisfaction

o organisational impact

o synergy advantages

o quality

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0,9

1

0<->2 2<->4 4<->6

Perc

en

tag

e

ROI in years

Manufacturing

Financial Services

Energy & Utilities

Overall

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0<->2 2<->4 4<->6

Perc

en

tag

e

Pay-back period in years




In the organisations surveyed,

manufacturers included cultural

impact in the business case

more often than organisations

in other industries. This is in line

with our finding that

Manufacturing organisations

are more concerned about the

risks associated with the impact

on the organisation.

0% 20% 40% 60% 80% 100%

Overall

Manufacturing

Financial Services

Energy & Utilities

Yes

No

Figure 12 : Business case update

Updating the Business Case

We asked the participants if

they update their business case

after the decision to source has

been taken. On average less

than 45% of the organisations

surveyed updated their

business case regularly.

It seems that business cases

are mainly used in the decision-

making process. Few

organisations track the results

to ensure the right decision has

been made and that the

estimated benefits are realised.

Given the fact that cost

reduction is the main driver




behind sourcing this seems

inconsistent.

Conclusion and our perspective

More than 80% of participants

expressed their aim for an pay-

back period of less than 4

years. Cost reduction is the

main driver in the business

case, followed by headcount

reduction and cultural impact.

Few organisations update the

business case regularly. In our

opinion, maintaining and

updating the business case is

important, firstly as a guideline

for making decisions in later

phases (additional requirements

during execution, for example),

secondly because it is important

to measure and compare the

benefits after the decision has

been made. As a consequence

few organisations can tell if they

have achieved their pay-back

period.

We see organisations aiming

for faster pay-back period. The

economic downturn seems to

be contributing to this trend.




Select and prepare for the partnership

This chapter covers our findings

on the selection and

preparation phase of the

sourcing strategy approach.

Selection and preparation is

essentially the execution of the

„make‟ or „buy‟ decision.

In the case of outsourcing, the

selection and negotiation with

one or multiple service

providers needs to be carried

out. In general, this selection

process takes a lot of time and

effort. This is because the

outsourcer needs to make sure

that the insourcer is capable of

fulfilling the outsourced process

or function with at least the

same (but preferably even

higher) quality.

When an in-house sourcing

mode is chosen, the

organisation needs to be

prepared for the movement of

workload. This might involve the

transfer of duties from one

department to another, or

building a new SSC to take over

the workload in scope.

Selection process

While selecting a supplier,

different criteria need to be

taken into consideration. The

six most mentioned criteria are

outlined in the figure below.

Price is the most important

selection criteria for choosing

the outsourcing supplier. This is

an expected outcome because

the major reason for sourcing is

cost reduction. Price was

followed by quality (15%) and

cultural fit (15%). In addition to

being one of the key selection

criteria, improving quality is also

one of the most important

reasons for sourcing

Organisations have, on

average, five potential

outsourcing suppliers. Many

organisations stated that they

quickly reduce the long list to a

short list or only use a short list.

This reduction is mainly done

based on market knowledge

and experience.

8%

8%

9%

15%

15%

22%

0% 5% 10% 15% 20% 25%

Reputation

Proof of concept

Process Experience

Quality

Cultural f it

Price

Figure 13 : Selection criteria (above 5%)

“Price was one of our

least important

selection criteria. We

were more focussed

on the added value of

the supplier to bring

our organisation to the

next level.”




Overall, the organisations

surveyed agreed a contract for

four years. Based on earlier

surveys we expected the

contract time period to be

longer. Avoiding lock-in and

increasing flexibility are reasons

for this relatively low average of

four years.

7%

21%

31%

34%

0% 10% 20% 30% 40%

Gain share

Fixed price

Transaction based fee

Combination f ixed & variable

Figure 14 : Deal construction (above 5%)

Financial arrangement

Variable financial arrangements

are more often used than fixed

price arrangements. Most

variable arrangements include a

fixed and variable element. 30%

of the organisations surveyed

agreed upon a fully variable

arrangement, a transaction

based fee. The high percentage

of variable arrangements can

be explained by the need for

flexibility regarding volumes or

workload. One participant

stated “We chose a variable

financial arrangement because

the financial flexibility was

important to us. When we use

less, we want to pay less”.

20% of the sourcing deals are

based on fixed price. It seems

that these organisations do not

strive for financial flexibility or

are not able to allocate costs to

cost drivers. For organisations

that already have a good

process in place and only focus

on cost reduction as their main

priority, fixed price could be an

optimal solution.

Most organisations mention that

they do not use gain share as

part of their financial

arrangements. Gain share is an

optimal approach to create „win-

win‟ situations for both

organisations, which is

expected of strategic

partnerships. Due to the need

for transparency in strategic

relationships, we expect the

number of organisations using

this approach to increase in the

coming years.

“When we use less we

want to pay less.”

“We know, based on

our experience, which

suppliers we can

remove from the short

list”




Figure 15 : Sourcing deal

construction

Construction of the sourcing

deal

For the purpose of this survey,

we have identified four main

sourcing deal types:

o Lift: the process is handed

over in the current condition

to the supplier or SSC

o Shift & lift: the process is first

transformed before it is

handed over to the supplier

or SSC

o Lift & shift: the process is

first handed over to supplier

or SSC, whereupon

transformation commences

o Combination: two or three of

the above construction

methods are combined for

different part of the process

Transformation is defined as

follows: activities required for

aligning and improving the work

of the outsourced and retained

processes with the goal to

improve productivity, reduce

costs or improve speed to

market.

Transformational Outsourcing is

the way to add value to the

organisation as well as gaining

additional domain and

technology expertise. It is about

making use of skilled labour

and technology to create

corporate growth, rather than

viewing outsourcing as merely a

way to cut costs via, for

instance, taking advantages of

low wages abroadii.

More than 60% of the

processes are transformed or

reorganised, either before

sourcing the process or after

sourcing the process. The

approach taken depends on the

level of maturity of the

processes in scope. Almost

20% of processes are

transferred as-is.

When outsourcing, our

participants preferred the „lift &

shift‟ approach. Where SSCs

were established, there was a

preference for „shift & lift‟. When

outsourcing was agreed, the

organisations surveyed

preferred to outsource the

transformation to the supplier.

In some cases organisations

used an SSC to transform the

processes before outsourcing

them to an external supplier.

Lift & shift36%

Shift & lift29%

Lift19%

Combination16%




Figure 16 : Top 5 challenges

Challenges in sourcing

contracts

During the contracting phase,

organisations face many

challenges, including those

identified by the participants in

our survey. The five most

significant challenges are

shown in figure 16.

During the contracting phase

the main discussion points are

about defining and agreeing the

quality and rates for in-scope

services. Several participants

mentioned that content was

missing.

One participant responded:

“there were too many sales at

the table and too little content”.

The outcome of negotiations

with the supplier, internal or

external, will be secured in a

contract. The contract will

contain different terms to be

discussed and agreed upon by

the insourcer and outsourcer. It

is interesting to see which of the

elements in the contract lead to

the most discussion after

signing the contract. The figure

below shows the four most

discussed elements according

to our participants.

Processes for dissolution and

non-performance penalties are

the subjects discussed most

often. Other topics for

discussion are rate and

compensation details, service

Figure 17 : Four most discussed topic

“There were too

many sales at the

table and too little

content”

10%

10%

12%

17%

27%

0% 5% 10% 15% 20% 25% 30%

Planning

Legal Conditions and Liability

Budget during transition

Rates for service

Quality of service

11%

13%

16%

20%

0% 5% 10% 15% 20% 25%

Key performance indicators (KPIs) to determine compensation

Service standards and performance requirements (KPIs)

Rate and compensation details

Process for dissolution and non-performance penalties




levels, wage inflation, attrition

and key performance indicators.

All topics are related to the type

of relationship between the

insourcer/supplier and the

outsourcer.

Is the supplier treated as a

contractor or as a business

partner? In the latter, a bonus

for high performance would

probably be a better

mechanism, than penalties for

low performance.

Satisfaction with current

supplier

The contract will be in place for

a specific time period. At the

end of the contract period a

decision needs to be taken

whether to extend the contract

or to look for another supplier.

We asked the participants what

they normally do at the end of a

contract.

54% of the participants will

renew the contract with the

existing supplier. The main

reasons for organisations to

retain their current supplier are

that the costs related to

changing supplier could be

prohibitive and the loss of

knowledge or experience could

increase risk or impact quality.

16% of the participants have

concrete plans to end the

relationship with their current

supplier, either by selecting a

new supplier (8%) or by

insourcing (8%). For the

remaining percentage (30%)

other solutions are mentioned,

such as insourcing a part of the

process, analysing a multi

vendor construction.

0% 10% 20% 30% 40% 50% 60%

new vendor

insourcing

other....

renew the contract using existing vendor

Figure 18 : What if the contract ends




Conclusion and our

perspective

Selection and Preparation is the

execution of the „make‟ or „buy‟

decision as part of the sourcing

strategy approach. Price is the

most important selection

criterion, followed by quality and

cultural fit.

Organisations identify, on

average, five potential

outsourcing suppliers.

Suppliers are eliminated from

the list on the basis of market

knowledge and experience. To

avoid lock-in and to increase

flexibility, the organisations

participating in the survey aim

for contracts with a lifespan of

four years.

It seems that organisations

experience difficulties in

defining the relationship with

the internal or external supplier.

This is explained by the fact

that sourcing is all about the

involvement of people, entering

a partnership and the

transformation of processes. In

our opinion, it requires specific

skills to formalise these aspects

in a contract.

As more than 60% of the

processes are transformed or

reorganised before outsourcing

we are not surprised that

processes for dissolution and

non-performance are the topics

discussed most often. Given the

complexity of these outsourcing

arrangements, a business

partnership is the preferred

relationship choice. One of the

indicators of such a relationship

is the bonus for high

performance, instead of the

penalty for low performance.

We still, however, see many

organisations using non-

performance penalties to

manage such a relationship.

More than half of the

participants pointed out that

they would renew the contract

with their current supplier if the

contract ended today. In our

opinion, organisations should

benchmark the performance of

the supplier and use the

outcome of that analysis to

decide whether to renew the

contract or to find a new

supplier. From the

organisations we have

interviewed, very few do use

benchmarking tools to

substantiate their decisions.




Change management

Change management is a

critical part of the sourcing

strategy approach which

involves skills and knowledge

that will enable people to accept

new procedures, technologies,

systems, structures and values.

To ensure successful

organisational transformation,

establishment of new policies,

procedures, systems and

processes is not enough. When

people are not fully informed,

they deny or resist change. It is

vital to understand, plan and

implement appropriate activities

to provide assistance to people

through the transition and

transformation.

In this chapter we describe the

change management aspects

during transition and migration,

including those associated with

transformation.

Critical elements of transition

During the transition and

migration phase there are

elements which determine

success. Change management

is the most mentioned critical

element to support transition.

Effective change management

and good communication

reduces the risks and potential

costs, while increasing the

likelihood of success and

improving the connection

between outsourcer and

insourcer.

Figure 19 : Critical elements

3%

3%

7%

10%

10%

21%

45%

0% 10% 20% 30% 40% 50%

Interfaces

Cultural f it

Quality of service

Continuity of business

Planning

Project management

Change management




Stakeholder management

The graph below shows which

stakeholders were involved in

the different phases of the


Senior Management is highly

involved at the start of the


The stakeholders of the

business (middle management)

are also involved from the start

but seem to be more involved in


phase.

The works council starts to be

involved from the scenario


phase up to delivery and

operations. There is low

involvement of unions across all

phases, this may be caused by

the limited role of unions in our

surveyed organisations.

Limited supplier involvement

was found in the analysis and

definition phase and in the

scenario planning and business

case phase. Participants want

to avoid early influence by, and

dependency on, suppliers.

Employees are involved from


phase onwards. Very few

organisations involve

employees during the scenario


phase.

Figure 20 : Degree of stakeholder involvement

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

80,00%

90,00%

100,00%

Analysis and Def inition

Scenario Planning and

Business Case

Selection and Preparation

Transition or Migration

Delivery or Operations

Senior management

Works council

Unions

Business

Employees

Vendors




.

Roadblocks

During the different phases

there will be barriers to

success. Roadblocks

encountered by the participants

are shown in the graph below.

Most of these roadblocks relate

to the way change management

was executed.

The lack of commitment and

resistance of employees is the

most common barrier to

success (18%) followed closely

by a lack of internal alignment

and diversity of interest (16%).

These roadblocks relate to

change management and

involvement of stakeholders.

A lack of capability, competency

and capacity (13%,) on the

other hand, points out that

organisations struggle with

freeing up resources with the

right competencies or that

organisations do not have the

required capabilities for

transition and migration.

Figure 21 : Roadblocks

7%

7%

9%

13%

16%

18%

0% 5% 10% 15% 20%

Lack of insight & transparancy

How to create an acceptable business case

Lack of vision and strategy

Lack of capability, competency & capactity

Lack of internal alignment & diversity of interest

Lack of commitment & resistance of employees




Yes54%

No34%

Unknown12%

Figure 22 : Involvement

consultancy

Involvement consultancy

Companies can gain knowledge

and capacity by hiring external

consultants. We asked the

participants if they hired

external consultants.

Over 50% of the participants

were supported by consulting

firms during at least one of the

phases. In general our

participants require more

support during the first phases

of the sourcing strategy

approach.

The Financial Services industry

is less inclined to involve

external consulting firms in

comparison to other industries.

It seems that Financial Services

organisations have developed

the capability and compentence

inhouse to execute sourcing

strategy programmes.

Conclusion and our

perspective

The success of the

implementation of a new

sourcing strategy is highly

determined by the intensity in

which change management

was applied. Subsequently, the

success of change

management highly depends on

clear communication and

accurate information. The lack

thereof usually creates

uncertainty, confusion and

resistance within the

organisation.

Change management is indeed

mentioned as the most critical

element during transition and

migration. The involvement of

senior management and

stakeholders of the business

(middle management) is high,

especially in the early phases.

Very few organisations involve

employees during the scenario


phase, as early involvement

might cause unnecessary

unrest, and we can understand

this approach. From a change

management perspective,

however, delaying employee

involvement can cause

problems later on in the

process.

Limited supplier involvement

was found in the early phases.

Whilst participants wished to

avoid early influence by

suppliers, we think it can be of

added value to involve suppliers

earlier. Suppliers can provide

support with defining

requirements, delivering

accurate market information

and managing expectations.

In general we see organisations

struggle with the involvement of

different stakeholders during

the sourcing strategy approach.

This is the case, not only for

transition or migration, but also

for developing the demand

organisation as a value added

activity in support of frontline

services. This includes working

with the business to replace

specific processes (such as HR,

finance, procurement), or

making changes to the

organisation structure and skills

within the retained processes.




In our opinion, three factors

play an important role in the

change management process:

1. Be clear about the

objectives of the sourcing

strategy approach; these

objectives determine, to a

large extent, the change

management activities.

2. Involve the right

stakeholders, at the right

time in line with the

objectives; given the

objectives there is more

clarity about whom to

inform when.

3. Effectively measure and

track the change

management activities; it

takes significant time and

effort to make things work,

track and measure these

efforts. Strong governance

is key.




Demand organisation

The demand organisation is the

intermediary between the

internal business client and the

third party or SSC. The demand

organisation manages the

supply side (internal/external

suppliers) as well as the

demand side (business).

Presence of the demand

organisation

The vast majority of participants

(91%) have a demand

organisation in place before

starting the transition or

migration. Three out of four

organisations confirmed that

they started the preparations for

the demand organisation in an

even earlier phase. There are,

however, differences in the

design of the demand

organisation.

Figure 23 : Demand organisation

A virtual team is the most

common design. A separate

department, which is

responsible for managing the

demand and supply aspects, is

also common. Both have

alignment as their main

objective.

Most organisations have

learned that focussing only on

demand or supply results in

unnecessary escalations in the

management process.

Nevertheless, we did still find

designs focussing mainly on

one or the other aspect of the

service.

“The linking pin

between business

and supplier was

very important for the

success of this

outsourcing deal”

11%

15%

22%

22%

30%

0% 5% 10% 15% 20% 25% 30%

Service delivery manager

Business

Service level / contract manager

Seperate department

Virtual team




Figure 24 : Responsibility

Responsibility of the demand

organisation

The outsourcer is, in three out

of four outsourcing deals,

responsible for the demand

organisation. Few participants

(6%) mentioned that this is a

shared responsibility. It seems

that organisations do not see a

demand organisation as

delivering added value to both

parties in the outsourcing

relationship.

In case of an SSC, this number

is much higher (29%). It seems

that partnerships within SSCs

are more common than within

outsourcing. An explanation can

be found in the fact that both

parties are part of the same

organisation.

Figure 25 : Quality control means

Figure 26 : Update frequency

Means to control the quality

of service

More than 60% of the

participants use an SLA to

control the quality of service

levels, 23% have multiple

mechanisms in place. The

majority of participants (over

95%) evaluate the quality on a

regular basis with the vendor. In

a changing environment it is

important to evaluate

performance on a regular basis.

This is also true for the

alignment of supply and

demand.

Although quality is an important

reason for sourcing, 12% of the

organisations evaluate service

quality only once a year.

Outsourcer57%Insourcer

14%

Shared responsibility

29%

Responsibility demand organisationSSC

Outsourcer76%

Insourcer18%

Shared responsibility

6%

Responsibility demand organisationOutsourcing

3%

3%

6%

10%

16%

23%

39%

0% 10% 20% 30% 40% 50%

People

Information

Meetings

Governance

Measurement

Multiple mechanisms

SLA

12%

12%

12%

27%

38%

0% 10% 20% 30% 40% 50%

Yearly

Weekly

Daily

Quarterly

Monthly




Conclusion and our

perspective

In contrast with some other

surveys, we found that

organisations recognise the

importance of a demand

organisation and start

preparation in time.

Organisations do, however, use

different designs to align

demand and supply. In our

opinion the right demand

organisation has control of both

aspects of the service.

The responsibility of the

demand organisation lies with

the outsourcer. It seems that

organisations have a

procurement-oriented mindset

towards the demand

organisation. In our opinion, it is

essential to enter a partnership

given the size and complexity of

the sourcing deal. A demand

organisation based on

partnership ensures alignment,

coordination and control of both

supplier and business needs.

However it is important that a

demand organisation adds

value as we often find that they

become unnecessary

roadblocks between the

business and the insourcer.




List of participants

o ABN AMRO

o AGIS

o Air France KLM

o Atlas Copco

o Ballast Nedam

o Blue Water

o Corus

o Enexis

o Fortis Bank Nederland

o Anheuser-Busch InBev

o Intergamma

o Mexx

o Nationale Nederlanden

o NedCar

o Nutreco

o Philips

o Rabobank Nederland

o Ricoh Nederland BV

o RWE

o Stork

o TenneT

o Van Lanschot

o Vitens

o Vodafone

o WE

Capgemini Consulting would

like to extend its thanks to the

executives who made time to

be interviewed for this survey.

Besides the organisations

listed on this page, a further 13

organisations participated in

this survey but requested that

they remain anonymous.

Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group

i “Transformational Outsourcing – The Highway to Innovation and Measured Improvements”, Nyenrode Business

University, Breukelen, Inaugural Lecture of Prof. dr. Ir. Andrzej Hajdasinski, May 2007

ii Neil Davey, www.mycustomer.com

About Capgemini

Capgemini, one of the world's foremost providers

of consulting, technology and outsourcing

services, enables its clients to transform and

perform through technologies. Capgemini

provides its clients with insights and capabilities

that boost their freedom to achieve superior

results through a unique way of working – the

Collaborative Business Experience™ – and

through a global delivery model called

Rightshore®, which aims to offer the right

resources in the right location at competitive

cost. Present in 36 countries, Capgemini

reported 2007 global revenues of EUR 8.7 billion

and employs over 88,000 people worldwide.

www.capgemini.com


transformation consulting division of the

Capgemini Group, with a team of over 4,000

consultants worldwide. Leveraging its deep

sector and business expertise, Capgemini

Consulting advises and supports organisations in

transforming their business, from strategy

through to execution. Working side by side with

its clients, Capgemini Consulting crafts

innovative strategies and transformation

roadmaps to deliver sustainable performance

improvement.

For more information:

www.capgemini.com/consulting

Capgemini Netherlands

Papendorpseweg 100 · 3528 BJ Utrecht

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OUTSOURCING STRATEGY SURVEY 2009-2010 Capgemini - Outsourcing... · Outsourcing Strategy Survey 2009-2010 7transformation consulting brand of Capgemini Group Capgemini Consulting