The Outsourcing Project

The Outsourcing ProjectA CxO Research Initiative

Published by CxO Research LtdCover Price £199

Achieving

Co

mp

etitive Ad

vantage thro

ugh C

ollab

orative P

artnerships

A CxO Research Initiative

Business

in ActionTransformation

www.cxoeurope.com

Achieving

throughCompetitive Advantage

Collaborative Partnerships

Achieving



TOP_06_Cover.qxd 12/7/06 5:17 pm Page 1

A CxO Research Initiative – Achieving Competitive Advantage through Collaborative PartnershipsSolutions Index

ACS is the leading provider of diversified, end-to-end business process outsourcing (BPO) and information technology (IT) outsourcing solutions to commercial and

ACS p61 www.acs-inc.com/emea government clients worldwide.

Atos Origin is a leading international IT services company.Its business is turning client vision into results through the application of consulting, systems integration and managed

Atos Origin p90 www.atosorigin.com operations.

Founded in 1959, Computer Sciences Corporation is a leading global IT services company with approximately

CSC p100 www.CSC.com 90,000 employees located around the world.

IBM Global Services provides comprehensive IT services integrated with business insight to reduce costs, improve

IBM p20 www.ibm.com/services productivity and assert competitive advantage.

Siemens Business Services is one of the world's top 10 outsourcing providers serving over 200 major clients in

SBS p44 www.siemens.com/sbs 44 countries.

To subscribe to: Achieving Competitive Advantage through Collaborative Partnerships apply online at www.cxoeurope.com


www.cxoeurope.com

A CxO Research Initiative – Achieving Competitive Advantage through Collaborative Partnerships

Contents

Section 1Strategy

8 Business Case Outline Jean-Francois Poisson Bell Canada

12 EXECUTIVE VISIONS Mega-deals, Multi-Sourcing and Value: A Perspective on the Future of IT Outsourcing

An interview with David Jordan IBM

16 Knowledge Transfer is the Key to Successful Strategic Outsourcing Dr. Joseph W. Rottman Dr. Mary C. Lacity – University of Missouri, St. Louis

20 IBM Global Services - Full Service, on Demand Outsourcing Capability IBM – PROFILE

23 Transformational Outsourcing – Mixing Oil and Water? NETWORK RAIL – CASE STUDY Juergen Weigand – WHU

29 Business impact of outsourcing a fact-based analysis Erasmus University Rotterdam Dr. Aleksandra (Saska) Mojsilovic – IBM Research

32 The Offshoring Revolution – Global Implications Torbjörn Fredriksson – UNCTAD

36 EXECUTIVE VISIONS IT Outsourcing: Enhance your Performance through Progressive Value Generation An interview with Christian Oecking - SBS

37 EXECUTIVE VISIONS Offshoring strategies An interview with Chris Disher – Booz Allen Hamilton

40 World-class information technology equal to the scale and magnitude of the Olympic Games OLYMPIC GAMES – CASE STUDY

42 Europe’sBack-OfficeBabel:Will language derail offshoring? Paul Morrison – Alsbridge

44 Outsourcing with Siemens Business Services – Maximizing your Enterprise Performance SBS – PROFILE

46 Knowledge Process Outsourcing (KPO) – Opportunities and Challenges Marc Vollenweider – Evalueserve

50 Employee Transition Rebecca Scholl – ACS Europe

53 Inland Revenue’s ASPIRE Procurement Experience Don Brown – Former Commercial Director - Inland Revenue

56 Atos Origin hosts and manages critical business applications for Network Rail NETWORK RAIL – CASE STUDY

58 Criticism, Empowerment and the Growth of organizations Prof. dr Slawomir J. Magala – Erasmus University Rotterdam

61 Technology-based results ACS – PROFILE

62 EXECUTIVE VISIONS Look before you leap into Outsourcing An interview with Robert L (Bob) Carlson – Former HSBC Global Head Of IT Operations

65 Agfa Europe Shared Service Centre chooses a Data Management Capture solution to improve A/P process efficiency Luc Le Brun – Agfa-Gevaert

69 EXECUTIVE VISIONS Benchmarking overview An interview with Tom Olavi Bangemann – The Hackett Group

Section 2Governance

72 AchievingSignificantCost ReductionsthroughDataCenter ConsolidationforStandard CharteredBank STANDARD CHARTERED BANK – CASE STUDY

76 Outsourcingrelationshipsatwork: Settingguidelinesforbehaviour Leslie Willcocks – London School of Economics Sara Cullen – Cullen Group

80 TransparencyinOutsourcing John Dain – Atos Origin

83 Establishing/LivingaSuccessful StrategicPartnership Dr Peter Patzina –KarstadtQuelle

85 Theemergenceofdynamicsourcing partnerships-Acollaborative businessmodeldeliveringincreased businessimpact,agilityand innovation David Moschella – Computer Sciences Corporation (CSC)

88 EXECUTIVE VISIONS DoesTechnologyMatterinBPO Relationships An interview with Bernhard Fischer – SAP AG

90 AtosOrigin–Aleadingbusinessand technologyintegrator ATOS ORIGIN – PROFILE

93 Thefutureoffinance…usingBPO/ KPOtofixthebusinesspartnering problem Dr. Martin Fahy – National University of Ireland

96 ShapingRelationshipsthatLast– PrinciplesofDynamicSourcing David Thomas – Computer Sciences Corporation (CSC)

100 Fordynamic,innovative, results-drivensourcingsolutions,talk toCSC CSC – PROFILE

102 Retendering&Renegotiation Companiesoftenmisssubstantial costsavingsbyrubberstampingthe renewalofexistingdeals Stephen Dunn – Everest Consulting Group

108 InnovativeApplicationManagement andGlobalSourcingapproachgives PhilipsSemiconductorsanadded ‘Impulse’bringingsignificant businessbenefitsandcostsavings! PHILIPS SEMICONDUCTORS – CASE STUDY

105 EXECUTIVEVISIONS Disputeresolution An interview with Mark Appel International Centre for Dispute Resolution

110 OutsourcingContracts–Arethey worththepaperthey’rewrittenon? Gill Andrews – Bird & Bird

IBC Solutions Index

Contents

Contents

3www.cxoeurope.com

Section 2Governance

76 Outsourcing relationships at work: Settingguidelines for behaviourLeslie Willcocks – London School of EconomicsSara Cullen – Cullen Group

80 Transparency in OutsourcingJohn Dain – Atos Origin

83 Establishing/Living a Successful StrategicPartnershipDr Peter Patzina –KarstadtQuelle

85 The emergence of dynamic sourcing partnerships -A collaborative business model delivering increasedbusiness impact, agility and innovationDavid Moschella – Computer SciencesCorporation (CSC)

88 EXECUTIVE VISIONSDoes Technology Matter in BPO RelationshipsAn interview with Bernhard Fischer – SAP AG

90 Atos Origin – A leading business and technologyintegratorATOS ORIGIN – PROFILE

93 The future of finance… using BPO/KPO to fix thebusiness partnering problemDr. Martin Fahy – National University of Ireland

96 Shaping Relationships that Last – Principles ofDynamic SourcingSM

David Thomas – Computer Sciences Corporation(CSC)

100 For dynamic, innovative, results-driven sourcingsolutions, talk to CSCCSC – PROFILE

102 Retendering & Renegotiation Companies often misssubstantial cost savings by rubber stamping therenewal of existing dealsStephen Dunn – Everest Consulting Group

105 EXECUTIVE VISIONSDispute resolutionAn interview with Mark Appel – InternationalCentre for Dispute Resolution

108 Innovative Application Management and GlobalSourcing approach gives Philips Semiconductors an added ‘Impulse’ bringing significant businessbenefits and cost savings!PHILIPS SEMICONDUCTORS – CASE STUDY

110 Outsourcing Contracts – Are they worth the paperthey’re written on?Gill Andrews – Bird & Bird

IBC Solutions Index

www.cxoeurope.com

NB All illustrations within thispublication can beviewed at a larger scaleat the above website

TOP_06_Contents.qxd 12/7/06 4:36 pm Page 3


The Advisory

Panel

4 www.cxoeurope.com

David BarrettHead of IT and Telecoms practicegroup, London, Simmons & Simmons

David joined Simmons & Simmons in 2000 and heads the IT and Telecoms practice group in London. He also heads the firm's global TMTindustry sector group.

David Barrett is a leading figure in the world ofoutsourcing. Besides being recognised as a lawyerwith international experience in outsourcing, he isalso regarded as a 'thought leader' in all mattersto do with outsourcing and the globalisation of ser-vices - particularly in respect of information tech-nology. David has worked extensively with offshoreoutsourcing providers in India and now Chinatogether with company and government bodiesoutsourcing to international destinations.

David is a member of the World OutsourcingCouncil (the only lawyer to be on that body) and isDeputy Chairman of the International Associationof Outsourcing Professionals. He is also listed as aleading individual in the “Chambers Guide to theLegal Profession”; “Who's Who in the Law” and in“The World's Leading Lawyers”.

David received his legal education in the UKand USA.

John BuscherPartner, TPI

John Buscher is a Partner at the world's largestglobal sourcing advisory company, TPI. John hasover 24 years of finance and business experienceand he has been instrumental in helping large cor-porations achieve their sourcing aims by providingadvice and guidance in setting sourcing strategy,managing large outsourcing transactions andongoing sourcing management activities. John'sarea of expertise includes the information technol-ogy outsourcing (ITO) and business process out-sourcing (BPO) as well as shared services strate-gies across a wide range of industry sectors.

Before joining TPI, John held various managementpositions at EDS and Perot Systems. In his last role,he worked as a Business Development Manager.He was responsible for needs assessment, finan-cial analysis, financial costing, application/systemsoftware evaluation, hardware evaluation, datacentre operations and creative problem solving.

Robert L (Bob) CarlsonFormer HSBC Global Head Of ITOperations and Telecommunications

Bob Carlson is a Visiting Industry Associate atthe Oxford Internet Institute (OII) where he is writ-ing a book on ‘RightSourcing’ that outlines bestpractices for getting sourcing decisions right.

Bob is also Principle of Robert L CarlsonAssociates, a consulting and advisory service forglobal IT and sourcing issues.

Bob retired recently from HSBC after 25 yearsworking across the world. He was HSBC GroupHead of IT Operations and Telecommunicationsfrom June 2000 with responsibility for some 7,500related staff and the infrastructure that supportsHSBC's 100+ million customers and 250,000employees and 10,000 offices in 80 countriesworldwide.

John DainSenior Vice President GlobalManaged Operations, Atos Origin

John Dain has responsibility for all major inter-national outsourcing and the company's serviceportfolio. He has 30 years experience in the ITindustry and combines a broad technical knowl-edge with sound business and management expe-rience. John's main focus is to create a workingenvironment that challenges the technical andinnovative capabilities of all staff, is quality driven,and based on sound financial success.

He joined Philips Electronics in 1971 and wasappointed General Manager in 1986. In 1990 hewas appointed Regional Manager Philips C&PAsia/Pacific, and from 1990 to 1997 successfullyestablished companies in Australia, China, HongKong, Malaysia, Singapore and Taiwan. With thecreation of Origin he was responsible for mergingthese companies into the new organisation andfrom 1997 to 1999 was responsible for companyoperations in Brazil.

In 1999 John was appointed Vice Presidentresponsible for worldwide sales and marketing forManaged Services. In 2000 Atos Origin wasformed and in 2001 he was appointed to his pre-sent position. In 2001/2 he led the team that suc-cessfully won the largest outsourcing contract evercompleted by a European IT service company.

Stephan GroppDirector, Global Education BusinessPartners, Sun Microsystems

Since October 2004 Stephan Gropp is responsi-ble for managing the education business partnerrelationships on a global basis for SunMicrosystems. Before that he was the SeniorDirector of Sun Educational Services in EMEAbeing responsible for the entire education businessin that region. Together with his team he led theoutsourcing project of the instructor led training toAccenture in 2003 in his timezone. He joined Sunin 1998 as General Manager for EducationalServices in Germany/Austria. Mr. Gropp has beenin the IT industry for more than 25 years. He hasbeen a Director of Consulting and Training serviceswith Informix in Central and Eastern Europe. Priorto that he was at Amdahl for 15 years where heheld various support positions as Soft andHardware specialist, including 5 years as TechnicalSupport Manager for Central Europe.

David JordanVice PresidentIBM Europe

David Jordan is a Vice President of IBM and part ofIBM’s European Headquarters team. David is respon-sible for IBM’s major services sales in northernEurope. David’s previous roles in IBM have included;

General Manager for IBM’s major services busi-ness in Asia Pacific for the telecommunications,media and energy industries.

Vice President for IBM’s Consulting and SystemIntegration business to the telecommunications,media and energy industries for the UK, Netherlands,Middle East, Ireland, and Africa.

Prior to joining IBM, David was Head of Telecoms,Europe for Computer Sciences Corporation where hewas responsible for business in the telecommunica-tions industry in Europe. Earlier in his career, Davidfounded and ran his own telecommunications con-sulting business and spent four years as a Boardmember of one of British Telecom’s subsidiaries.

David has spent over 30 years in the computerindustry with 18 of these years in the telecommuni-cations industry. David has operated at Board levelwith P+L responsibility for 17 years and has special-ized in the consulting, systems integration and out-sourcing areas. David has worked and lived in theUSA, Europe and Japan and is currently based inZurich, Switzerland.

Les Mara Head of Business ProcessingOutsourcing EMEA, HP

Les has a 25 year career in the ServicesIndustry, with deep knowledge and expertise inConsulting, Systems Integration and Outsourcing.Over this time Les has worked in most IndustrySectors and with many significant organisationsthroughout Europe on challenging business change& Outsourcing programmes.

For the past 5 years Les has focused his effortson developing the BPO Services market in Europe.

Les has clear views on what is driving the rapidgrowth in demand for BPO and is passionate aboutthe customer service and the delivery of successfulbusiness outcomes.

Robert Morgan Director, Business & BrandDevelopment, Morgan Chambers

Part of the City's 1980s deregulation and liber-alisation, Robert worked with various Outsourcingvendors. As Outsourcing steadily became moresophisticated and a genuinely strategic Client deci-sion, he helped found Morgan Chambers (1994)the first independent, end-client centric, practition-er led Sourcing advice and support consultancy.CEO from 1999 - 2004, he is now responsible forgroup Business and Brand Development withinEurope.

TOP_06_Pan Biogs.qxd 12/7/06 4:39 pm Page 2

The Advisory Panel

5www.cxoeurope.com

Chris DisherVice President Booz Allen Hamilton

Mr. Disher is a Vice President and founding Partnerof Booz Allen Hamilton’s Global OutsourcingAdvisory Service. With over twenty-five years ofconsulting experience, Mr. Disher specializes inorganization and technology strategies for stepchange improvement in business performance. Hehas led global client engagements that involve costreduction, business operations and administrativeperformance improvement, and outsourcing. Mr.Disher is a founding member of the InternationalAssociation of Outsourcing Professionals servingon the Standards Board and as Chairman of theResearch Committee. He also serves as Officer inCharge for the Offshoring Research Initiative withDuke University. Mr. Disher is a frequent speakeron trends in outsourcing, offshoring, and IT effectiveness.

Mr. Disher completed a Double Masters inAccounting and Business Administration fromSouthern Illinois University. He holds a B.S. inEnvironmental Sciences from the University ofIllinois. Mr. Disher is a Certified ManagementAccountant (C.M.A.).

Steven Ferrari Service Development Director,Prudential

Steven has been with Prudential for three years.Recently, as Service Development Director, he isresponsible for the business development of theMumbai offshore centre that now employs over1000 people; outsourced policy administration inthe UK; and Customer Service Account Managementfor Distribution Partners, namely financial advisers,banks and employee benefit consultants.

Previously as Offshoring Director, he wasresponsible for setting up the Mumbai centre withmajor workstreams including company, propertyand IT infrastructure set-up; HR & ChangeManagement; Migration and Business Continuity.

Former employment included three years at AXAUK as Business Development Director for OffshoreService Centre in Bangalore (AXA BusinessServices) fulfilling the customer servicing needs ofAXA companies in the UK, Japan and Australia.

Prior to AXA, Steven spent three and a half yearsat PwC as a senior consultant in the ManagementConsulting Division for Financial Services -Strategic Change, specialising in strategy reviews,cost reduction, process improvement, outsourcingand offshoring.

Mr. Miguel Ribeiro FerreiraGroup Financial ControllerElectricidade De Portugal, SA

Mr. Miguel Ribeiro Ferreira was appointed headof our planning and control, consolidation, account-ing and tax office of EDP Energias de Portugal inAugust 2003. From August 2001 to July 2003 hewas head of treasury, consolidation, planning andcontrol, accounting and tax issues of NovabaseGroup (a Euronext/Lisbon listed company). FromApril 1993 to July 2001 he was responsible for BCPGroup's consolidation and financial & prudentialreporting (a Euronext/Lisbon listed company). FromSeptember 1991 to March 1993, he served as anAudit Staff at Price Waterhouse Audit Department.Mr. Ribeiro Ferreira holds a management degreefrom Lisbon's Instituto Superior de Gestão andpost-graduate degree in advanced corporatefinance from Universidade Católica Portuguesa,Lisbon.

Bernhard Fischer VP Solution Management, BusinessProcess Outsourcing – SAP AG

Bernhard Fischer is responsible for SAP’s solutionstrategy in regards to BPO. Prior to the SolutionManagement responsibility for BPO Bernhard ownedsolution strategy, solution delivery and customerssupport at SAP’s B2B-subsidiary SAPMarkets andSAP’s succeeding Business Unit “Marketplaces”.

Bernhard has been with SAP since 1990 execut-ing a variety of responsibilities including softwaredevelopment for the R/3 system administration suiteof tools, R/3 implementations in Europe and NorthAmerica, foundation of the Regional Support Centersin Walldorf, Singapore and Shanghai. Before joiningSAP he was member of a design team for the oper-ating software of PBX systems with German vendorSiemens-Nixdorf.

Bernhard holds a masters degree in Physics atthe Technical University of Karlsruhe.

Christian OeckingPresident of Global IT Outsourcing,Siemens Business Services

Christian Oecking is a member of the ExecutiveBoard of Siemens Business Services GmbH & Co.OHG and is responsible for the IT outsourcing busi-ness of Siemens Business Services globally.

He is especially interested in the strategicaspects of outsourcing projects and in their effecton the value of the respective partner companies.Christian Oecking is a recognised author andspeaker on the subject of strategic outsourcing.

Before joining Siemens Business Services in1998, Christian Oecking worked as Director ofBusiness Development at EDS DeutschlandGmbH. He is a graduate in civil engineering andstudied mechanical engineering at the Universityof Dortmund.

Dr Peter PatzinaCIO Mail Order KarstadtQuelle andManaging Director of Itellium GmbH

Dr. Peter Patzina is Managing Director of ItelliumSystems & Services GmbH, responsible for consul-tancy and systems integration for the mail-orderbusiness of KarstadtQuelle and also CIO of themail-order business of the group.

After studying business administration andcompleting a post-graduate-study, Peter Patzinastarted as a management trainee at Quelle in1990. After several management positions in IT hebecame CIO of Quelle and Neckermann, the twobig mail-order companies of KarstadtQuelle. In2003 he became Managing Director of Itellium.

Jean-Francois PoissonGeneral Manager - ContractManagement, Bell Canada

Jean-Francois is a member of the InternationalAssociation of Outsourcing Professionals (IAOP) anda Certified Outsourcing Professional.

As General Manager- Contract Management,Jean-Francois Poisson is currently responsiblewithin a real estate team to manage Bell CanadaReal Estate Management Services Agreement; one of the largest real estate outsourcing venturesin Canada.

Previously, Jean-Francois has participated withinthe Outsourcing Team to the development of out-sourcing governance processes, and in setting upimportant outsourcing projects between BellCanada and outside providers.

Jean-Francois combines theoretical modelknowledge to the daily management experience ofoutsourcing ventures. He’s a sought after guestspeaker for various outsourcing events across theUSA and Europe, and a contributor to the first MRIand CXO outsourcing projects.

Rebecca Scholl Director Of Strategy ACS Europe

Rebecca is Director of Market Strategy for ACSin Europe. She is responsible for developing ACS'BPO value proposition in Europe, providing marketintelligence, assisting on overall marketing effortsin Europe, helping form partnerships, identifyingacquisition candidates and developing influentialbusiness relationships in Europe.

Prior to joining ACS in 2004, Rebecca was the principal analyst at Gartner, Inc. covering the BPO market.

During her five years at Gartner, Rebecca pub-lished numerous reports on BPO Market Trends,including The Rise of BPO in 2000 (2001), BPO atthe Cross-Roads (2002), BPO Validated:Verticalization and Aggregation Accelerate (2003).

Prior to Gartner, Rebecca was a senior consultantat BIPE in France, specialising in the pharmaceuticaland telecommunications industry segments.

Rebecca earned a master of science degree inmanagement from the Community of EuropeanManagement Schools at the Ecole des HautesEtudes Commerciales (HEC) in Paris and a degreein international economics at the Institut d'EtudesPolitiques de Paris. She is fluent in English, French,Spanish, and Russian.


www.cxoeurope.com

Thank YouWe would like to thank all those members of theoutsourcing industry worldwide, who have beenso generous with their time, advice and assis-tance during the production of this book. Thereare too many to mention by name – but youknow who you are!

Achieving Competitive Advantagethrough Collaborative Partnerships

©CxO Research Limited

The entire contents of the publication are protect-ed by copyright, full details of which are availablefrom the publisher. All rights reserved. No part ofthis publication can be reproduced, stored in aretrieval systems or transmitted in any form or byany means - electronic, mechanical, photocopy-ing, recording or otherwise – without the priorpermission of the copyright owner.

Published by:

CxO Research LimitedBarnhill House, 30 Barnhill RoadHayes, Middlesex. UB4 9AP

Tel : +44 (0)208 845 2248Fax: +44 (0)208 845 9512

email: [email protected]

Publisher . . . . . . . . . . . . . . . .Tony H.Johal

Publishing Consultant . . . . . . .Ron Lawson

Editor . . . . . . . . . . . . . . . . . . .Richard Hampson

Art Director . . . . . . . . . . . . . . .David Witcomb

New Media Consultant . . . . . .Richard Starr

Production . . . . . . . . . . . . . . .Nina Kaur

Accounts . . . . . . . . . . . . . . . .Naginder Johal

Issn: 1476-2064

While every effort is made to ensure the accuracyof the contents of this book, the publisher acceptsno responsibility for any errors or omissions, or anyloss or damage, consequential or otherwise, suf-fered as a result of any material here published.

The publisher assumes no responsibility for state-ments made by advertisers in business competi-tion, nor do they assume responsibility for statements/opinions expressed or implied inthe articles of this publication.


The Advisory

Panel

6 www.cxoeurope.com

Neil SmithChief Operating OfficerRisk Management, Deutsche Bank

Neil Smith is the Chief Operating Officer forDeutsche Bank's Risk Management division. Sincejoining DB in 1996, Neil has led numerous efficien-cy drives, including outsourcing initiatives for bothlow level data process and high value knowledge-based services. Prior to DB, he spent three yearsat Credit Suisse, two as head of its collateral man-agement group and a year as Head of EuropeanEquities within product control. Neil trained as achartered accountant with KPMG and upon qualify-ing spent three years with the Institute ofChartered Accountants of Scotland as both a lec-turer and manager of the London training centre.He has a BA in business studies from the RobertGordon University, Aberdeen.

Welcome to the fourth edition of TheOutsourcing Project - Achieving CompetitiveAdvantage through Collaborative Partnerships.This report and the accompanying website aredesigned to put you in touch with the best outsourc-ing solutions available today.

This issue includes white papers from consul-tants, academics, end users and industry solutionproviders. These are the individuals who have thevision and the sense of community to contribute toThe Outsourcing Project. For that we thank them,and trust their efforts will be appreciated andreflected in your support.

We would also like to offer our thanks to each ofour editorial advisory panel members for their support and guidance.

The complete content of the report is also mirrored on the website at www.cxoeurope.com

Make sure you regularly visit the website to findupdates, fresh insights, news and guidance.

We hope you enjoy reading this edition and passit on to other members of your organization.

Finally, if you have something to contribute tothis forum please get in touch.

Tony [email protected]

David ThomasVice President, European BusinessDevelopment, CSC

Mr. Thomas is a vice president within CSC'sEuropean Business Development group, a special-ist unit focusing upon large-scale outsourcingtransactions and acquisitions.

Mr. Thomas has been in the IT industry for morethan 20 years. He has worked for a number ofglobal companies and has held senior positions insales management, international marketing, busi-ness strategy and acquisitions. He has workedwith a financial services focus for over a decade -within capital markets as well as retail finance. Hehas a deep understanding of outsourcing - of bothIT and business processes. Mr. Thomas has a BScin Pure Mathematics and Economics.

Leslie WillcocksProfessor of Information ManagementWarwick University Business School

Leslie has an international reputation for hiswork on e-business, information management,IT evaluation and information systems outsourcing.He is Professor of Information Management and E-business at Warwick Business School, AssociateFellow at Templeton College, Oxford, and holdsseveral visiting professorships. He is co-author of24 books and over 150 refereed papers in journalssuch as Harvard Business Review, SloanManagement Review, California ManagementReview, MIS Quarterly, MISQ Executive. In February2001 he won the PriceWaterhouseCoopers/MichaelCorbett Associates World Outsourcing AchievementAward for his contribution to this field. He is a reg-ular keynote speaker at international practitionerand academic conferences, and has been retainedas adviser by major corporations and several gov-ernment institutions in the UK, USA and Australia.Books include Global IT Outsourcing (Wiley, 2001)and Intelligent IT Outsourcing (Butterworth, 2004)

Introduction


Section 1

Section 1www.cxoeurope.com

Strategy

TOP_06_Section 1.qxd 12/7/06 4:40 pm Page 1

BUSINESS CASE OUTLINE

IntroductionFor many, preparing an outsourcing busi-

ness case is a daunting task; what informationshould be made available, how much shouldbe disclosed, which detail would be relevantand really helpful to make and enlighten deci-sion? In reality, it is much simpler than onemight think. The business case should builditself throughout the decision making processfollowed by the organization.

This white paper is intended to be used asa guide for the preparation of anyOutsourcing Business Case. It is purposelygeneric so it applies to any type of outsourc-ing. The reader may also find it useful as aguide or a step by step process to conduct theoutsourcing analysis.

StrategySECTION 1

8 www.cxoeurope.com

Business Case PrimaryPurposes

The first objective of the OutsourcingBusiness Case is to document, in a compre-hensive manner, the strategic analysis leadingto the outsourcing decision.

Secondly, to document in a rigorous man-ner, how outsourcing upon the contemplatedterms is an attractive opportunity for the enter-prise.

And lastly, to clearly define the future modeof operations by providing a ‘blueprint’ of howit will be achieved. In other words; to formu-late a clear vision of how the outsourced ser-vices will be offered within the enterprise, toidentify all operational, organizational (HR)and financial impacts on the enterprise bottom

InsourceOutsource

• Executive Summary

• Strategy

• Operations

• Human Resources

• Financials

• Communications

Business Case

Evaluate OutsourcingBusiness Case

Yes

Yes

Yes

No

No

No

regularreview

Insource

Insource

Is the servicestrategic (core)

to Bell?

CorporateStrategic

Imperativesand Core

Competenciesregularreview

Isthere a

significant opportunity to be gained by outsourcing?

Will outsourcing, at this time,resolve a significant

constraint*?

Willoutsourcing,

at this time, introduce a significant risk?

Is there, at this time, asignificant unresolved

constraint*?

Figure 1: Illustration of an outsourcing decision process.

Jean-Francois PoissonGeneral Manager - Contract ManagementBell Canada

TOP_06_BellCanada_wp 12/7/06 4:41 pm Page 2

is seeking to do and what it will gain from out-sourcing the activity (ie. cost competitiveness,improve quality, access to technology,increase control, variable cost structure, flexi-bility, etc....).

• Strategic ChoiceAn assessment of the outsourcing options

and the competitive advantages over the sta-tus quo.

• Strategic ObjectivesA description of what the enterprise is

seeking from the outsourcing transaction andrelationship. This would include future oppor-tunities between the enterprise and theprovider and the importance of the relation-ship to the enterprise.

• Structural ModelA review of potential outsourcing structural

models such as: Divestiture, Sale of business,Subsidiary, Joint Venture, etc. and the recommen-dation of the most desirable financial structure.

• Contractual ModelAn evaluation of potential business models

(General/Sub Contractor, Consignment,Principal/Agent, etc.) with a recommendationof a contractual model that will meet the out-sourcing objectives.

• Provider Selection and/orRecommendation

A recap of the potential providers, and abrief review as to why these providers could beselected. (ie. financial stability, management,ownership, market growth, expertise, pastexperience, business fit, etc,).

• Risk MitigationA risk mitigation matrix highlighting the major

risks to proceed with the outsourcing as well asthe mitigation tactics to address these risks.

• Exit StrategyA description of the alternatives available

should the relationship prove unsatisfactoryand/or re-entry strategies should the enter-prise decide to repatriate the function in thefuture.

OperationThe operational section/plan outlines how

the outsourced activities will be transitioned,and how the relationship will be structuredand managed. The operation plan sets out the

SECTION 1Strategy


line, and explaining how this initiative will becommunicated to all stakeholders.

The Business Case must be a self con-tained, stand-alone document which articu-lates clearly the critical elements of the pro-posal and outlines the outsourcing rationale. Itprovides a permanent record of the project andserves as a detailed document for board pre-sentation and senior executive endorsement.

As previously documented in two previousarticles published by the author under MRI andCxO Research Ltd, succeeding at business pro-cess outsourcing has a lot to do with makingthe right strategic decision, transitioning theoperations and the human resources, develop-ing the proper contractual and financialmodel, and properly communicating through-out the process. Hence focus the OutsourcingBusiness Case around the five key outsourcingdimensions shown in FIG. 2

Executive SummaryLike any other Executive paper, the first

section should be the Executive Summary, thelatter provides an overview of all the key ele-ments of the outsourcing initiative and a sum-mary of the five following sections:

• Strategy • Operation• Human Resources • Financial• Communication

9www.cxoeurope.com

It summarizes key issues and highlights theconclusions and recommendations for a quickunderstanding of the outsourcing solution.

The executive summary should also con-tain an Authorization Section with the appro-priate corporate approval workflow of theexecutives who are required to Recommend,Endorse, and Approve the outsourcing project.

StrategyThe strategic section/plan outlines the

assessment of the enterprise seeking out-sourcing solutions. It describes the currententerprise situation, highlights industry trendsand benchmarks, and shows process compar-isons between the enterprise and the industy.The following analysis supports the rationalefor selecting the proposed alternate servicedelivery model or outsourcing.

Here in more detail what the Strategic plandiscloses:

• Overall StrategyA clear articulation of the business defini-

tion, a description of the key factors drivingchange within the enterprise as well as themarket within which they operate, the enter-prise strategy to respond to these changes andthe impact this will have on its operation, cus-tomers, and labour force.

• Business RequirementsA clear articulation of what the enterprise

“The outsourcingecosystem is asystematic approach toproceed with each phaseof any type of outsourcing throughoutits duration”

StrategyOperations

FinanceHuman Resources

Communication

ManagingRelationship

Implementation DevelopBusiness Case

Outsourcingassessment

Identifyopportunity

Recompeting

Figure 2


StrategySECTION 1

10 www.cxoeurope.com

• Management of the FinancialProcesses

A description of how the financial relation-ship would be managed. This will include ele-ments such as: the mechanism for billing andpayments, etc.

• Financial StudyLastly, any economic studies and conclu-

sions to support the outsourcing decision andbusiness model.

CommunicationThe communication section/plan outlines

the communication components of the out-sourcing project; moreover, how it will beimplemented. The communication planensures that the current partner relationship iswell known to all stakeholders in a timelymanner.

• Enterprise Employee Communication Plan

This plan should have two components:first, a general communication strategydesigned to keep employees affected by theoutsourcing and their union (if any)informed of the status of the transaction;and second, an individual communicationstrategy designed to keep each employeeinformed of the impact of the outsourcing onhim or her.

• Customer Communication PlanA communication plan focused on com-

municating to customers the impact the out-sourcing will have on them as well as thechanges which will likely take place movingforward. In some instance, a jointly enter-prise/provider communication might beappropriate.

• Regulatory and orGovernment/Community Communication Plan

If required, a communication strategy todemonstrate to any regulatory organizationthe resulting impact of the outsourcing deci-sion on the constituents.

• Union A communication strategy that comply

with the current union and any legal boardrequirements.

mechanisms through which the enterprise willimplement its strategic plan.

This section likely includes the followingkey elements:

• Division of Functions, Roles andResponsibilities

A description of the outsourcer functions,roles and responsibilities. From the client per-spective, a description of the ‘stay back team’retained in the enterprise. Such a team is usu-ally required to take over the management ofthe business relationship and to act as thepoint of contact between the enterprise andthe provider.

• Transition activitiesA description of the transition phases and

their respective timelines.

• Division of Assets and SystemsA description of which assets and systems

will need to be shared with the provider andhow the risks of giving such access to a thirdparty will be controlled and safeguarded.(Gateways, Restricted Access, Logical AccessControl, etc).

• Management of day to day operationsA day to day interface and escalation pro-

tocol.

• Management of the OverallRelationship

A description of how the overall relation-ship would be managed. This must includeidentification of the key people involved andthe protocol for periodic senior executiveinterfaces.

• Management of Outsourcing ContractPerformance

A description of how performance underthe contract would be measured and man-aged, including the description of the keyperformance measures and incentive formu-la if any.

Human ResourcesThe Human Resource section/plan out-

lines in some detail how the enterpriseHuman Resource members are impacted bythe outsourcing and what the potential out-comes are.

This section would likely include the fol-lowing clarifications;• Division of Human Resources

It provides a summary of the resourcesaffected by the project. The HR plan documentsthe migration of resources to the provider ifany, or their re-assignment in the enterprise aswell as the potential for the employees to beeligible for retirement and the estimate of theseverance costs of such alternatives.

• Diagnostic of the enterprise’s HumanResource Needs

An identification and diagnostic of thehuman resources required within the enter-prise to implement the plan set out above(transition team, ongoing management team,‘on site manager’, etc.). An emphasis on thecompetencies or expertise required to excel inthe new mode of operation. If need be, theskills and knowledge gaps with a plan for fill-ing such gaps.

• Diagnostic of the Provider's HumanResources Needs

An identification of human resource (man-agement and non-management) required bythe provider to implement the outsourcing setout above.

FinancialThe financial section/plan outlines the

financial rationale for outsourcing this businessactivity and the financial impact that the trans-action will have on the enterprise bottom line.

This section includes;

• Financial BaselineA set of financial pro forma reflecting the

impact on the business after proceeding withthe outsourcing as proposed for the durationof the outsourcing term.

• Incremental Impact of Transaction onthe Provider

If relevant, a set of financial statementsreflecting the impact on the provider of thetransaction as proposed.

• Provider's ValuationA valuation of the provider's business as a

stand alone business operating as a goingconcern.


Section 1Strategy


11www.cxoeurope.com

ConclusionIt is imperative to make The Outsourcing

Business Case (OBC) speak. The OBC needs tocatch executives’ attention, bottom line is thatit is about getting executives’ buy-in.

Unfortunately for many, outsourcing busi-ness case means finance and it is all aboutcost…true that the financial plan might drawthe most attention at this point; however, out-sourcing best practices are more than justmoney talk. Outsourcing implies the transfor-mation and the transition of critical businessactivities involving People, Processes andTechnology.

When facing outsourcing failures, manyblame the lack of relationship managementand unrealized benefits. Other questionsshould also be raised, was there anOutsourcing Business Case to start with? Wasthe outsourcing decision made on a solidground?

This article, part of a series of outsourcingpapers, is aimed at simplifying outsourcing

processes. The reader may want to review twoprevious white papers entitled TheOutsourcing Performance Assessment Modeland The Outsourcing Business Plan, whichtogether might be useful in guiding the out-sourcing journey.

BiographyJean-Francois is a member of the

International Association of OutsourcingProfessionals (IAOP) and a CertifiedOutsourcing Professional.

As General Manager- ContractManagement, Jean-Francois Poisson is cur-rently responsible within a real estate team tomanage Bell Canada Real Estate ManagementServices Agreement; one of the largest realestate outsourcing ventures in Canada.

Previously, Jean-Francois has participatedwithin the Outsourcing Team to the develop-ment of outsourcing governance processes, andin setting up important outsourcing projectsbetween Bell Canada and outside providers.

About the AuthorJean-Francois combines theoretical model

knowledge to the daily management experi-ence of outsourcing ventures. He’s a soughtafter guest speaker for various outsourcingevents across the USA and Europe, and a con-tributor to the first MRI and CXO outsourcingprojects.

N.B. This white paper contains certain forward-

looking approaches and statements thatreflect the current views and experimentationof the author with respect to his involvementin outsourcing, and are subject to discre-tionary usage in Bell Canada.



MEGA-DEALS, MULTI-SOURCING ANDVALUE: A PERSPECTIVE ON THE FUTURE OF IT OUTSOURCING.

• 11.8 points higher annual EBIT growth• 16.1 points higher ROA growth• 5.7 points lower SG&A growth.

In addition to this compelling picture, the improvement inearnings was greater for larger outsourcing deals (figure 1).

In a survey conducted during 2005 of over 800 European firmswhich had outsourced, Gartner2 noted that “satisfaction levels withservice provisioning are consistently high across continental Europe”.Less than 10% of those questioned considered in-sourcing as anoption – and even in many of these cases, it was a matter of scopeadjustment rather than complete termination of the agreement.

So what does this all mean? The facts point to a high level of satisfaction with existing outsourcing agreements and demon-strable, long-term business benefits from outsourcing IT.

Q) Is the mega-deal a thing of the past?Much as been made recently about the shift in client buying

behaviour to smaller ‘less risky’ deals – the mega-deal is dead and‘multi-sourcing’ is the vogue. Let me first explode a few mythshere. Our own analysis of publicly announced IT outsourcingdeals in Europe shows that, for contract values above $500M,signings levels in the last few years have rarely been higher sincethe market first started 20 years ago (figure 2). A recent reportfrom TPI3 specifically on mega-deals confirms this picture.

Of course, there are now an increasing number of ‘secondgeneration’ deals to swell the numbers – renewals of contractsfirst signed 7-10 years ago. However, the fact that these are beingrenewed as broad-scope ‘mega-deals’ serves to reinforce thenotion that for many clients, such arrangements deliver the bestoverall business and financial value.

Overall, we have certainly seen many more smaller deals andthis arises due to many factors – only some of which relate tobuyer behaviour:• contract length: some clients are signing shorter contracts:

3-5 years compared to 7-10 years. In some cases, the clienthas done this to increase flexibility by providing contractual‘break-points’. Another factor is the growth in applicationsmanagement outsourcing where shorter deals have alwaysbeen the norm compared to infrastructure outsourcing. So the

Q) Some commentators say that outsourcing has failed todeliver on its promise and that ‘in-sourcing’ is the next wave:what is your view?

There has certainly been some degree of scepticism in themarket about the true benefits of outsourcing – but lets look at thefacts. First we must recognise that, beyond any tactical benefitssuch as immediate cost savings, the longer-term business bene-fits will always be difficult to prove conclusively. Various studieshave demonstrated the positive short-term impact of outsourcingdecisions on company share prices but the multiplicity of marketforces hinders the demonstration of any long term link. However,IBM Research and Harvard Business School recently analysed asample of 56 outsourcing deals and their impact on some impor-tant client financial metrics: Earnings Before Interest and Taxes(EBIT), Return on Assets (ROA) and Sales, General andAdministration expenses (SG&A). The work1 looked at deals witha range of service providers – not just IBM. Compared to theirsector peers, those companies which outsourced were shown tohave performed much better in the two years following the out-sourcing decision:

An interview with David Jordan Vice PresidentIBM Europe

EXECUTIVE VISIONS

Figure 1: Relationship between the size of the IToutsourcing agreement and growth in earnings

TOP_06_IBM_EV.qxd 12/7/06 4:42 pm Page 2


deals are similar in scope but the shorter duration means asmaller total contract value.

• global sourcing: we have seen the increasing acceptance ofglobal sourcing models creating additional pricing pressure –originally in the applications arena but increasingly aroundinfrastructure services. So the deals are similar in scope butthe costs are lowered by the suppliers.

• market maturity: as the market has developed and sourcingknow-how has increased, a greater number of smaller com-panies have sought the benefits of IT outsourcing. So morecompanies are on the ‘outsourcing runway’ expanding themarket and the deal landscape is increasingly reflecting thesesmaller company deals.

• multi-sourcing: some clients have decided to let multiplecontracts in parallel (eg desktop, datacentre, applications,network) rather than a single broad-scope deal. However,many clients have multiple outsourcing providers due entirelyto historical reasons: possibly they started with a desktop dealthen as confidence and experience developed, they let a sep-arate contract covering the datacentre a few years later.Perhaps their first contractor was not able to provide the addi-tional services. So there are certainly more ‘multi-sourced’arrangements than there were, the trend however has beengradual – not the avalanche that many claim.

What does all of this mean? Well the market remains largewith a diverse range of customers and customer requirements butthe mega deal is very much ‘alive and kicking’.

Q) But aren’t mega-deals just too risky these days – we haveseen some large deals terminate?

It is interesting that you mention risk. It used to be the casethat outsourcing was just about cost savings but today it is alsoabout the transfer of risk from the customer to the supplier. In thehugely competitive and fast moving business world of our cus-tomers, the risks involved in deploying IT are both intense andmaterial to the results of their business - the assurance that the ITwill succeed can outweigh any potential cost savings. However,if a client chooses the right supplier, he can transfer the risks tothem, be assured of a positive outcome and begin to enjoy addi-tional benefits of flexibility and value that were not possible withhis more limited resources.

The analogy I use with many clients is that of a senior busi-ness executive hosting an important dinner party. If the event isimportant enough, he or she will want to ensure that their guestsare properly attended to by hiring a professional chef. The chefwill be someone they trust and rely upon to gather the best qual-ity ingredients, put in the hard work and take away their concernsover the catering arrangements. Furthermore, the meal needs tohave the right balance of courses and flavours so they’ll use a sin-gle chef for the entire event – not a different one for each course!Its all about flexibility and capability as well - a professional chefis more likely to be able to cope with last minute additional guestsand requests for vegetarian alternatives!

Returning from our analogy, multi-sourcing has its place inthe market but in our experience, if you select capable and suit-ably flexible suppliers, the benefits of larger, broader-scope dealsare clear:• fewer interfaces and boundaries of responsibility – hence less

risk of failure;• less management effort for the client – hence a potentially

smaller retained organisation;• clearer contractual responsibilities – the client has only ‘one

tie to grab’;• greater scale and therefore greater overall cost savings;• greater interest from the supplier to provide additional value -

he sees his fortunes tied more closely to those of his client.

These benefits are brought into even sharper focus if you con-sider that most outsourcing contracts are no longer about ‘yourmess for less’ – they are much more about driving transformationand innovation - about delivering company wide, global process-es, improving service levels and improving IT’s link with the busi-ness. It is very difficult to secure large scale transformation whenall of the components are ‘owned’ by separate service providerswith their own responsibilities, motivations and agendas.

Sure, we have seen some large deals terminate. Opinionstowards outsourcing can sometimes be almost religious. When achange of CEO or company ownership occurs, changes in sourc-ing strategy can lead to difficult decisions. Sometimes, expecta-tions on both sides can be over-optimistic and when not met,problems occur – that’s when you find out how good your jointrelationship management has been! There is also the harsh real-ity that bad news makes very good press. Only a small fraction oflarge deals unwind and when they do, it tends to be more visible.It is a testament to the outsourcing industry and their clients thatsuch large undertakings can execute smooth ‘reverse-transition’of assets, staff and responsibilities back to the ‘in-house’ state.

Q) Doesn’t multi-sourcing allow a client to select best-of-breed contractors?

The theory here is clear – but quite often, the procurementprocess does not direct the client towards best-of-breed suppliersbut rather ‘medium-breed-but-cheapest’. In those scenarioswhere multi-sourcing is a tool adopted principally to beat pricesdown, there are few long term winners – least of all the client – ifvendor margins reach unsustainable levels. If the servicesrequired are heavily commoditised then price will certainly be themain criterion but it is easy to overlook other considerations con-

13www.cxoeurope.com

EXEC

UTI

VEVI

SION

S

Figure 2: Total European IT outsourcing signings by year fordeals larger than $500M total contract value (source: IBM analy-sis of publicly announce deals)


An interview with David Jordan, Vice President, IBM Europe


EXECUTIVE VISIONS

cerning overall business value. Chief financial and operating offi-cers are looking for new ways to meet business requirements andoften, it is more than just a technology or cost debate.

Additionally, in a world where customers are looking to trans-fer risk, multi-sourcing fails completely because the customer isthe integrator and retains the overall risk of failure. Furthermore,each supplier with their cheapest bid component has little under-standing of the customer’s overall strategy and little incentive forinvestment to deliver additional business value.

Depending on the client situation, multi-sourcing can indeedbe exactly the right strategy. When executed poorly however,multi-sourcing reminds me of John Glenn’s famous remark whenasked what went through he mind when he was crouched in theApollo nose-cone at launch-time: “I was thinking that the rockethad twenty thousand components, and each was made by thelowest bidder".

Finally, and speaking frankly, multi-sourcing has been with usfor decades. IBM and other providers have for many years beendriving best-of-breed service delivery by integrating specialistthird-party suppliers into their delivery strategies as part of con-sortium approaches. Sometimes, a service provider has capabil-ities to meet certain price points, niche skills or perhaps they werethe incumbent within a prior sourcing arrangement and havebeen retained to reduce risk. However, the lead service providerremains the single point of responsibility to the client for overalldelivery and, in the case of commoditised services such as net-work bandwidth provision, the lead contractor can benchmarksuppliers and introduce alternative sources of supply in line withchanging client needs and supplier offerings.

We have for decades been making a success of multi-sourcingbut where the new trend is different is the dis-intermediation ofprime supplier contracts. This dis-intermediation can savemoney but at the cost of risk and value; this is a worthwhileexchange for some clients and a disaster for others.

Q) We hear a great many claims about outsourcing deliveringbusiness value – what’s the best way to make it happen?

To me, business value is about ensuring that an outsourcingarrangement not only meets the required savings and/or deliveryperformance improvements – but also has a direct impact on theclient’s primary business objectives. These might relate to profitand revenue growth, market share acquisition, market entry or amyriad of other scenarios. The sourcing relationship should beable to positively influence the speed of achieving these businessgoals and/or significantly de-risk them. In doing so, one thing iscertain: it is much more than just about IT.

Let me provide a practical example from the telecommunica-tions sector. In the telco business, a short time-to-market for newservices is critical. However, the IT to support them involves newapplications integrated with existing delivery and billing plat-forms. The more standardised and flexible these platforms – thefaster new services can be launched. The telco could outsourcethe service creation/service operation and measure the supplieron running the existing platform for less. However, there wouldbe more business value in engaging a supplier who could alsotransform the end-to-end process and be measured on speed tomarket and service profitability.

This is where the subject touches again on multi-sourcing. Ifyou want to use outsourcing to drive business and IT transforma-tion, multi-sourcing will not be appropriate unless the client takeson the management and governance challenge, bears the addi-tional integration cost and also assumes the associated risk offailure. If you invest in a trusted supplier to manage that risk, theymust of course have appropriate control of the means to success-fully deliver. Stretching our analogy somewhat, we could chal-lenge our chef to be paid on the basis of how many complimentsthe meal attracted from guests during the evening. However, theymight be somewhat reluctant to commit to this if we’d commis-sioned another chef to prepare the first course or that we’dalready ordered the ingredients on their behalf from a cheapsupermarket.

Two areas of obvious synergy are infrastructure and applica-tions. We find that many organisations could reap major advan-tages and cost savings by rationalising the management of legacy applications. By outsourcing both applications manage-ment and infrastructure, a service provider has the leverage todriving significant costs savings, free up funds for reinvestmentand better integrate both areas for improved flexibility and otherbusiness benefits.

One aspect of business value is innovation - it matters tomany of our clients and is part of the IBM culture. Our most suc-cessful client relationships are those where the client has neededto drive transformation and has benefited in doing so by tappinginto the many technology, business, research and product expertswithin the company and its partners. Leveraging this capability isfar more effective within a broader relationship spanning bothbusiness and IT. We call this process Innovation Sourcing4.

Q) Don’t clients worry about their loss of control through out-sourcing?

Yes – there is always a delicate balance. This is exactly whyoutsourcing is a strategic decision for an organisation and shouldnot be a knee-jerk reaction to a few bad financial quarters. A client needs to have a well-developed sourcing strategy, beclear what the objectives are and ensure that there are realisticexpectations. If they go through this process, they make a con-scious decision as to what controls (and risks) they can transferto a partner and those they need to retain. The latter will relateto operations which drive competitive differentiation – perhapsrelated to critical customer- or supplier-facing processes.

Once in an outsourcing relationship, the right contract, cou-pled with the right governance approach should provide all of theflexibility and controls a client needs consistent with the service

Depending on the client, multi-sourcing can indeed beexactly the right strategy. When executed poorly however,multi-sourcing reminds me of John Glenn’s famous remarkwhen asked what went through he mind when he wascrouched in the Apollo nose-cone at launch-time: “I wasthinking that the rocket had twenty thousand components,and each was made by the lowest bidder".


• breadth of service: via consolidation or alliances, serviceproviders will continue to widen their service portfolio to har-ness ‘best-of-breed’ capability; they will also look to improvethe industry knowledge and process skills required to drivethe transformation we have been discussing. Unless they doso, suppliers will be left with only a fiercely competitive,increasingly commoditised market to pursue.

Fortunately for IBM, we already have the global deliveryinfrastructure and breadth to compete – but this is only a ticket tothe game. To win it, we’re working hard on delivering the busi-ness value and innovation that clients expect.

References1. “Business impact of outsourcing – a fact-based analysis”,

IBM Global Services, 2005, http://www1.ibm.com/ser-vices/ondemand/outsourcing_report.html

2. “Multi-client study: Utility Outsourcing, ApplicationManagement and Business Process Outsourcing -Outsourcing Trends in Western Europe - 2005’, GartnerDeutschland GmbH, 2006

3. “The Many Myths of Mega-Deals”, 2005, TPI white paperavailable at http://www.tpi-sourcing.com

4. “Innovation Sourcing: Increasing Business Value WithinOutsourcing Relationships”, T Clifton and J Benaroya (IBM),http://www.cxoeurope.com/documents.asp?d_ID=73

5. “IDC’s Top 100 Global Outsourcing Deals of 2004”, Nov 2005,IDC #32024

(C) Copyright IBM Corporation 2006, All Rights Reserved

IBM, the IBM logo, the e-business logo, e-business on demand, e-businessHosting and WebSphere are trademarks or registered trademarks ofInternational Business Machines Corporation in the United States, othercountries, or both.

Other company, product and service names may be trademarks or servicemarks of others.

References in the publication to IBM products or services do not imply thatIBM intends to make them available in all countries in which IBM operates.

provider’s assumed responsibilities. The key here is ‘the rightcontract’ which recognises the client’s unique business direction,plans and objectives. Blindly copying other companies’ supplycontracts or following one dimensional advice from the army ofoutsourcing commentators will almost certainly lead to failure forall concerned.

Q) How do you see the outsourcing market develop over thenext 2-3 years?

The outsourcing market is a fascinating one – it has been thedriver of IT services growth for many years now and the compet-itive landscape has changed dramatically from its early days. Thelast few years have seen the rapid increase in global sourcingsolutions as well as the explosion in business process outsourc-ing. It is therefore somewhat difficult to predict the future.However, I see two segments emerging:• selective deal market: where clients decide that outsourc-

ing is appropriate to a limited scope of operations and/orwhere a multi-sourcing approach meets their specific needs.IBM will remain a key player in these opportunities – indeed arecent IDC study5 identified IBM as the leader in terms of newdeals signed and the leader in terms of participation in multi-sourcing contracts;

• broad-scope deal market: focussed increasingly on risk-reward, value-priced deals covering a broader scope of IT and business process operation. They are invariably trans-formational in nature and require suppliers with broad-scopecapabilities and/or consortium-based approaches. This mar-ket will continue to provide a consistent level of signingsopportunity year-on-year – including mega-deals.

One important caveat here: deal size is purely a relative term.Service providers forget at their peril that any outsourcing decisionis strategic in the context of the client so whilst a deal for $20Mmay by relatively modest in the wider deal landscape, for thatclient, it is probably a huge financial and (for some) emotionalcommitment. We envisage many of these broader-scope risk-reward, value-based deals to be relatively modest in size.

Q) Finally, if this is what’s happening in the market, how willthe competitive landscape change?

I believe that we will continue to see a number of shifts in thesupplier landscape. Primarily, we’ll continue to see consolidationprompted by two basic needs:• scale: service delivery today is all about scale economies and

leveraging global resources. Many suppliers lack the neces-sary scale in order to compete in a sustainable manner;

IBM will remain a leader in both market segments – theselective deal market driven by multi-sourcing plus thebroader-scope deal market driven by transformational deals


15www.cxoeurope.com

EXEC

UTI

VEVI

SION

S


KNOWLEDGE TRANSFER IS THE KEY TO SUCCESSFULSTRATEGIC OUTSOURCING

Knowledge Transfer inStrategic Outsourcing

Today, nearly every manager calls theiroutsourcing deals ‘strategic.’ In reality, muchof outsourcing is still about cost reduction inback-office services. For us, the term ‘strategicoutsourcing’ is restricted to circumstances forwhich suppliers play a key role in helpingclients deliver innovative products to the mar-ket faster and cheaper than competitors.

Based on 160 interviews with US clientsand their Indian suppliers, we found that themain impediment to strategic sourcing isknowledge transfer. At the outset, both partiesrealize that strategic outsourcing requires thesupplier to deeply understand the client’s busi-ness and technical domain. But there is often adisconnect between what each party means by‘domain expertise.’ To the supplier, domainexpertise means understanding the client’sindustry. To the client, domain expertisemeans understanding the clients particular

Dr. Joseph W. RottmanAssistant Professor of Information SystemsUniversity of Missouri, St. Louis

Dr. Mary C. LacityProfessor of Information SystemsUniversity of Missouri, St. Louis

StrategySECTION 1


business, technology, products, markets andprocesses. (See Figure 1)

The key to strategic outsourcing is under-standing the knowledge gap and how to fill it.Knowledge transfer entails balancing costs(such as supplier training) against risks (suchas loss of intellectual property.) Our researchuncovered five lessons on effective knowledgetransfer (see Table 1). Three of these lessonshelp clients transfer knowledge to the supplier.Two lessons help clients protect their knowl-edge transfer investments.

We illustrate these lessons by profiling oneFortune 500 US manufacturing company.

Knowledge Transfer: USManufacturing

A large industrial equipment manufactur-ing company we shall call US Manufacturing ,illustrates the challenges of transferringknowledge to suppliers. This company sellsheavy-duty industrial equipment that reliesextensively on embedded software to operate.

TO:

FROM:

Supplier’sgeneralindustry

knowledge

Client’sspecific

knowledge

KnowledgeTransfer

Figure 1: WHAT IS THE KNOWLEDGE GAP & HOW & WHO WILL FILL IT?

TOP_06_Rottman Lacity_wp 12/7/06 4:43 pm Page 2

SCE managers’ second attempt at offshorefocused obsessively on knowledge transfer,adhering to the five practices discussed below.

1. Motivate in-house staff to share knowl-edge with suppliers

Like all of the US clients we studied, staffemployees at the SCE were initially reticent toshare their knowledge with suppliers. Wouldthey be helping to build their own guillotines?Managers at the SCE addressed this issuehead-on by sharing the vision of strategic out-sourcing and the staff’s role within the vision.The SCE staff was motivated to share knowl-edge with suppliers because they werepromised the following benefits:• Job security because strategic outsourcing

would be used to reduce the immensebacklog, not internal headcount

• Reduction of the staff’s 60 - hour work-weeks

• More interesting career paths

The SCE had a three-year backlog com-bined with a flat staffing forecast. According tothe manager of the SCE:

“My people were tired of working 60-hourweeks. We communicated that offshore was away to better manage our project pipeline sincewe were not going to add a bunch of expensiveNorth American resources to meet the demandand then lay them off later. And so they are notworried about losing their job. They just see thisas a way of getting back to some kind of normal40 to 50-hour workweek, and even more impor-tantly, as a way for them to move up in their levelof responsibility.”

Considering the application developmentbacklog facing SCE and the over-utilization ofthe internal staff, the SCE viewed offshore asway to better utilize their internal staff andmove them into higher-level tasks. As theengineering supervisor at the SCE stated:

“Many of our junior to mid-level people werewanting and ready to move up, but they were sobusy with low-level tasks, they were not able tolearn the necessary skills, or have exposure tothe high profile projects. Once we got offshoreworking properly, our junior people were freedup to begin taking on tasks with greater respon-sibilities.”

Roles with greater responsibilities includedsubject-matter experts, project managers, andarchitects. The SCE involved HumanResources to help map exciting future careerpaths for the SCE staff. Through these benefits,

SECTION 1Strategy


Executives at this company had the vision touse offshore suppliers to more quickly andmore cheaply develop innovative softwarethat is embedded in their core products. Thiscompany did not achieve their outsourcingvision until a second round of implementation.During the first attempt offshore, project costsexceeded budgets, software quality lessenedand some projects were never finished. Muchof the failure was attributed to the suppliers’lack of client-specific knowledge. Instead ofabandoning the vision, senior executives usedthe experience to develop five knowledgetransfer practices. In its second attempt, thesepractices helped to drop development costs by10 to 15 % and shorten product delivery timeswhen compared to onshore. US Manufacturingcan now declare with confidence that ‘our out-sourcing deals are strategic.’

The successful knowledge transfer practiceshighlighted in this article are centered within USManufacturing’s Six Sigma certified SoftwareCenter of Excellence (SCE). The SCE employsapproximately 150 people and has an annualdevelopment spend of $32 million. The mem-bers of the SCE are tasked with the develop-ment and deployment of embedded softwaresystems that are highly integrated into the man-ufacturing and operation of core products.

Recognizing the need forbetter knowledge transfer

The Software Center of Excellence beganits journey in late 2000 when several pro-jects were sourced offshore. As an example,one project required a new GlobalPositioning System (GPS) steering system tobe integrated into one of the larger productlines currently in production. USManufacturing chose a large Indian supplier

17www.cxoeurope.com

for this project. The client delegated thedesign and creation of the integration pro-ject to the offshore supplier. They believedthat the supplier had the sufficient domainknowledge because it had prior experiencein this industry. This project failed to pro-duce any of the deliverables outlined in thestatement of work and was ultimately pulledback in house and completed well behindschedule and over budget.

US Manufacturing experienced similar fail-ures with other offshore projects. Each workproduct delivered from the offshore suppliersneeded extensive rework to correct inaccurateand incomplete application development.Looking back, the manager of the SCE and hisstaff underestimated the need for extensivedomain knowledge transfer (product, processand market) as well as their own expertise inmanaging offshore projects.

Despite the failures, the SCE saw promisein some aspects of the original offshoreengagements. For example, as the offshoreemployees became more experienced withembedded software and how the SCE inter-acted with business units, the members ofSCE noticed that the quality of code improvedand delivery times shortened. These improve-ments helped the management of the SCEconvey a sense of optimism about offshore tothe senior management. As one SCE manag-er noted:

“We had to realize that our Indian suppliersdid not understand embedded software or eventhe equipment we manufacture. They didn’t evenknow what our product looked like! Now we arespending considerable time on domain knowl-edge transfer and training.”

The SCE used the lessons it learned and re-launched its offshore effort in January, 2004.

Practices to transfer knowledge

Practices to protect the knowledge

transfer investment

1. Motivate in-house staff to share knowledge with suppliers.

2. Train the supplier’s employees as if they were internal employees.

3. Integrate the supplier employees fully into the development team.

4. Require suppliers to have shadows for key onsite supplier roles to protect knowledge transfer investments.

5. Protect intellectual property by unitizing projects into small segments of work and dispersing work among multiple suppliers.

Table 1: EFFECTIVE KNOWLEGDE TRANSFER PRACTICES

Table 1:


StrategySECTION 1


costs of training a replacement. For key supplier roles, the SCE went one

step further. It required suppliers to provideshadow managers for key onsite supplier roles.Depending on the role, the required shadowingperiod was three to six months. This overlapperiod had two major benefits. First, the knowl-edge transfer was done predominatelybetween the supplier’s employees, thus freeingup the SCE’s valuable architects and leads.Second, the incumbents were able to introducetheir replacements to US Manufacturing’s busi-ness units and staff. This helped to maintainthe social contacts and connections that werecreated during the engagement. According tothe engineering supervisor:

“Once we started overlapping the liaisons,our customers felt much better about rolling peo-ple off the project. The outgoing liaisons madeour job much easier since they took their initialtraining and subsequent learning and were ableto convey it to their replacement much, muchbetter than we can.”

5. Protect intellectual property by unitizingprojects into small segments of work anddisperse work among multiple suppliers

Besides protecting the knowledge transferinvestment against turnover, the SCE alsowanted to protect its intellectual property. Thismight seem to contradict the previous lessonsof generous knowledge sharing, but it doesnot. Training focuses on products that arealready in the market. The SCE’s main concernwas protecting the new innovations the sup-pliers were helping to build.

To mitigate this risk, the SCE (1) unitizedprojects into small segments of work and (2)dispensed these segments among three off-shore suppliers to effectively distribute theintellectual property. They viewed their intel-

the SCE motivated their staff to share theirknowledge with offshore suppliers.

2. Train the supplier’s employees as if theywere internal employees

Many CIOs would never co-train theirinternal employees with external supplieremployees because of the high cost as well asconcerns over the protection of intellectualproperty. The SCE, however, had little choice.The suppliers needed to deeply understand theinternal functions of not only the manufactur-ing equipment, but of the entire company.Managers at the SCE decided that key supplieremployees needed to undergo the same seriesof training sessions as internal employees.

The SCE provided the key supplier employ-ees with facility tours and training classes onengine architecture, production software,equipment simulation products, operatingguides for various lines of equipment, qualityassurance processes and an overview of all ofthe various manufacturing products and plat-forms. They were introduced to various soft-ware development tools, the development envi-ronment and embedded development tools.

These classes were delivered on site and inperson to the suppliers’ onsite employees. TheSCE paid the supplier employees for the timespent in training, but it only paid offshore (ver-sus the much higher on-shore) rates.

For the offshore employees, the classeswere recorded and streamed offshore.According to the manager of the SCE:

“We couldn’t ship an engine or a piece oflarge equipment over to India, so we did the nextbest thing: we videotaped many equipmentpieces in action and showed what the ECUs(Electronic Control Units) were designed to do.”

In addition, the SCE invited most of theemployees of the offshore suppliers to spendsome time onsite prior to working on the out-sourced projects. According to the Manager ofthe SCE:

“What we saw was the benefit and real valueof actually bringing those people here for a shorttime to bring them up to speed. Let them seehow an application works and work right next tothe team doing the development.”

3. Fully integrate the supplier employeesinto the development team

Beyond formal training, knowledge isexchanged socially among members of agroup with close proximity, trust, and solidari-ty. To promote social exchange of knowledge,the SCE made a concerted effort to encourage

and facilitate unified teams. For example, sup-plier employees were invited to birthday par-ties and happy hours. The line between ‘us andthem’ blurred and the supplier’s employees(both on and offshore) were viewed by USManufacturing’s employees as team members.They all shared in the successes and chal-lenges of the projects.

Besides the obvious benefit of knowledgesharing, the business users at US Manufacturinghad higher levels of customer satisfaction.According to the Group Project Manager at oneof the SCE’s large Indian suppliers:

“Of all of our embedded systems clients, theSCE at US Manufacturing has worked the hard-est to make our employees feel very much part ofthe team. Our C-Sat (customer satisfaction rat-ings) from the client show the value of this inte-gration. Our employees have internalized themission and values of [US Manufacturing]. It is ahighly coveted assignment to work on the [USManufacturing] account.”

While the lessons so far have appeared‘warm and fuzzy,’ the SCE was aware of twosignificant risks associated with such expensiveand extensive knowledge sharing: high costs oftraining and loss of intellectual property. Thenext two practices address these issues.

4. Require suppliers to have shadows forkey onsite supplier roles to protect knowl-edge transfer investments

The SCE incurred significant training coststo transfer knowledge to the suppliers. To reapthe rewards of this investment, the SCE had toprotect against supplier turnover. (Unwantedsupplier employee turnover was as high as75% in some of the companies we studied.)The SCE required that trained supplier employ-ees remain on the account for at least one yearafter training or the supplier would incur the

Supplier Three’s IP Segments

Supplier Two’s IP Segments

Supplier One’s IP Segments

Figure 2: VIEWING INTELLECTUAL PROPERTY AS A PUZZLE


Section 1Strategy


19www.cxoeurope.com

lectual property as a puzzle. By distributingsmall pieces among three suppliers, no onesupplier can assemble the puzzle on their own(See Figure 2).

The first part of the strategy involved theunitization of tasks to be sourced. These taskswere typically 5 to 7 business day activitiesthat had clearly defined objectives andrequirements. The statements of work (SOWs)for these tasks were appended to the masterservice level agreements the SCE establishedwith its suppliers. The segmentation of largerprojects into such small components allowedthe SCE to more easily capture all associatedcosts and manage deliverables and milestonesclosely. While the transactional overhead ofthis strategy was considerable, the Manager ofthe SCE claimed the transaction costs weremore than recouped by such close monitoring:

“In our first round [the failed attempt at off-shore sourcing], projects were allowed to creepand the only people who saw the creep were theaccounts payable people on our end and theaccounts receivable people at the supplier. Now,each task has an owner and we watch the pro-jects from a functional perspective, not anaccounting perspective. By using this strategy,we are seeing much less re-work and the qualityhas improved considerably!”

The second part of the strategy involvesmulti-sourcing. The SCE distributed workamong three suppliers (two large and one bou-tique). While maintaining engagements withmultiple suppliers did increase transactioncosts and management overhead, the benefitsincluded protection of intellectual propertyand the creation of a competitive environmentto keep costs low and quality high.

In summary, the five knowledge transferpractices resulted in success for the US manu-facturer. The manager of the SCE concluded:

“Our suppliers are not only providing a lowercost talent pool, but they are helping us strategi-cally. We keep looking for ways to increase theengagements. Our costs are down, productivityis up, and the quality is as good, if not better thanwhat we can do in house.”

Realizing the benefits ofknowledge sharing

To elevate outsourcing from merely tactical(focused solely on costs) to strategic (focusedon quality, innovation, speed and cost) effec-tive knowledge transfer is critical. The suppli-ers need to have domain knowledge in cus-tomer – specific domains including product,process and market; not just a particular verti-cal. Utilizing these five effective practices,companies can achieve strategic outsourcingengagements by creating an environment thatsupported knowledge transfer while simulta-neously protecting both intellectual propertyand development quality.

About the AuthorsDr. Joseph Rottman is an Assistant

Professor of Information Systems at theUniversity of Missouri-St. Louis. He earned hisDoctor of Science in Information Managementfrom Washington University in St. Louis. Hehas conducted research and spoken interna-tionally on global sourcing, innovation diffu-sion and public sector IT. He has conductedcase studies in over 40 firms and has beenengaged by Fortune 100 firms to analyze theiroffshore strategies. His publications haveappeared in Sloan Management Review, MISQuarterly Executive, IEEE Computer, theJournal of Information Technology, the Journalof Management Information Systems andleading practitioner outlets such as CIO Insightand the Cutter Consortium.

Dr. Mary Lacity is a Professor of InformationSystems at the University of Missouri-St. Louis,Research Affiliate at Templeton College, OxfordUniversity, and Doctoral Faculty Advisor atWashington University. Her research interestsfocus on IT management practices in the areasof sourcing, IT privatization, relationship man-agement, and project management. She hasconducted case studies in over 100 organiza-tions and has surveyed both US and European ITmanagers on their management practices. Shehas given executive seminars world-wide andhas served as an expert witness for the USCongress. She was the recipient of the 2000World Outsourcing Achievement Award spon-sored by PricewaterhouseCoopers and MichaelCorbett and Associates. She has written sixbooks: Global Sourcing of Business and ITServices (Palgrave, 2006; coauthor LeslieWillcocks), Netsourcing Business Applications(Prentice Hall, 2002; co-authors Thomas Kernand Leslie Willcocks); Global IT Outsourcing:Search for Business Advantage (Wiley, 2001; co-author Leslie Willcocks); Strategic Sourcing ofInformation Systems (Wiley, 1997;co-authorLeslie Willcocks); Beyond the InformationSystems Outsourcing Bandwagon: TheInsourcing Response (Wiley, 1995; co-authorRudy Hirschheim) and Information SystemsOutsourcing: Myths, Metaphors, and Realities(Wiley, 1993; co-author Rudy Hirschheim). Hermore than 50 publications have appeared in theHarvard Business Review, Sloan ManagementReview, MIS Quarterly, IEEE Computer,Communications of the ACM and many otheracademic and practitioner outlets. She is SeniorEditor for MIS Quarterly Executive and US Editorof the Journal of Information Technology.


Outsourcing has long since evolved from apure cost reduction focus towards one ofstrategic relationships helping businessesachieve a wide range of goals - driving greatersystems and business process flexibility,optimizing IT and enabling businesstransformation. Clients can focus on their corebusiness and rely on an outsourcing partner toleverage economies of scale, exploit newtechnologies and source the wide range ofnecessary skills.

IBM is fully able to meet these evolvingneeds and can provide end-to-end outsourcingservices for companies across industries andaround the world, regardless of the size of abusiness or its hardware/softwareenvironment. IBM outsourcing capabilitiesinclude business transformation outsourcing,application management services, e-businessHosting services and strategic outsourcing(covering datacenter outsourcing, managedstorage services, network outsourcingservices, desktop and helpdesk services).These services can be tailored to industry andcompany-specific concerns to help reducecosts rapidly and add value over the long term.

Success in outsourcing requires a focusfrom both parties on relationship developmentunderpinned by a supplier capable of servicedelivery excellence. Furthermore, suchrelationships prosper best when underpinnedby flexibility and joint investment intechnological and business innovation. IBM'soutsourcing services described below areguided by these principles and draw upon thecompany's technological expertise andbusiness insight.

SOLUTION PROVIDER

Business transformationoutsourcing

Business Transformation Outsourcing(BTO) delivers improved business resultsthrough the continuous strategic change andoperation of business processes, applicationsand infrastructure with results measuredagainst business outcomes. Through BTO,enterprises can leverage the expertise andscale of a strategic partner by handing overmanagement of non-core processes to thispartner and concentrating on their corebusiness. IBM BTO services cover Finance andAdministration, Human Resources,Procurement and Customer RelationshipManagement (CRM) as well as a variety ofindustry-specific processes. Within theseareas, IBM BTO solutions consider andaccount for business and IT design, processand integration challenges. IBM BusinessTransformation Outsourcing provides a

IBM Global Services provides comprehensive IT services integrated with business insight to reducecosts, improve productivity and assert competitiveadvantage.

Sam Palmisano – Chief Executive Officer

Michael E Daniels – Senior Vice President, Global Technology Services, Global Services

David Jordan – Vice President, IBM Europe

International Business Machines CorporationHeadquarters:One New Orchard Road, Armonk, NY 10504,Westchester County, United States,Tel +1 914-499-1900

Business Contact:Trevor Clifton – Marketing Manager, Strategic OutsourcingE-mail: [email protected] Tel: +44 (0)1256 341174

www.ibm.com/services

IBM Global Services - full service, on demand outsourcing capability

www.cxoeurope.com20

IBM Global Services is focused on whatmatters most - working with you to provide theright business and technology services thatdeliver real business outcomes. We harness ourinsight into your industry, technology leadershipand hands-on experience to deliver services thathelp increase the growth, efficiency and ongoingflexibility of your business - making it easier toanticipate and respond to your market andimprove your ability to serve your customers.Your success is our success.

strategic roadmap for change, globalbenchmarking and best practice-based changemanagement, supported by IBM industry,process and IT expertise, as well as insightsgained from our own internal on demandbusiness transformation.

IBM Business Transformation Outsourcingoffers companies a wide array of advantagesthat will help them improve their businessperformance: Through BTO, companies will:• Reduce costs• Increase organizational agility• Improve speed to market• Strengthen their intellectual capital• Improve their competitive position• Benefit from disciplined, best practice-

based processes• Improve risk management

Application managementservices

Today, daily operations alone compelcompanies to continually upgrade and add totheir application portfolios - a dauntingproposition in terms of cost and managementrequirements. Indeed, attempting to respondfully to changing market trends and customerdemands at an application level canoverwhelm in-house IT organizations andquickly consume budgets. IBM ApplicationManagement Services (AMS) offers a flexibleset of services that can help companies deployand manage applications according to definedservice levels and for a predictable cost,through proven governance, skills, processesand technologies. In this way, IBM AMS helps

TOP_06_IBM_p 12/7/06 4:44 pm Page 1

SOLUTION PROVIDER

21www.cxoeurope.com

Strategic outsourcingIBM Strategic Outsourcing Services cover

datacentre operations, desktop services,networks, storage etc and, if necessary,operate in concert with the other IBMoutsourcing services. IBM StrategicOutsourcing consultants work closely withcustomer executives to improve a company'soverall competitive advantage by evaluatingbusiness objectives and identifying specificprocesses and operations to outsource. IBMStrategic Outsourcing services can helpbusinesses realize significant cost reductionsand, at the same time, accelerate speed-to-market, forge stronger links with partners,suppliers and customers, and achieve apotentially higher return on investment. Plus,strategic outsourcing can provide importantflexibility and adaptability - critical buildingblocks for on demand initiatives and businesstransformation.

IBM has introduced innovative on demandcapabilities to its strategic outsourcingofferings. To deliver true on demandcapabilities, IBM Strategic Outsourcingleverages the IBM Universal ManagementInfrastructure (UMI), a proven environment foroutsourcing comprising hardware, software,architecture and best practices. Based on openstandards, UMI is designed to help build andmanage on demand computing environments- offering reliable and automated IToperations… improved capacity utilization…lower infrastructure and labour costs… andhigher service levels.

Strategic outsourcing on demand capabilitiesare tailored to cases in which IT demands - on

companies focus IT spending on implementingbusiness strategies, rather than managing andmaintaining applications.

To mitigate engagement and deploymentrisks, IBM can help companies plan,implement and manage a customizedapplication management solution and, inturn, provide proven project managementtechniques and systems integration expertise.IBM AMS can manage a single application, asubset of process-linked applications or theentire portfolio, as business needs dictate.Regardless of the scope of the engagement,IBM AMS offers the benefits of virtuallyunparalleled global reach in leveragingstrategic relationships with industry-leadingapplication vendors. Flexible service optionsand contracting methods make AMSsolutions highly cost-effective over the shortand long-terms.

e-business Hostingservices

IBM e-business Hosting offersorganizations help in designing, deploying andmanaging their e-business strategies andmission-critical business processes throughapplication hosting, facilities hosting andmanaged hosting services. Through e-businessHosting, companies access and leverage aleading-edge e-business infrastructure andbusiness applications as Web-based services -and enjoy the economies of variable pricingmodels. This flexibility is especially useful forbusinesses that have highly dynamic capacityand capability needs. With e-business Hostingservices, businesses can purchase ITcapabilities piece by piece, on an as-neededbasis and pay accordingly. In this way, upfrontinvestments are reduced. Plus, IBMinfrastructural standardization supportssimplified, rapid deployment delivering addedcost savings and supported scalability.

Our success in helping more than 5,000clients implement their e-business strategies isborne out in a state-of-the-art global networkof IBM hosting centres. These facilities providerapid deployment of hosted solutions, fortifiedby industry-leading security and continuitysupport… multi platform support… reliable

high-bandwidth Internet access andbandwidth capacity on demand… no singlepoint of network failure… and around-the-clock monitoring and reporting. IBM providessuperior world-wide customer support andhas skilled technicians onsite, 24 hours a day.IBM e-business Hosting clients have access toa customized WebSphere portal, whichconsolidates critical business functions,performance data and multi-vendormonitoring and reporting services.

With IBM's help, companies can improvespeed to market by relying on IBM's expertisein designing, building and running ITenvironments… reducing up-front costs bypaying for infrastructure and management asa service… mitigating risk in a climate of rapidtechnological change… and enjoyingeconomies of scale in infrastructure, peopleand technologies.

On DemandIn today's highly competitive environment,

forward-looking organizations are evolvingtowards a business model that is:• Responsive: Capable of sensing change and

responding dynamically to unpredictablefluctuations in supply or demand, marketturns, emerging needs or unexpectedcompetitive moves

• Variable: Able to adapt cost structures andbusiness processes in order to reduce risk,drive performance and achieve higher levelsof productivity, capital efficiency andfinancial predictability

• Focused: Committed to concentrating oncore competencies and assets thatdifferentiate the organization

• Resilient: Leveraging systems andprocesses that are robust, scalable,security-rich and available

Together, these characteristics comprise aconcept IBM calls On Demand. In technologyterms, this means that systems and solutionsmust be integrated, automated, virtualized andopen - ready and able to respond to a variety ofevents in realtime. IBM Global Services can offerclients just that and, in turn, help support a

company's successful transformation to the ondemand business model.

IBM has incorporated on demandcapabilities into its outsourcing offerings: a newand flexible pricing model designed to transformstatic IT overhead into a 'variable' expensematched to business needs. Companies canaccess and leverage infrastructure and servicecapacity as needed, so that the e-businessenvironment is continually up-and-running,despite fluctuations in demand.

TOP_06_IBM_p 12/7/06 4:44 pm Page 2

application assets or storage capacity or serverperformance - vary by season, month, day oreven hour. While traditional outsourcingengagements allow for capacity fluctuations on astable curve, adding on demand capabilitiesfacilitates adjusting capacity to both predictableand unexpected demands - dynamically.

With these capabilities, strategicoutsourcing can offer businesses an additionaland unprecedented ability to reduce costs bymatching IT pricing to demand. The figureillustrates schematically the efficienciesprovided by an on demand versusconventional model.

IBM on demand capabilities withinStrategic Outsourcing can be tailored to acompany's business and IT requirements.More specifically, companies can choose fromseveral options:• The IBM Flexible Demand Option provides

IBM-managed services based onstandardized infrastructures in IBMfacilities. Multiple clients can share theenvironment in order to capture significantcost savings. At the same time, privacy andintegrity are maintained through security-rich partitioning and other techniques.Services include automated, usage-basedand variably priced provisioning of server,storage and network resources… balancedworkloads… porting and testing… andpowerful management and reportingcapabilities.

• The IBM Flexible Support Option providesseveral alternatives for clients wishing toretain more control over their ITenvironment. For example:• IBM can help support a company's IT

infrastructure up to and through theoperating system layer. In this scenario,businesses retain IT ownership, as well asbusiness process and applicationoversight; it is the infrastructuremanagement that is outsourced.

• Alternatively, IBM can provide anenvironment dedicated to a single client.Services and capabilities closely resemblethose provided with the Flexible DemandOption, but in this case no infrastructuralresources are shared with other clients.

Either way, the IBM Flexible SupportOption helps enable companies to pool andoptimize resources across business unitswhile harnessing the efficiencies of rapid andresponsive scaling.

When properly deployed and leveraged,adding on demand capabilities to strategicoutsourcing can result in lower costs, greaterresiliency, rapid up-and-down scalability, fasterdeployment and speedier time to market. Morespecifically, companies using strategicoutsourcing on demand can benefit from:• Variable, usage-based costs• Ability to support shorter product lifecycles• Proactive risk management

• An increase in privacy, security andcontinuity

• An open, highly integrated IT environment• Self-healing, self-managing systems• User-adaptive technology

Leadership

Across industry lines, informationtechnology has become a fundamental driverof business transformation and forward-looking on demand initiatives. Likewise,outsourcing tools and offerings are on anevolutionary, increasingly strategic andspecific path. IBM remains at the vanguard ofassociated thought leadership and capabilitiesdevelopment, with a full range of outsourcingofferings applicable to enterprises everywhere,in virtually every industry. Our tools andservices can be applied alone or in concert inanswer to your company's most pressingbusiness directives. Plus, all IBM outsourcingengagements are fortified by our:

• Global sourcing• On Demand Business leadership• Business, industry and IT consulting• Strategic partnerships with leading service

providers and product providers• Flexible financing options from IBM Global

Financing• Virtually unmatched capabilities, skills and

expertise.

© Copyright IBM Corporation 2005, All RightsReserved

IBM, the IBM logo, the e-business logo, e-business ondemand, e-business Hosting and WebSphere aretrademarks or registered trademarks of InternationalBusiness Machines Corporation in the United States,other countries, or both.

Other company, product and service names may betrademarks or service marks of others.

References in the publication to IBM products orservices do not imply that IBM intends to make themavailable in all countries in which IBM operates.

www.cxoeurope.com22

SOLUTION PROVIDER

SOLUTION PROVIDER – www.ibm.com/services

www.ibm.com/services

Schematic representation of efficiencies provided by an on demand usage-based modelversus a conventional approach.

TOP_06_IBM_p 12/7/06 4:44 pm Page 3

SECTION 1 – Strategy

23www.cxoeurope.com

TRANSFORMATIONAL OUTSOURCING – MIXING OIL AND WATER?

Recently, many IT outsourcing providershave been scrambling to reposition them-selves as proponents of a new business modelknown as transformational outsourcing, orbusiness innovation partnership. In trying tointegrate competencies from both IT outsourc-ing (i.e. run) and consulting and system inte-gration (i.e. plan and build), they are aiming toescape a competition-intensive, low-margincommodity market and break into high-mar-gin, added-value ‘utopia’. However, while theprovider-side massively promotes the model,the proof of its concept and its degree of cus-tomer acceptance remain to be seen. Doubtsover whether this shift is the right strategicresponse to changing market requirementshave arisen from a scientific perspective.

In this article, the authors will examine thecurrent strategic challenges for IT outsourcingproviders within the context of the Germanmarket. They will discuss the major argumentsin favor of a new transformational outsourcingmodel and critically assess its validity. Thisdiscussion will be based on a theoretically ori-ented discussion regarding hold-up problemsin the context of theory-based incomplete con-tracts, as well as the inherent mechanics ofpurchasing professional services such as IToutsourcing or transformational outsourcing.The authors conclude that while some demandfor such offerings might exist, a repositioningin transitional outsourcing will not solve the

Peter KreutterManaging DirectorWHU GRID

existing problems of most players in the out-sourcing field. As such, it does not safeguardfuture survival.

Welcome To A MaturingIndustry!

In 1990, Daimler-Benz’s IT outsourcingunit ‘Debis’ was founded. It was to be thestarting signal for the German IT outsourcingmarket, and since then, the industry haschanged significantly. A clear understanding ofthis evolutionary industry trajectory isparamount for a discussion of current trendsand challenges. In fact, by taking a long-termperspective, major shifts regarding marketsize, customer acceptance and industry orga-nization become much more obvious than in ashort-term analysis.

Market volume rose to a stunning €14 bil-lion in 2005, from a mere €0.7 billion back in1994. The increase suggests a compoundannual growth rate of about 30 per cent, andsupports management legend Peter Drucker’sremark: ‘If you ask me what is the fastestgrowing industry – it’s outsourcing’. Althoughthe proponents and opponents defended theirpositions in the early years, outsourcing isnow considered to be one of the most impor-tant methods for restructuring and optimizinglarge parts of a corporate value network.Customers accept IT outsourcing’s valuepreposition. Even industries known for theirreluctance regarding outsourcing, such as

banking, are increasingly turning to it, as deci-sions by Deutsche Bank and Zurich FinancialServices demonstrate.

A giant leap in the IT outsourcing industry’sdegree of professionalism mirrors the market’sprogressive development. Best practicesregarding request for proposal (RFP) process-es, overall contract structures and service levelagreements (SLA) have developed over time,basically providing some form of ‘dominantdesign’. Today, companies on the customerside are able to hire specialized intermedi-aries, such as Gartner, TPI or Compass, fortheir unique, professional and up-to-dateexpertise in planning, structuring and negoti-ating outsourcing transactions.

This seems to paint a bright picture, but itis only one side of the coin. As recentlydescribed by Harvard Business School’s AnitaMcGahan, it partially reflects the pattern foundin emerging industries that are maturing,rather than being a unique development. Thisevolutionary, lifecycle-oriented process imme-diately raises the question regarding howother defining factors, such as the number ofcompanies active in the market, the businessmargins or, in general, competition in theindustry have developed.

As far as the number of companies that areactive is concerned, research by the new OttoBeisheim School of Management shows thatthe development of non-captive IT outsourc-ing in Germany clearly follows evolving indus-

Juergen WeigandProfessor of Economics and DirectorWHU

TOP_06_Kruiter_wp 12/7/06 4:45 pm Page 1

pened, because the market volume rose byabout 16% between 2000 and 2001.

The bursting of the dot.com bubble, whichoccurred in the same year as the shakeoutoccurred, could offer an alternative, capitalmarket-based explanation. However, sincenone of the examined companies, except one,matches the typical start-up profile, it isunlikely that this was the major driving force.In fact, the concurrent events seem to be coin-cidental. A different, more complex and inter-nally driven mechanism that resulted inincreased competitive pressure, that restrictsmarket entry and encourages exit, is at work:the process of industry evolution towards amature stage. Observable factors such asdeclining margins and decreasing growthrates support this hypothesis. It is ironic that acontinuously increasing market volume couldcamouflage many of the evident signals.

Anecdotal evidence of the increasing com-petition can be found in the business media’srecent coverage. T-Systems, one of the marketleaders in Germany, suffers from profitabilityproblems and declining growth. SiemensBusiness Services (SBS), another major player,

StrategySECTION 1


tries’ expected pattern. While initially increas-ing from 1990 to 1999, the number of vendorsdropped dramatically from 2000 onwards.There is, of course, always reason enough tocriticize studies of that type based on the well-known problems of delineating industries andthe difficulties of capturing every single com-pany active within an industry. Nonetheless,none of the 15 participants who follow thedevelopment of the German IT outsourcingindustry, and with whom the authors dis-cussed the initial research results, questionedthe overall pattern that was developing. A sea-soned executive’s answer perfectly summa-rized one of the most often heard responses:‘The graph sketches what I have experiencedover the last couple of years - our industry isconsolidating.’ In fact, what the theory hadpredicted, by means of robust empirical evi-dence from many industries, happened: a‘shakeout’.

Conventional wisdom would initially pre-sume that the underlying reasons for theshakeout would be declining demand.However, according to the figures from PierreAudoin Consultants, exactly the opposite hap-

Number of companies active in the non-captive IToutsourcing market in Germany 1990-2005

60

50

40

30

20

10

01990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Figure 1

has shown negative earnings for several quar-ters. International players such as LogicaCMGor CSC, that are active in the German market,aren’t immune either. LogicaCMG announcedlosses in the German market for the first half of2005. Some weeks ago, CSC’s CEO, Van B.Honeycutt, analyzed the situation from abroader viewpoint: ‘For some time it has beenapparent to us, and to other companies in ourindustry, that there is excess capacity in cer-tain geographies, particularly Europe.’ Theplain and simple message of all the facts is:Welcome to a maturing industry!

Why is it so important to comprehend thisfact and its direct implications in the context ofthe question discussed in this article? From ourperspective, it is the industry’s mature situa-tion and competitive pressure rather than anyother factor, such as the customer demand ornew technological innovation, which accountfor the observed shift towards the ‘transforma-tional outsourcing’ model. In the words of Kim& Mauborgne’s best-selling 2005 strategybook, Blue Ocean Strategy, companies likeIBM, Accenture or CSC try to create a ‘blue,unexplored ocean’: new and uncontested mar-ket space. The critical question is whether thiscan actually be achieved.

Defining TransformationalOutsourcing And ItsCharacteristics

Both in business practice and academiathere is an ongoing discussion on whether‘transformational outsourcing’ (as opposed to‘traditional outsourcing’) could be a uniquemeans of redefining and revitalizing the IToutsourcing market. With reference to its pri-mary goal, transformational outsourcing canbe defined as ‘outsourcing to achieve a rapid,sustainable step-change improvement inenterprise-level performance’. As shown inFigure 3, transformational outsourcing shallachieve a fundamentally new level of addedvalue for customers.

All this is supposed to be accomplished bythe integration of competencies, for examplein the fields of strategy business, technologyand (traditional) IT outsourcing, that are cur-rently separately offered and sourced. Thebasic underlying idea is that in the sense of atop-down, consulting-led approach, one singlevendor will be fully in charge of: - the strategic redefinition of an entire value-

chain along changing business demands,- providing and implementing new systems

needed in the course of change, as well as:


SECTION 1Strategy


25www.cxoeurope.com

- running those systems over a longer periodof time.

At this point it is noteworthy that from abasic theoretical perspective, there is initiallyno difference between traditional and trans-formational outsourcing. The raison d´être ofboth can be found in transaction cost eco-nomics, which assumes that when firms ratio-nally undertake sourcing decisions, they con-sider transaction-related costs, such as assetspecificity, environmental uncertainty, andvarious other types. In a broad sense, transac-tion costs can be interpreted as the cost ofusing the external market, or the cost of thedivision of labor. Considering the additionaltheory that specialized service providers couldattain cost advantages through economies ofscale and scope, outsourcing of former inter-nal activities could potentially generate posi-tive economic value for a client.

The Hold-Up Problem - AFundamental Barrier ToSuccess

The conditions of economic interchangebetween two sides are defined via contracts,thereby protecting the parties from a transac-tion by another opportunistic party. In general,the degree of protection depends on whetherthe contract is complete or incomplete, i.e.‘does not fully specify the mapping from everypossible contingency to rights, responsibilities,and actions.’ Asymmetric information andproblems in measuring performance areamong the major factors responsible for con-tracts’ incompleteness.

This is critical, as it could lead to an unde-sirable situation for both parties in such a con-tract, known as a ‘hold-up’ problem. Hold-uprefers to the ability of one party to expropriatethe profits of another party. Loopholes in acontract are always an invitation to use themfor one’s own benefit. Whether this will beactively pursued depends on how closely theother party is bound by the contract, i.e. if ithas the ability to not only threaten, but to exer-cise an existing option to back out. IT out-sourcing’s high switching costs usually meanthat once operations are in place, there issome form of lock-in, specifically in respect ofthe client, which limits its ability to take action.In certain situations, the vendor could face asimilar fate, too.

A hold-up in IT outsourcing is far from sim-ply being pure theoretical reasoning, as can beseen in the many studies examining outsourc-

Traditional vs. Transformational Outsourcing(Mazzawi 2002)

Operational focus

All about cutting costs

Helps impose control

Aligns with fundamentally unchanged businessprocesses

Based on external IT specialists achievinghigher performance than a non-specialistcompany

Removes non-core functions from the businessto provide a one-time release of capital

Business focus

All about creating value

Helps to manage uncertainty

Aligns with the business processes that changein line with strategic goals

Based on the creation of a network ofpartnerships in the new connected economy

Business change and cost re-engineeringenable sustained value creation

Traditional Outsourcing Transformational Outsourcing

Figure 3

Market Volume (inMio. €) and Annual Growth Ratesin German IT outsourcing market (Ovum 2006)

0

2.000

9.94010.785

11.68412.638

13.62814.618

8.0%8.5% 8.3%

8.2%7.8%

7.3%

4.000

6.000

8.000

10.000

12.000

14.000

16.000

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

2004 2005 2006 2007 2008 2009

application-led outsourcing plus infrastructure-led outsourcing

Figure 2


ing contracts’ successes and failures. The fol-lowing press article about problems in the large,‘traditional’ IT outsourcing transaction betweenIBM and Deutsche Bank, illustrates an excellentexample of a hold-up situation. Whether thishold-up is real, or only perceived as such by theclient, Deutsche Bank, doesn’t make much dif-ference since tensions will inevitably increasein the service recipient and service provider’simportant basis of mutual trust.

Deutsche Bank FacesTrouble In Data CenterOutsourcing Deal

Dark clouds have appeared on the horizonof Deutsche Bank’s data center outsourcingcontract with US outsourcing giant IBM. Thiswas disclosed by the German newspaper`Welt` in its Wednesday issue, citing a sourcewithin the banking industry, who preferred toremain anonymous.

According to reports, the realized cost sav-ings won’t reach the expected €80 million inYear One, but only €56 million. The initial costbasis was €400 million. Sources cite the rea-son for this as being the significantly increasedcosts of the so-called ‘change requests’ thatDeutsche has to pay IBM for services beyondthose defined and agreed on in the overallcontract. Deutsche hasn’t officially comment-ed on this issue.

Source: dpa-AFX news, December 3, 2003(Our translation)

In general, there is a simple rule of thumb:the greater the perceived risk of facing a hold-up, the less likely it is for a company to agreeto a transaction, or make larger up-frontinvestments. While recognizing the sensitivitytraditional outsourcing has shown in respectof hold-ups, we will see that transformationaloutsourcing, with its extended businessmodel, actually compounds the potentialproblem.

First of all, by definition the integration,building, and running of the entire plan of thetransformational outsourcing model increas-es complexity. The larger scope makes adetailed definition of the desired outcome, aswell as the measuring overall performance,more difficult. In traditional outsourcing con-tracts it is currently established practice tobenchmark cost and performance withrespect to the market after a certain period,and to adjust them if necessary. Conversely, atransformational outsourcing solution’s highspecificity will make it almost impossible tofind a comparable solution and market priceto be benchmarked against. Based on theincompleteness of the contract, and a greaterinformation asymmetry arising in favor of thevendor due to the greater scope, the risk of ahold-up problem significantly increases intransformational outsourcing. Clients mighttherefore be potentially discouraged to entersuch a deal.

Secondly, and closely related, ‘changingthe paradigm’ means weaving IT outsourcingactivities into questions of business out-come. This again increases complexity, but inanother dimension. In order to get a trans-formational outsourcing contract signed, apotential vendor needs to get the approval oftwo diverse, internal parties: IT executivesand executives from the business side.Examining customers’ sourcing strategiesand their decision-making processes willclarify the inherent problem arising from thissituation.

StrategySECTION 1


Transformational outsourcing defined as integrationof formerly shared compatencies (Fink et al.2004)

Plan Build Run

Traditional model with shared competencies and different vendors

IT L

evel

Bus

ines

s Le

vel

Traditional model with integrated competencies and a single vendor

IT L

evel

Bus

ines

s Le

vel

Plan Build

Intergrated project management

Run

Range of competencies of aBusiness Innovation Partner

(i.e. Transformational Outsourcing Provider)

Strategy & BusinessConsulting

IT consulting &Systemintegration

ITOutsourcing

Figure 4

The four worlds of outsourcing (Cohn/Yopung 2006)

OPTIMIZATION CREATION

MANAGEMENT ACCESS

Delivery

Value

One-to-one

Pay for businessperformance

One-to-many,ormany-to-many

Business transactionpriced

One-to-one

Fee forservice level

One-to-many,ormany-to-many

Pay for usage

Business Outcome

Custom Standard

Operational Outcome

Figure 5


SECTION 1Strategy

The Outsourcing Project – Achieving Competitive Advantage through Collaborative Partnerships

27www.cxoeurope.com

and IT services from the optimal set of internaland external providers in the pursuit of busi-ness goals’ is one among different emergingapproaches emphasizing this trend. Itsparadigm regarding the question of how thedivision of labor is structured and organized isdiametrically opposed to the one inherent inthe transformational outsourcing offering thatsuppliers propose.

Multisourcing stresses the strategic value ofinternally coordinating the different serviceofferings sourced, whereas transformationaloutsourcing’s one-stop-shop approach con-versely draws its legitimacy from the supposedadded value provided by a vendor’s externalcoordination. Naturally, the aggregation level ofdistinct activities plays an important role in eval-uating optimal strategy. However, in respect ofIT outsourcing activities alone, there is alreadysignificant empirical evidence from variousstudies that selective outsourcing produces bet-ter results than full or total outsourcing, clearlyindicating the limits of external coordination.

Clients’ SourcingStrategies ProvideAnother FundamentalBarrier To Success

The field of professional services repre-sents a major part of corporate expenditures. Itincludes a diverse set of activities, for instanceadvertising, financial advisory or consulting,and IT outsourcing, While others sourcingrelations, for example manufacturing and sup-ply of industrial parts, were for many yearssubject to extensive strategic considerationsand far-reaching operational improvements,strategies for and optimization of professionalservices sourcing played a secondary role atbest for a long time. Increasingly, ongoing costpressures in almost all industries, and limita-tions on the generation of further cost savingsin the traditional sourcing areas, call for astrategic and structured approach to profes-sional services.

The concept of ‘multisourcing’, i.e. ‘the dis-ciplined provisioning and blending of business

Selective outsourcing refers to sourcing singleknow-how blocks, such as infrastructure man-agement or application development, from best-of-breed providers, rather than relying on a sin-gle sourcing strategy for the entire informationtechnology element.

New market studies, for example, analy-sis from TPI, underline the increasing pro-portion of client companies turning to partialIT outsourcing. Recent examples includeDeutsche Bank outsourcing its data centeroperations to IBM, while contractingLogicaCMG for application development.Zurich Financial Services followed a similarstrategy by splitting its IT outsourcing activi-ties between Computer Sciences Corp.(application management) and IBM (infras-tructure and desktop management).Companies like General Motors and ABNAMRO have joined the list of those in favourof partial outsourcing.

A second underlying multisourcingassumption is that services subject to externalsourcing differ widely in nature, consequently,different sourcing strategies need to beemployed. With regard to transformationaloutsourcing, even a cursory analysis showsthat the distinct integrated competencies,namely common IT outsourcing and strategyand business consulting, are parts of largelydiffering sourcing worlds. The concept devel-oped by Gartner classifies services based onthe types of value delivered (business outcomevs operational outcome) and the businessmodels (custom vs standard).

Service activities for which the businessoutcome is difficult or impossible to measurewill have to be placed into the ‘operationaloutcome’ quadrants as shown in Figure 5. Inturn, all activities that can be evaluated interms of their direct impact on business goals(e.g. revenue or market share) belong in thetop two quadrants of ‘business outcome’.

By explicitly addressing the problem ofmeasuring business value in IT outsourcing(‘What is the value of your data network?’),Cohen/Young recognize its ‘operational out-come’ characteristics. Moreover, there hasbeen a shift from customized to standard solu-tions during recent years, locating IT outsourc-ing in the lower right quadrant and clearlydefining the type of sourcing strategies ITexecutives should pursue. In contrast,Business and strategy consulting is character-ized by a strong focus on business outcomeand a customized approach, in other words,the upper right quadrant.

Generic sourcing strategies for professionalservices (Baker/Faulkner 1991)

Pn

…

P2

P1

T1 T2 … Tn

Traditional Outsourcing

Pn

…

P2

P1

T1 T2 … Tn

Fractional Strategy

Pn

…

P2

P1

T1 T2 … Tn

Relational Strategy

Pn

…

P2

P1

T1 T2 … Tn

Transactional Strategy

Figure 6


The model’s results regarding the inherentdifferences in both fields of competencies’optimal sourcing strategy are supported byanother study which focuses on two differentdimensions in sourcing decisions. The first iswhat is called the product level, i.e. the distinctsingle offering meeting a specific need, andthe second is the transaction level, i.e. howoften a single product or offering is demandedby one customer over a given period of time.According to Baker/Faulkner’s theoretical rea-soning, for strategy and business consultingservices, which are project-based in natureand demand different functional expertise ineach project, a transactional strategy usuallyprovides the best results. Fractional strategiesare supposed to be the most suitable approachto sourcing services with a profile similar tothat of IT outsourcing. As outlined above, thetrend in recent outsourcing transactionstowards partial outsourcing backs this theoret-ical reasoning with empirical evidence.

Finally, it’s important to mention thatBaker/Faulkner are extremely skeptical ofrelational strategies, a classification intowhich transformational outsourcing would fallaccording to its profile. The practical argu-ments that these authors put forward, such asprofessional services companies’ observedgrowing opportunistic behavior, add weight tothe argument for a higher risk of hold-ups

Despite focusing on the different dimen-sions analyzed in both concepts,Cohen/Young and Baker/Faulkner come tothe same conclusion: the business model char-acteristics of transformational outsourcing, i.e.the attempt to integrate different competen-cies, and the client’s differentiated valueexpectations, as well as sourcing strategies,seem to be rather incompatible in principle.

What Will The FutureHold?

As we have outlined, transformational out-sourcing faces some major barriers in the mar-ket from theoretical and practical points ofview. However, this does not necessarily meanthat there won’t be attractive, working trans-formational outsourcing deals in the future.The two major arguments, the risk of hold-upand the sourcing and decision-making pro-cesses, advanced against transformationaloutsourcing merely answer the strategic ques-tion regarding whether transformational out-sourcing will be a business model that revolu-

tionizes the entire IT outsourcing market.EDS’s recent decision to sell off its strategyconsulting unit A.T. Kearney could be indica-tive of the inherent difficulties of such inte-grated business models. In the mid-1990s, EDShad already developed “co-sourcing”, a servicemodel similar to transformational outsourcing.

From our point of view, there are more obvi-ous strategies with which vendors could improvetheir competitive positioning. On the one hand, amore focused, industry-specific service offering isone way a vendor could differentiate itself suc-cessfully in the market. This is an option evenlarger players could employ to position them-selves against, for example, the services andtechnology powerhouse that is IBM. TietoEnator’sstrong focus on telecommunications or AffiliatedComputer Services’ focus on public sector clientsare two examples that follow this logic. We con-sequently expect an increasing amount of know-how switching mergers and acquisitions (M andA) deals in future. Computer Sciences’ disposal ofits Austrian pulp and paper industry unit toTietoEnator, as well as WM-data’s acquisition ofAtos Origin’s Nordic operation are prototypical ofsuch moves.

On the other hand, mature markets alwaysdemand aligned, efficient delivery structures.IT outsourcing is the key to control costs andmaintain profitability, despite the market’sprice pressures. Rather than just reducing fac-tor costs by off-shoring activities to low-costcountries, the future challenge will be toreplace some of today’s labour-intensive ser-vice activities by hardware and software tech-nologies that will allow greater economies ofscale and higher standardization. This couldbe one answer to the question regarding IBM’sfuture direction, since the common argumentof a long-term trading up strategy from hard-ware to software and from software to ser-vices might be far too simple.

References[1] Baker, W.E. and Faulkner, R.R. (1991).

Strategies for managing suppliers of pro-fessional services. CaliforniaManagement Review. Vol. 33, No. 4, pp.33-45.

[2] Besanko, D. et al. (2004). Economics ofStrategy. Wiley, Hoboken. Cohen, L. andYoung, A. (2006). Multisourcing: movingbeyond outsourcing to achieve growthand agility. Harvard Business SchoolPress, Boston.

[3] Cullen, S. and Willcocks, L. (2003).Intelligent IT Outsourcing. Butterworth,Oxford.

[4] Cunningham, P.A. and Fröschl, F. (1995).Outsourcing: Strategische Bewertungeiner Informationsdienstleistung.Frankfurter Allgemeine Zeitung Verlag,Frankfurt.

[5] Fink, D. et al. (2004). Die dritte Revolutionder Wertschöpfung: Mit Co-Kompetenzenzum Unternehmenserfolg. Econ,München.

[6] Göbel, E. (2002). NeueInstitutionenökonomik: Konzeption undbetriebswirtschaftliche Anwendung.Lucius & Lucius, Stuttgart.

[7] Kim, C. and Mauborgne, R. (2005). BlueOcean Strategy: How to CreateUncontested Market Space and Make theCompetition Irrelevant. Harvard BusinessSchool Press, Boston.

[8] Kotler, P. et al. (2002). MarketingProfessional Services: Forward-ThinkingStrategies for Boosting Your Business,Your Image, and Your Profits. PrenticeHall Press, Englewood Cliffs.

[9] Kreutter, P. and Weigand J. (2006).Consolidation patterns in the German IToutsourcing industry. G/R/I/D WorkingPaper, Vallendar.

[10] Lacity, M.C. and Willcocks, L. (1998). Anempirical investigation of informationtechnology sourcing practices: Lessonsfrom experience. MIS Quarterly, Vol. 22,No. 3, pp. 363-408.

[11] Mazzawi, E. (2002). Transformational out-sourcing. Business Strategy Review. Vol.13, No. 3, pp. 39-43.

[12] McGahan, A. (2004). How IndustriesEvolve: Principles for Achieving andSustaining Superior Performance.Harvard Business School Press, Boston.

[13] SMP Strategy Consulting (2006). SMP IT-Studie 2006. Duesseldorf.

[14] Williamson, O. E. (1975). Markets andsHierarchies: analysis and antitrust impli-cations, a study of the economics ofinternal organization. Free Press, NewYork.

StrategySECTION 1




29www.cxoeurope.com

BUSINESS IMPACT OF OUTSOURCINGA FACT-BASED ANALYSIS.

IT outsourcing was clearly a part of aneffective management strategy that the com-panies in the study used to achieve positiveresults. The study illustrates that IT outsourc-ing is a proven business tool that other com-panies should consider to build better bottom-line results and please shareholders.

Companies that out-sourced IT outperformedpeers on key businessmetrics

Companies in the study realized better long-term improvements in businessperformance when compared to sector peers.The results were impressive.

Lower growth in SG&AAlmost three-quarters of the companies

studied observed significant reduction in sell-ing, general and administrative (SG&A)expenses compared to sector peers. Prior tooutsourcing, the annual growth in SG&Aexpenses of companies in the study wasalready 4.2 points lower than the sector medi-an, likely due to preexisting corporate culturesfocused on business improvement. Within oneto two years after IT outsourcing, these com-panies improved even more. Annual growth in

Building better bottom-line results

Revenue growth. Product and service inno-vation. Cost containment. Process and perfor-mance improvements. Market-share expan-sion. These pressing concerns top today’s cor-porate agendas, as company executives lookfor ways to deliver better short- and long-termresults. Executives are increasingly outsourc-ing information technology resources to helptheir companies reduce costs and better focuson core business strategies.

This rapid growth in outsourcing IT hasattracted the attention of researchers andpractitioners alike, as they seek to ascertainthe value of outsourcing IT. Most research hasbeen qualitative, relying on case studies, inter-views and questionnaires. In some cases,teams undertook quantitative approaches tounderstand the financial impact of outsourc-ing. Typically, however, they focused on short-term stock performance.

Using a rigorous statistical approach, IBMscientists analyzed the financials of 56 publiclytraded companies – 38 non-IBM clients and 18IBM clients. The analysis revealed a correla-tion between major IT outsourcing deals andsignificant improvements in key business met-rics for those companies.

Scientists at the IBM T. J. Watson Research Center investigated the long-term effects on companies that outsourced a major por-tion of their IT infrastructure between 1998 and 2002. Unlike previous research that relied on the case-study approach, the IBMResearch study1 is the first to apply rigorous statistical analysis to measure the impact of an outsourcing agreement on a com-pany. The study concludes that companies engaged in information technology (IT) outsourcing outperformed their peers on along-term basis in key business metrics, specifically selling, general and administrative (SG&A) expenses, return on assets (ROA)and earnings before interest and taxes (EBIT). Further, the research indicates that the larger the outsourcing contract, the morelikely the improvement in bottom-line results. This white paper examines the results of the survey.

Dr. Aleksandra (Saska) MojsilovicScientist, Mathematical SciencesIBM Research

with collaboration from Dr. Marc BertonecheHarvard Business School, Visiting Professor

SG&A expenses for these companies was 9.9points lower than the sector median. Onenotable performer, a global supplier ofadvanced semiconductors with annual rev-enue of about US$1.3 billion, reduced SG&Aexpense by almost half after outsourcing IT.Meanwhile, SG&A expenses for the semicon-ductor supplier's competition grew by 9 pointsover the same period.

Increased growth in ROAAlmost two-thirds of the companies stud-

ied outperformed their peers in return onassets (ROA) two to three years after IT out-sourcing commenced.

Prior to outsourcing, the annual ROAgrowth rate for companies in the study was7.5 points lower than the sector median. Afteroutsourcing, however, these companies expe-rienced 8.6 points higher annual growth ratein ROA compared to the sector median-a sub-stantial swing of 16.1 points. A global providerof travel and real estate services, for example,grew ROA by more than 300 percent, while itscompetitors' ROA dwindled by 29 percent.

Higher growth in EBITNearly two-thirds of the companies studied

grew earnings before interest and taxes (EBIT)

TOP_06_IBM_wp 12/7/06 4:46 pm Page 1

and May 2004. To minimize the selection bias,an automatic filter was implemented to searchthe database using the following criteria:- Multinational company listed on a U.S.

stock exchange- Announced total contract value (TCV) of

US$50 million or higher to a singleprovider/vendor

- Outsourcing agreement announcedbetween January 1, 1998, and November 31,2002; end date chosen to allow sufficienttime window for the impact analysis

- Scope of outsourcing contract was pre-dominantly IT, such as data centres, desk-side support and hosting

- Contract was the company’s first major IToutsourcing announcement

The analysis demonstrates a strong corre-lation between outsourcing IT resources andthe financial performance of the companiesstudied. It is important to note, however, thatthe results do not imply that outsourcing wasnecessarily the sole driver behind thisimprovement.

To further establish confidence in theresults, the IBM Research team ran a MonteCarlo simulation computing the probability ofobserving the same result in a random popula-tion of companies. The team randomly select-ed 56 companies while preserving the same

StrategySECTION 1


faster than their peers. Two to three years afterIT outsourcing, companies experienced anannual rate of growth in earnings 11.8 pointshigher than the growth rate of the sector medi-an. To better understand the dual impact onearnings, please see the Appendix.

Improvement in earnings growth more likelywith larger contracts

Research by IBM scientists indicates thatthe larger the outsourcing contract, the morelikely the improvement in bottom-line results.While 54 percent of companies engaged in IToutsourcing agreements of less than US$100million per year experienced positive earningsgrowth, 71 percent of companies engaged inIT outsourcing agreements of greater thanUS$100 million per year realized positivegrowth in earnings. (See figure 1.)

Research analysis andmethodology

The quantitative analysis was performedby scientists in the Mathematical SciencesDepartment at the IBM T. J. Watson ResearchCenter. They analyzed each company’s finan-cial performance in the year prior to outsourc-ing and measured results up to three yearsafter outsourcing began. Following the theo-retical and empirical evidence that the keyreasons for outsourcing include cost reduc-tion and focus on core operation,2,3 IBM scien-tists focused their investigation on SG&A,EBIT and ROA.

Figure 2 shows the before-and-after busi-ness results. Other studies that explored theeffects of outsourcing have only analyzed peri-

ods of months before and after the beginning ofan outsourcing agreement. The IBM team uti-lized a patent-pending methodology to mea-sure changes in business performance ofdiverse companies over a longer-term period—starting from one year prior to outsourcing andup to three years after.

IBM used the Datamonitor ComputerWiredatabase of historical services signings toidentify candidates for the study. On July 15,2004, the database listed 5,085 servicesengagements announced between May 1994

IT outsourcing con-nects global telecomcompany to betterbusiness resultsA global telecommunications company out-sourced the management of its data centresand other processes in an agreement valuedat US$4 billion. The year before the companyoutsourced IT, its quarterly SG&A expensewas US$3.1 billion. Three years into the out-sourcing agreement, quarterly SG&A expensedropped 13 percent to US$2.7 billion. Theresult is in marked contrast to the sector’s200 percent increase in SG&A expenses dur-ing the same period.

Figure 1: Relationship between the size of the IT outsourcing agreementand growth in earnings

Outsourcing forstronger financialhealth A healthcare insurance company outsourcedmanagement of its data centres, PC support,companywide help desks and data networksto a service provider in January 2002 with aten-year agreement worth over US$700 mil-lion. Prior to outsourcing, the company’squarterly EBIT was US$47 million. Two yearsinto the agreement, the company’s quarterlyEBIT grew to US$119 million. The 153 per-cent increase in EBIT was ten times greaterthan the rate of earnings growth in the sectoras a whole.

TOP_06_IBM_wp 12/7/06 4:46 pm Page 2

SECTION 1Strategy


31www.cxoeurope.com

References:

1 1 “Outsourcing Business Impact,” IBM T.J.Watson Research Lab, 2004

2 M. A. Smith, S. Mitra, S. Narasimhan,“Information Systems Outsourcing: A studyof Pre-Event Firm Characteristics,” Journalof Management Information Systems, Fall1998, Vol. 15, No.2, pp. 61–93

3 D. J. Bruce, M. Useem, “The Impact ofCorporate Outsourcing on CompanyValue,” European Journal of Management,Vol. 16, No. 6, pp. 635–643, 1998

4 Gao, Ning. “What does Stock andAccounting Performance tell us aboutOutsourcing?” Katz Graduate School ofBusiness, University of Pittsburgh, 2005

5 “Today’s sluggish economy,” ControllersReport, March 2003

6 “Worldwide IT Trends and BenchmarkReport,” Meta Group, 2004

7 Carr, Nicholas. “IT Doesn’t Matter,”Harvard Business Review, May 2003

8 Davis, Kendall; Rath, Anna; and Scanlon,Brian. “How IT Spending is Changing,”McKinsey Quarterly, 2004 Special Edition,2004

© Copyright IBM Corporation 2006, All Rights Reserved

IBM, the IBM logo and the On Demand Business logoare trademarks or registered trademarks ofInternational Business Machines Corporation in theUnited States, other countries or both.

Other company, product and service names may betrademarks or service marks of others.

References in this publication to IBM products or ser-vices do not imply that IBM intends to make themavailable in all countries in which IBM operates.

sector distribution, and ran the same analysis1,000 times. The same financial improvementsoccurred in less than 5 percent of the samples,indicating a 95 percent confidence level in theresults.

Furthermore, an independent study recent-ly released by the Katz School of Business atthe University of Pittsburgh confirmed theresults measured by the IBM team. Using dif-ferent data, methodology and business met-rics, the study concluded that firms experiencesignificant improvements in operating efficien-cy for each of the first three years following theoutsourcing contract.4

ConclusionOutsourcing IT is a strategic business

decision that is likely to boost a firm’s per-formance. Most of the existing research onthe effects and benefits of IT outsourcing isbased on case studies and client interviews.The IBM study used robust statistical meth-ods to take a fresh look at outsourcing,investigating its long-term impact on com-panies. Besides the wealth of knowledge onwhy and how to outsource, the results shednew light on the value that a well-structuredand well-executed IT outsourcing agreementcan deliver to a company. The study alsoemphasizes the potential that large-scale IToutsourcing strategies offer to boost thebusiness performance and bottom-lineobjectives of companies.

AppendixEarnings before interest and taxes is deter-

mined by revenue, less costs; selling, generaland administrative general expenses; as wellas depreciation and amortization expenses.SG&A expense, also known as overhead, typi-cally varies as a percent of revenue from 16percent to 25 percent across industries.5

IT expense is typically accounted for with-in SG&A expense. IT expense as a percent ofrevenue also varies by sector—from 1.43 per-cent in construction to 6.64 percent in finan-cial services.6 According to a study across mul-tiple industries, IT expense accounts for half ofa company’s capital expenses on average.7

Most Fortune 500 companies use accrual-based accounting, depreciating IT assets overthree to five years.8

IT and capital expenses should decreasewhen a company successfully outsources IT.The expense reductions enable a company torealize lower SG&A expenses, as well asdepreciation and amortization expenses, com-pounding the improvement in earnings.

Figure 2: Difference in points in annual growth, as compared to sectormedian, prior to and after outsourcing IT

It is important to understand the differencebetween the terms "points" and "percent" whenthey are used to describe growth or relationshipwith the median. Points reflect the actualnumerical increase or decrease in percent. Forexample, when a central bank raises interestrates from four to six percent, they have raisedrates by two points, not two percent."

TOP_06_IBM_wp 12/7/06 4:46 pm Page 3

THE OFFSHORING REVOLUTIONGLOBAL IMPLICATIONS

As companies continue to view offshoring as an attractive way to boost their competitiveness, the trend is gaining momentum.This is likely to add fuel to the debate on whether it is a welcome development or not. In this article, which draws on the WorldInvestment Report 2004, the United Nations Conference on Trade and Development suggests that the offshoring of services offersconsiderable potential gains to both importers and exporters of the relevant services, as long as appropriate policies are adopted.

Torbjörn Fredriksson Senior Economist UNCTAD

StrategySECTION 1


The irreversible tradabilityrevolution

New information and communication tech-nologies (ICT) have radically improved thepossibility to trade services over a distance.The cost of one megahertz of processingpower fell from $7,600 in 1970 to 17 cents by1999; in India, the price of an international2Mbps fibre leased line dropped by up to 80%only between 1997 and 2001.1 Such changeshave led to a revolution in the way companiesare organizing their production of services.

The use of ICT allows knowledge to becodified, standardized and digitized, which inturn allows the production of more services tobe split up, or ‘fragmented’, into smaller com-ponents that can be located elsewhere to takeadvantage of cost, quality, economies of scaleor other factors. In fact, many of the forcesdriving the fragmentation and globalization ofservices are similar to those that have long ledcompanies to create international productionsystems for the manufacture of goods.

As highlighted in the World InvestmentReport 2004, the range of processes affectedby the fragmentation of services is huge, fromsimple activities (e.g. entering numbers into acomputer) to highly sophisticated tasks (e.g.architectural design, financial analysis, R&D).2

While some are specific to a particular indus-try, many are generic and cut across most

industries. So, while the globalization of man-ufacturing activities affects only manufactur-ing, offshoring of services is of potential rele-vance to firms in all sectors from miningcompanies to banks.

Obviously, not all services are affected, butmany will be. In an UNCTAD/Roland BergerStrategy Consultants survey of leadingEuropean firms' offshoring strategies, no busi-ness process was explicitly excluded from off-shoring considerations by more than 20% of therespondents. So, there are no ‘sacred cows’.

More importantly, the fundamentalchanges in the tradability of services are irre-versible in nature. Once companies learn toexploit fully the opportunities created by pool-ing services and locating them where they canbe most efficiently performed, they are unlike-ly to go back to the old way of organizing theirbusiness processes. Consequently, policymak-ers need to carefully consider how best toaddress this new situation.

Offshoring vs outsourcingAn important distinction should be made

between outsourcing and offshoring (chart 1).Outsourcing implies moving a business pro-cess outside the firm to a third party serviceprovider. This supplier may be located in thesame country as the principal or abroad.Offshoring implies shifting the business pro-

TOP_06_UN_wp 13/7/06 12:54 pm Page 2

Why do companies offshore services?

The key factor behind the offshoring pro-cess is the search for improved competitive-ness – through cost reduction and/or improvedquality. Different studies show that cost savingscan be substantial – often between 20 and 40%.Savings can be achieved partly by seeking out

lower-cost locations, partly by consolidatingoperations and reducing the cost of infrastruc-ture, training and management. Consolidationof activities may reduce the need for expendi-tures on infrastructure and maintenance, aswell as labour costs.

SECTION 1Strategy


33www.cxoeurope.com

cess outside the home country. This can bedone either by outsourcing the service to anexternal supplier (offshore outsourcing) or to aforeign affiliate (captive offshoring).

Outsourcing of business processes within acountry has existed in some form for centuries.It gained in importance as companies focusincreasingly on what they do best (their corebusiness) and outsource non-core activities.The global market for such outsourcing wasestimated at $110 billion by end 2002 and isexpected to grow to about $173 billion in 2007.Offshore outsourcing of business processes,meanwhile, accounted for only 1% of this mar-ket, but is expected to achieve a market shareof 14% by 2007.3

In fact, in many countries, the bulk of theservices exported have been generated as aresult of captive offshoring. For example, up to60% of India's exports of IT-enabled servicesare produced by foreign affiliates. Similarly, inIreland, two-thirds of all employees in the callcentre industry work in foreign affiliates.

Location

Domestic

Foreign(‘offshoring’)

Source: UNCTAD, World Investment Report 2004: The Shift Towards Services.

Internalized production

Production kept in-house at home

Production by own foreign affiliate

‘Captive offshoring’

Externalized production(‘outsourcing’)

Production outsourced to third-party service provider at home

Offshore outsourcing to third-party provider abroad

Chart 1: Offshoring and outsourcing

1

2

3

4

5

6

7

8

9

10

Source: UNCTAD, based on data from LOCOMonitor.

Customer support centres

Canada (81)

India (79)

U.K. (48)

Philippines (40)

Ireland (32)

China (21)

USA (21)

France (17)

Australia (15)

Germany (13)

Shared service centres

India (108)

Ireland (25)

Hungary (14)

Poland (14)

Czech Republic (11)

U.K. (11)

Philippines (10)

China (9)

Singapore (9)

Malaysia (9)

R&D services

India (532)

China (368)

USA (132)

U.K. (94)

Singapore (81)

France (65)

Canada (56)

Germany (53)

Taiwan Province of China (50)

Ireland (47)

Chart 2. Top 10 destinations by number of FDI projects related to selectedservice functions 2002-2005

Even more interesting is that companiesoften report quality gains from offshoring. Forexample, in the case of captive offshoring, theconsolidation of services in a few rather thanmany locations may allow the development ofcentres of excellence. Moreover, when the‘back-office services’ of one firm become the‘front-office services’ of a specialized service

provider, the latter may pay more attention toquality while the principal can focus scarceresources on its core activities. In some cases,offshoring has also taken place to cope withexcess demand for certain kinds of services.This happened in the United States in the run-up to the new Millennium as companies strug-gled to find sufficient number of computer pro-grammers in their home country to address theY2K problem, as well as in Europe before theintroduction of the Euro.

Contrary to common perceptions, off-shoring is not simply a question of shiftingactivities from high-cost to low-cost loca-tions. In fact, much restructuring takes placeamong the industrialized countries. Forexample, when Infineon Technologies in July2003 announced the consolidation of itsEuropean customer logistics managementfrom 19 to 3 locations, the new centres wereplaced in Dublin (Ireland), Kista (Sweden)and in Munich (Germany).4 This just illus-trates that many factors other than cost dif-ferentials also influence where a service isultimately produced.

A review of FDI projects related to selectedservice functions during 2002-2005 confirmsthe diversity of destinations depending on thenature of the service that is offshored (chart 2).In the case of customer support centres,Anglo-Saxon countries dominate, led byCanada, India and the United Kingdom.Industrialized countries make up 7 of the top10 destinations. English-speaking capabilitieshave so far been an essential asset to attractFDI projects in this kind of services. However,opportunities are emerging in locations inEastern Europe, Africa and Latin America thatcan handle such languages as German,French, Spanish and Japanese.

Contrary to common perceptions, offshoring is not simply a question of shifting activities from high-cost

to low-cost locations.

TOP_06_UN_wp 13/7/06 12:54 pm Page 3

StrategySECTION 1


companies are concerned that the servicequality will suffer if certain activities (e.g. cus-tomer services) are offshored to a foreign loca-tion. Others are afraid that control over theservice activity or the institutional knowledgeneed to perform the tasks will be lost in theprocess. Data-security issues can also consti-tute a potential barrier to offshoring. Based onhow companies perceive such risks, they differsignificantly in their assessment of the poten-

tial benefits from offshoring. For example, inthe financial industry, the Royal Bank ofScotland – in contrast to competitors such asBarclays and HSBC – took a decision not toshift certain services abroad (at least not forthe time being).7

Nevertheless, a growing number of compa-nies are likely to consider new business pro-cesses as candidates for offshoring. Accordingto the 2004 survey by UNCTAD and RolandBerger Strategy Consultants, only 40% ofEurope's largest firms had any experience withservices offshoring. About 44% of the firmsstated that they had concrete plans for future

offshoring most of which were related to var-ious back-office functions. Within Europe,British companies have been most active inthe area of offshoring. By contrast, companiesin the large economies of France, Germanyand Italy have shown much less interest inexploring the opportunities created by thetradability revolution.

What does it mean for thecountries involved?

The global shift in services offers potentialbenefits for countries at both ends of the pro-cess. For exporting countries, offshoring pre-sents a new source of export revenues, thecreation of new jobs in the service sector,opportunities for skills upgrading, andchances to become better connected with the

global economy. As the demand for offshoringgrows from a wider range of companies seek-ing an optimal mix of locations in differenttime zones and with different capabilities,there is likely to be scope for more countriesto find a niche in which they can develop acompetitive position.

As far as the importing countries are con-cerned, the offshoring trend has already givenrise to concerns. No doubt, some workers willbe negatively affected as companies restruc-ture their services production. However, themagnitude of the possible impact is likely to befar smaller than that of normal fluctuations indemand and technological change. If ForresterResearch, the consultancy firm, is right in esti-mating that 3.4 million service jobs will be off-shored from the United States by 2015, itwould correspond to a few hundred thousandjobs annually. Comparing this with the 4 mil-lion (!) job turnover that takes place on aver-age every month in the U.S. economy helps toput the offshoring debate in perspective.

Moreover, one new job created in an off-shore location does not equate to one job lostin the importing country. In many cases, theoffshoring process reflects an increaseddemand that has to be met by exploring newsources of skills. There is little evidence thatoffshoring of services has led to job losses inthe source economies. In the U.K., for exam-ple, call centre employments is expected toincrease from below 500,000 in 2003 to

650,000 by 2007, despite the fact that manyBritish companies are setting up call centreactivities e.g. to India and South Africa. In theUnited States, similarly, call centre employ-ment is predicted to grow from 3% in 2001 to5% of the workforce by 2010.

In addition, the fact that the United Stateswas a pioneer in terms of both outsourcingand offshoring has given rise to a new busi-ness: contract service provision. It is no coin-cidence that many of the leading contractservices providers such as Convergys,Sykes, Sitel, IBM and EDS are American.These and other similar companies are nowexploiting the fruits of first-mover advan-tages developed in the United States by set-ting up a network of service centres in differ-ent parts of the world.

For shared services centres, the picture isslightly different, suggesting that for back-office functions, access to other skills than lan-guage capabilities is relatively more important.The list of the top-10 destinations includesthree new EU members (Czech Republic,Hungary and Poland) in high positions. ForGerman speaking enterprises, a 2005 surveyby Deutsche Bank and BITKOM found thatthese three countries will see the fastest

growth as offshoring destinations. In 2005,Costa Rica and Romania also emerged as pre-ferred locations for shared services centres.

For R&D services, the skills requirementsare particularly high. Still, India and China arenow the top destinations for related FDI projectsmost of which are related to software develop-ment. As noted in the recently published WorldInvestment Report 2005, more than half of theworld's top R&D spending firms already doR&D in China, India or Singapore.5

How much will be off-shored?

The offshoring trend is still in its infancy.No one knows precisely how large the phe-nomenon will become. However, whateverthe exact numbers, it is quite likely that wehave only seen the tip of the iceberg. Arecent assessment found that the global mar-ket for offshoring services is growing at anannual rate of 30%, possibly reaching $100billion by 2008.6 Other studies put the maxi-mum number of jobs in the U.S. that could be‘at risk’ at around 14 million. Various otherconsultancy reports indicate that some 2-4million service jobs are likely to be offshoredin the next 5-10 years.

If early movers in the area of offshoringcontinue to experience competitiveness gains,it will be difficult for their competitors not tofollow suit sooner or later. As the trend gainsmomentum, it should also become easier forcompanies to find a larger number of capablesuppliers of a growing range of services.

Indeed, companies are still on a steeplearning curve and many are struggling tocope with the challenges of offshoring. Many

If early movers in the area of offshoring continue toexperience competitiveness gains, it will be difficult for

their competitors not to follow suit sooner or later.

The global shift in services offers potential benefits forcountries at both ends of the process.

TOP_06_UN_wp 13/7/06 12:54 pm Page 4

For the importing economy, offshoring canallow companies to produce/source servicesmore cost-effectively and thereby to improvetheir competitiveness and invest in new jobs.As shown by Catherine Mann at the Institutefor International Economics in Washington,globalization of services is expected to lead tomajor productivity gains – maybe even largerthan as a result of the globalization of manu-facturing activities.

The policy challengeSo what does this mean in terms of poli-

cies? What can countries do to reap greatergains from a process that is likely only to gainin force in the years to come?

The first lesson is for policymakers toaccept that the increased tradability of serviceswill not be reversed. Hence, companies willcontinue to consider ways of restructuringtheir activities internationally. As all kinds ofstructural change, this creates opportunitiesand risks. Those policymakers that are able toaddress these in a constructive and forward-looking manner stand the best chances ofreaping the greatest gains. Conversely, thosepolicymakers that primarily focus on ways toslow down or alter the trend towards off-shoring, will at best be able to postpone theneed for adjustment. On the other hand, suchdelays may eventually place their own compa-nies in a worse competitive position comparedwith those companies that enter the learningprocess at an early stage.

The second lesson is that all countries mayidentify niches in which they may offer attrac-tive conditions for the production of services.As explained above, offshoring is not simply aNorth-South phenomenon. Both developed

and developing countries stand a chance ofattracting centres of excellence for the produc-tion of specific services or business processes.Each country needs to assess carefully itsstrong as well as weak points in order tounderstand where it may have an opportunityto attract such activities.

Thirdly, governments can influence corpo-rate decisions in this area. Active investmentpromotion can ensure that prospectiveinvestors are aware of existing investmentopportunities in a country. In this context, theprovision of so-called after-care services maybe particularly effective. As many as 40% of thelargest European companies stated that fac-tors beyond pure benchmarking affect theiroffshoring decisions, including internal lobby-ing by their own foreign affiliates. Investmentpromotion agencies can assist in such efforts.

But even if the long-term benefits are sub-stantial, there are also important short-termchallenges to consider. All shifts in compara-tive advantage entail adjustments at the microlevel. Some people do lose jobs, and there willbe transition periods during which they searchfor new employment. People may have toacquire new skills or move to new locations tobecome employable. There are, in otherwords, real adjustment costs. In this situation,the role of the Government is to minimize orameliorate such costs. The institutional chal-lenge is to ease the transition process for thosedirectly affected by offshoring, upgrade skillsand increase innovation. This does not requiremeasures to force service jobs to stay at home,but rather more constructive policies thatencourage education, training and R&D.

Protectionist measures aimed at arrestingthe offshoring trend would likely destroy

rather than save jobs. Indeed, limiting the abil-ity of its firms to exploit opportunities from off-shoring may have a negative effect on theirinternational competitiveness, with consider-ably more serious implications for employ-ment in the long term.

1 McKinsey Global Institute (2003). New Horizons:Multinational Company Investment in DevelopingEconomies (San Francisco: McKinsey GlobalInstitute), www.mckinsey.com/knowledge/mgi.

2 UNCTAD (2004), World Investment Report 2004:The Shift Towards Services (Geneva and NewYork: United Nations).

3 Scholl, Rebecca S., Debashish Sinha, Ravi Datarand Sujay Chohan (2003). “India will generate$13.8 billion from offshore BPO exports in 2007”,Gartner Dataquest Report, June (Stamford, CT:Gartner, Inc.).

4 UNCTAD (2004), World Investment Report 2004:The Shift Towards Services (Geneva and NewYork: United Nations).

5 UNCTAD (2005), World Investment Report 2005:Transnational Corporations and theInternationalization of R&D (Geneva and NewYork: United Nations).

6 EIU (2006), The Face of Offshoring: Closer toHome? (www.eiu.com/offshoring).

7 According to the company: "The best outcomefor our staff, shareholders and customers is tocontinue to employ people in countries in whichwe operate, provided the fiscal and regulatoryclimate is supportive of business"(http://www.guardian.co.uk/business/story/0,3604,1065770,00.html).

SECTION 1Strategy


35www.cxoeurope.com

TOP_06_UN_wp 13/7/06 12:54 pm Page 5


EXECUTIVE VISIONS

At New York’s Jacobi Medical Center, patients now wear theirmedical history on an RFID wristband. Medical professionalsnow identify patients in seconds and access a secure databasecontaining detailed medical history and care instructions. Useof leading edge technology has made Jacobi an innovator inpatient care.

• Identify cost controlling opportunities for clients.At Owens Corning, an integrated service delivery model wasleveraged to lowering costs by 25% over the course of the three-year outsourcing contract.

• Create repeatable processes that add value. In Vienna, aparking lot management solution was designed and imple-mented based on mobile phone messages (SMS) and mobilecontrol units, enabling an easier payment process more effi-cient parking space administration.

• Create a long-term roadmap for innovation structuredthrough corporate governance. A leading global beveragecompany contracted for a five-year roadmap of innovationand savings through a progressive gain-sharing approach.

Siemens Business Services defines, governs and delivers whatshould be done to drive innovation and transformation for itsclients. This is done through a formalized process of creating atransformation roadmap that helps enterprises address and prior-itize business challenges. First, the optimal alignment betweenthe business and IT, the target operating model, is identified.Then, a proprietary tool is applied to facilitate the discussion andplanning of which technologies and services will drive fulfillmentof the target operating model.

Make Innovation a RequirementA formalized approach to innovation and transformation

within an outsourcing relationship can provide business valueand drive competitive advantage. An innovative service partnerlike Siemens Business Services can transform the entire ITenvironment, from the technology through the support pro-cesses, and provide the governance model for continuousimprovement.

Enterprises are looking for innovative ways to create addedvalue through IT outsourcing. But what is innovation and how doyou harness its potential to transform your business?

Companies that outsource their IT functions seek greaterinnovation from service providers. CIOs are challenging serviceproviders to help bring IT and business goals together throughtechnology advancements and deliver transformation through astructured approach. Outsourcing clients want contractuallyagreed upon roadmaps for innovation.

So what exactly is ‘innovation’? Industry analysts and busi-ness leaders agree that in order for a product or service to be con-sidered an innovation, it must make a great leap forward in deliv-ering a measurable benefit. Siemens Business Services definesinnovation as something new and different that creates value.Value is defined as the ability to lower cost or create a businessadvantage. Innovations that create an advantage are those thatempower organizations to reach beyond their current operatingor business models and be opportunistic in the pursuit of growth.For enterprises, the real definition of innovation depends on theirindividual business requirements, industry factors, and competi-tive landscape. Once an optimal state of operations is identifiedthrough innovation, ‘transformation’ is the set of actions that willprovide a roadmap to achieve the desired state

Five Ways to InnovateSiemens Business Services has found specific, measurable

and repeatable ways to drive innovation and transformation:

• Identify competitive advantage opportunities forclients. In 2004, the BBC became the first in the media mar-ketplace to adopt an outsourcing approach to technology ser-vice provision. Focusing on strategic initiatives, the BBC istransforming the industry by connecting customers with any-where/anytime content and leading the creation of a fully dig-ital Britain.

• Enable structure for continuous evaluation of leadingedge services/technologies. Radio Frequency identificationtechnology is traditionally used in supply chain processes.

Christian OeckingPresident of Global IT Outsourcing,Siemens Business Services

EXEC

UTI

VEVI

SION

S

IT OUTSOURCING: ENHANCE YOURPERFORMANCE THROUGH PROGRESSIVEVALUE GENERATION

TOP_06_SBS_EV.qxd 12/7/06 4:49 pm Page 2

OFFSHORING STRATEGIES

37www.cxoeurope.com

how those promises are not executed. There are fewer and fewerresources available in places like India, which has a highturnover of staff. We are seeing some problems with access toresources there. Cost is number one and it depends on whetheror not the companies are feeling the benefits. The second onethat we are seeing is really important: accessing the ability to getresources globally.

To summarise: are the companies getting the benefits? If it iscost, they surely are if they are offshoring - without that it is diffi-cult. But they are also looking to get access to resources, which isa big benefit; and to support growth strategies. We are seeingsome extremely good returns there.

CxO: Are we focusing too much on cost and neglecting effec-tiveness?

CD: I don’t think so. I think in the executive’s mind the cost isnumber one. I believe quality is expected as a delightful benefit.Depending upon the service, the quality and effectiveness isimportant. We see that with more mature markets, where there isa better understanding of the service metrics and performancemetrics and where those are well-defined, the outsourcer canfocus upon and deliver against those metrics. So in a less matureservices area (where there is more bundling of services togetherbecause the standards are not in place, without great clarity aboutwhere service stops, and against the measures) it is more difficultfor those to claim that quality has actually improved.

CxO: What are the primary qualities that you should look forin an outsourcing partner, and how would you rank thesequalities?

CD: I think that would depend on what the service is, certain-ly. Each service should be measured on its own set of objectives.We can talk about speed, quality and cost, but at a very generallevel. However, those are kind of relevant depending on what youare trying to get done. For example, if the company is going totransform business processes and they have significant invest-ments in renovation and IT, now that’s an extremely complex ser-vices offering and very difficult to outsource in a classical way.But suppose your performance measures around businessimprovement of that process? Contrast that with IT maintenance,

CxO: How should outsourcing fit into corporate strategy?CD: I believe that outsourcing should become part of corpo-

rate strategy and it is a part of the organisation’s global footprintand human capital strategy.

CxO: What are the key benefits that companies expect toreceive through outsourcing and, in practice, are they everrealised?

CD: The primary benefit companies look for is cost and, it isimportant to distinguish the phenomena that has happened overthe last five years, in using outsourcing as a way to get access toresources that are offshore. And with the access to offshoreresources we’re actually able to find lower cost options than com-panies have seen in the past. From what I have seen in outsourc-ing there are three places that companies get benefits from. One:better factor cost such as lower cost labour or lower cost facili-ties.Two: its access to scale, and three, some kind of competence,and I think its very challenging for companies to get lower costservices through outsourcing without offshoring because for largecorporations they already have scale. In many traditional out-sourcing approaches you transfer staff over to do exactly thesame work as they were doing before, so there is no saving fromlabour, or even from a facility standpoint, as they are often usingthe same facility, so that leaves competence and that’s a difficultone from which to realise savings. In a recent presentation, Ihighlighted the hurdle for saving is significant: clients typicallywant 15 per cent. I think there is one outsourcing firm that saysthat’s the average they see in contacts. We know that vendorsneed 15 per cent and then there’s the overhead on top of that.And that all has to be covered when you go to a third party to getsomething done that you were doing for yourself. For onshoreoutsourcing that’s just very difficult to make. We see, in manycases, the company not getting the cost benefit that they expect-ed through outsourcing; while that is the number one thing thecompanies look for. With offshore strategies, we see benefits inthe 30 to 40 per cent range.

Therefore it’s important that offshoring is part of your out-sourcing strategy before I give you blanket statements about out-sourcing. I also see in the market a lot of cases where offshoringof resources is promised in outsourcing arrangements but some-

An interview with Chris Disher Vice President and founding PartnerBooz Allen Hamilton

EXEC

UTI

VEVI

SION

S

EXECUTIVE VISIONS

TOP_06_Disher_EV.qxd 12/7/06 4:51 pm Page 1

An interview with Chris Disher, Vice President and founding Partner, Booz Allen Hamilton


which is where many companies started outsourcing. You arelooking for consistent delivery, high quality and low cost. That’seasier to measure there. So it depends on what it is. If you aredoing more transformational work, that opportunity is going tolook completely different to someone doing some piecemealpiloting of IT maintenance.

CxO: What are the top five best practices in benchmarking?CD: I don’t think companies find benchmarking useful. I think

it’s something that’s talked about a lot at the outset of the nego-tiation process. But, at the end of the day , I don’t think the ven-dors will ever believe that benchmarking will be done well. Theyalways argue that apple-to-apple comparisons are difficult aseach company is unique.

CxO: Could there be general benchmarking standards?CD: I think in very mature process where you are charging by

the cost of transaction, and that was clear from the front end, thatis possible. But with even simple things, like field support for IT,which has been around for some time, it’s just going to depend alot on the profile of the customers’ users, their vocation and soforth. For example, how would you compare a bank at CanaryWharf in London with a bank in Wisconsin?

CxO: Why is relationship management so important to thesuccess of the outsourcing arrangements?

CD: Firstly, it’s one of the reasons that companies would sayoutsourcing arrangements fail. In a recent study, in associationwith IAOP, we surveyed nearly 60 companies and asked them ifthey were getting benefits from outsourcing. We found that thereare few companies (one in ten) that are reaping consistent bene-fits. The rest of them are either having troubles or they’ve got amixed bag. The main reason why arrangements fail is becauseboth vendors and customers disagree on what the problems are. I asked the vendors and their customers questions about wherethe problem areas are and the finding was that expectations arenot set-up properly from the very beginning. There seem to be realproblems with skills and relationship management and the prob-lems tend to be before the transaction is done and after the trans-action is done. So relationship management is key to the wholeprocess. Specifically, its crucial to understand the politics withineach of the organisations, their own objectives, and how thosecompanies work, what change management means, the impactit’s going to have on the business and a clear understanding of thecompany’s business objects and what their challenges are andtheir operating model. All this becomes important in knowing howto work within the organisation. So if you are going to drive sig-nificant change through outsourcing. Its also a key in helpingexpectation set in terms of what you are expecting me to deliverand what quality and services levels. When we talk about servicelevel agreements (SLAs) what are we really talking about? Are wereally seeing eye to eye on that? Getting expectations set and man-aging them properly are parts of relationship management.

CxO: Previously you said that understanding the sources ofvalue, risk and the organisation DNA are keys to building win-win relationships. Can you elaborate on that?

CD: We have a mechanism at Booze, Allen and Hamiltoncalled organisation DNA, it’s a way to find the culture of anorganisation and how it works. There are components to that:the first is the motivators, performance measures, the roles ofresponsibility and all the other things that go to make up theorganisation culture. And when you are putting two businessestogether, it all needs to work seamlessly. It’s more important tounderstand information flow because you haven’t just choppedoff part of an organism. That process still needs to work and theprocess is made of those components. So if you outsourcedepartments such as contact centres or warranty claims, orsomething of that nature, and it comes to an outsourcer dealingwith a company’s end customer, it’s important that you proper-ly set up those performance measures, or the incentives. Havingdiscussions about customer account profitability or market prof-itability versus customer satisfaction and the tensions betweenthose is important.

CxO: How do you go about building win-win relationships?CD: It starts with making sure your outsourcing relation-

ship is based on sound economic basis. We have seen manycases in the past where a company wants to enter a new mar-ket of an outsourcer or an industry, or do something to gain acertain client then they’ll do something, they’ll make a largeinvestment to win the account but later on, when that accountneeds to be profitable, the customer should not be surprisedthat all of a sudden new charges are levied, or the vendor isinterested in doing other things in that account to make sure itis profitable. Sound economics principles are a good place tostart. The customer needs to clearly understand how the ven-dor is making money within the relationship. Far too often thecustomers don’t care so much about that and that reallystrains relationships.

CxO: Is there a best practice governance structure that canlead to a good relationship?

CD: It depend on how you define governance. Some of itmeans just the day-to-day working relationship between the cus-tomer and the vendor, in which case they obviously need clearpoints of accountability between the two parties and somebodyshould bear the responsibility for those line operations that arebeing supported through the outsourcers, and that person needsto be an important player in working though the performancemeasures and standards that needs to be changed. Dependingupon the complexity of the relationship, you might have a broad-er set of stakeholders involved in certain areas such as technolo-gy standards, working through the business architecture anddesign – it depends on the nature of the relationship and the ser-vice being provided. The more significant it is, the more importantthe governance becomes.

EXECUTIVE VISIONS



CxO: Given your length and breadth of experience in outsourc-ing, what things have you learned, both good and bad, fromthose experiences?

CD: With outsourcing I have learned, over a long period oftime, that the economic hurdles for large companies were prettyhigh in making these things successful until we saw the advan-tage through offshoring of work, or the advances in technologiesthat vendors can use. I think that’s number one. Many situationshave failed in the past because of lack of understanding the eco-nomics. Secondly, bundling too much into these relationshipsmakes it very difficult and risky. I am not saying that you are notgoing to find a company that’s done a large deal, and they willclaim a great deal of success, but certainly we are seeing compa-nies moving away from single vendor relationships to more of aportfolio of relationships. I think that’s been a very positive trendbecause it does so many things for the customers if they can learnto manage them properly. In dealing with a number of differentvendors they’re learning how to work with them and so forth. Ithink the other good thing is that companies are learning to gethuman capital globally. I think that is critical for growth in thefuture as domestically, we are running out of people.

CxO: What is the current mood within the US with regards towhat’s happening with offshoring?

CD: When we were in a downturn in the economics cycle,people liked to point to the trend in offshoring of work as some-thing that’s bad. We had an election going on, so I think the mediaand the politicians were using it as a somewhat of a smoking gun.In the background the companies were quietly going about tryingto figure out how to improve performance. They looked at all ofthe options, including outsourcing and the movement of work toother countries. Now we are realising, as the economy has turnedaround and the companies are trying to grow, that we don’t haveenough professionals to do the work, engineering or IT. Fororganisations that are growing internationally, they are looking tothese new markets to do business in. They are not just looking tooffshore work there but are looking to be able to access newregions of the world. Asia is an important one now, particularlyChina, but I think Latin America will become very important in thenear future too. The other thing is the finding that we have fromthe Duke study, which really puts an exclamation mark over thispoint about growth and innovation. There is a chart in there thatshows the number of jobs created offshore versus the number ofjobs that are displaced in the US. Now we don’t know if someonelost their job or if they moved but where the work was moved off-shore that ratio tended to be one to one. In other words I lost ajob here, I moved it somewhere else. But within product develop-ment and engineering, one job displaced in the United States cre-ated 13 jobs offshore. What’s happening is companies are findingthat they can get more resources, they can do more with thesame, have more flexibility and they can support their growthstrategies. They are able to use resources in lower cost countriesto not only improve the bottom line but to fuel growth.

CxO: What will be the major challenges and opportunities overthe next five years?

CD: We are now in an outsourcing environment where thereis everything from a very mature almost commodity-like processto very immature ones. The companies are looking at outsourc-ing all of those, human resources, finance and accounting, and soon. The highly bundled forms I would say are less matured. Weare going to be cutting our teeth and learning how to outsourcein those areas because those tend to be the hot ones, personnel,finance and engineering. I think there will be more success in themature processes: IT and contact centres and some portions ofprocurement, so we will be working with more processes. Andwe will be doing them in multiple countries. This is important forcorporate strategy: companies are going to need to learn how todeal with myriad of captive offshore, outsourced offshore, andonshore resources and relationships. They’re going to need tobuild the capabilities within the corporation so that they can man-age that structure well. That’s what we are working on for thenext five years.

About the Author

Mr. Disher is a Vice President and founding Partner of Booz AllenHamilton’s Global Outsourcing Advisory Service. With over twenty-fiveyears of consulting experience, Mr. Disher specializes in organization andtechnology strategies for step change improvement in business perfor-mance. He has led global client engagements that involve cost reduction,business operations and administrative performance improvement, andoutsourcing. Mr. Disher is a founding member of the InternationalAssociation of Outsourcing Professionals serving on the Standards Boardand as Chairman of the Research Committee. He also serves as Officer inCharge for the Offshoring Research Initiative with Duke University. Mr.Disher is a frequent speaker on trends in outsourcing, offshoring, and ITeffectiveness.

Mr. Disher completed a Double Masters in Accounting and BusinessAdministration from Southern Illinois University. He holds a B.S. inEnvironmental Sciences from the University of Illinois. Mr. Disher is aCertified Management Accountant (C.M.A.).

39www.cxoeurope.com

EXEC

UTI

VEVI

SION

S


BUSINESS CHALLENGESAtos Origin is the Worldwide IT Partner for

the International Olympic Committee (IOC) forthe Olympic Games of Athens in 2004, Torino in2006, Beijing in 2008, Vancouver in 2010 andLondon in 2012. This set a new world record asthe largest sports IT contract ever awarded.

For the Torino Olympic Winter Games in2006, Atos Origin led the consortium of tech-nology partners developing and managing thesystems and software that power theInformation Technology solutions

SOLUTIONSAs lead integrator, project manager and IT

operations manager, Atos Origin has also devel-oped many of the key software applicationsused. Successfully delivering one of the largestIT projects in sports history represented a stag-gering task. The sheer volume of informationprocessed to run and document the event cre-ates a massive and complex IT environmentrequiring a dedicated power infrastructure, 450extremely sophisticated data network Lenovoservers, 4,700 Lenovo computers, 1,800 resultssystems terminals and 700 Lenovo printers.

One characteristic of this environment is thehigh degree of redundancy in data processing,which necessarily calls for fail-safe accuracy indata transfer. Another is the innovative IT secu-rity built into the entire IT environment, which

"We are extremely pleased to have expanded our partnership with Atos Origin as the Worldwide IT Partner for two more Games. Today the role anduse of Information Technology is vital for the staging of the Games. Atos Origin was a crucial player in the success of the delivery of the Athens 2004and Torino 2006 Olympic Games. We are confident that, in the future, Atos Origin will deliver an outstanding job for the Beijing 2008, Vancouver2010 and London 2012 Olympic Games."

Jacques Rogge, President of the International Olympic Committee (IOC)

Strategy

Case Study

SECTION 1


could effectively be considered the highest-pro-file data system in the world over the course of16 days.

Protecting the Games’ IT infrastructure fromundesired and/or uncontrolled phenomenathat can impact any parts of the result chain andassociated services is paramount. The innova-tive approach features monitoring of all devia-tions from ‘normal’ behavior of critical parame-ters in critical areas (applications, systems andnetworks), plus screening and correlation of all‘alerts’ to allow the security team to focus andact only upon critical issues. Finally, there is theunparalleled testing program to ensure thatsmooth, seamless operations are ready on time.

For an event of this magnitude, deadlinesare not negotiable. When world-class athletesare ready to compete for gold after years of rig-orous training and qualification, there are nosecond chances.

BENEFITSAs one of the most high-profile customers

that Atos Origin has ever had, the InternationalOlympic Committee (IOC) has spurred AtosOrigin to take on new directions since itsinvolvement with the Olympic movement in2004. The Athens 2004 Olympic Games wasaccomplished with significant cost and opera-tional savings over previous Games. AtosOrigin provided this without in any way increas-

Key components of Atos Origin’s IT mission

• Infrastructure deployment

• Critical monitoring system

• Technology Partner management

• Knowledge capture and transfer

Key capabilities demonstrated by Atos Origin for this Olympic Games project

• Systems integration

• Information security

• Critical monitoring system

• Technology Partner management

• Knowledge capture and transfer

Achievements successfully completed

• Competition results delivered to all participants,athletes, officials, media and press

• Knowledge leveraged for the design of all key IT systems (3 to 5 years before start of Games)

• Key core planning applications provided anddeployed (3 years before start of Games)

• Results systems integrated and tested (2 years before start of Games)

• Complete array of IT systems operating and monitored once the Games began

WORLD-CLASS INFORMATION TECHNOLOGY EQUAL TO THE SCALE ANDMAGNITUDE OF THE OLYMPIC GAMES

TOP_06_Olymics_cs 12/7/06 4:52 pm Page 2

SECTION 1Strategy


ing the risk of its technology operations, andactually succeeded in reducing the risk.

Today’s systems implementations objectiveis focused on minimized cost with minimizedrisk. This is demonstrated in the OlympicGames program through massive re-use, facili-tated by systematic knowledge capture andthorough, disciplined systems integration prac-tices to redeploy large applications into newenvironments every other year.

Specific components of the IT program crit-ical to the Olympic Games’ success include the

41www.cxoeurope.com

integrated, holistic approach to security used tomanage the highly visible environment. Otherfactors include effective partner and programmanagement for the highly complex programcomprising a diverse consortium of technologypartners; intensive operations management;and design and building phases leveraging theknowledge base created through work at previ-ous Games, which significantly reduce thelearning curve.

Meeting the immovable deadline with guar-anteed quality every time can only be achieved

through relentless testing. Exhaustive prepara-tion and testing were clearly vital to the successof the IT systems, to deliver seamless servicesand sub-second communication to the OlympicFamily (partners, IOC members, athletes andmedia). Simulation testing was also used todevelop test cells representing each of 15 sportsdisciplines and nine major applications.

For each country where the Olympic Gamesare held, an Organizing Committee responsiblefor hosting and managing that particular editionof the Games is set up. Atos Origin partnerswith each Organizing Committee while workingwith the IOC to meet its strategic objectives.This kind of commitment and attention to detailat the local level was a factor that led to AtosOrigin’s success in managing this prestigiouscontract.

About Atos Origin

Atos Origin is an international information technolo-gy services company. Its business is turning clientvision into results through the application of consult-ing, systems integration and managed operations. Thecompany’s annual revenues are more than EUR 5,5billion and it employs over 47,000 people in 40 coun-tries.

Atos Origin is the Worldwide Information TechnologyPartner for the Olympic Games and has a client baseof international blue-chip companies across all sec-tors. Atos Origin is quoted on the Paris Eurolist Marketand trades as Atos Origin, Atos Consulting, AtosEuronext Market Solutions and Atos Worldline.

The Olympic Games is the largest sporting event to

take place worldwide and at regular intervals every

two years. At the TORINO 2006 Olympic Games, Atos

Origin developed the IT solution for the accreditation

system that allowed Kodak to issue and activate

90,000 accreditations for Games comprising 84

events and represent thousands of hours of live

competition. Live commentator services were

delivered for 19 sports and approximately 250,000

INFO2006 pages viewed every day. The Winter

Olympics spans 28 competition and non-competition

venues, involves 2,500 athletes, 10,000 members of

the media and 20,000 volunteers.

TOP_06_Olymics_cs 12/7/06 4:52 pm Page 3

EUROPE’S BACK-OFFICE BABEL: WILLLANGUAGE DERAIL OFFSHORING?

The English language has provided firmfoundations for the global outsourcing boomof the last 20 years. English-speaking busi-nesses have been able to directly tap into thecompetitive workforces of Ireland, Canada andabove all, India, in areas such as IT and callcentres. As a result, offshoring today is domi-nated by Anglophone suppliers and customers- The US is easily the largest single source ofoffshore demand, the UK has made up morethan half of the European market, and Britishand US brands such as American Express,HSBC, Citigroup and British Airways have beenin the vanguard of new offshoring models.

Anglophone firms may dominate the cur-rent picture, and English may be the linguafranca of much of international business. ButEnglish is of course not universally spoken inEurope, either by customers or by office work-ers. This raises major questions about thefuture of offshoring – Will its expansion be lim-ited by these global language barriers? CanEuropean firms find a way to globalise theirmulti-lingual back offices, or does offshoringonly makes sense in English?

The language gapNon-English language issues are above all

a European problem. The US has access to arange of competitively priced Spanish-speak-ing populations in central and southern

Paul MorrisonManaging ConsultantAlsbridge

StrategySECTION 1


American locations such as Costa Rica,Jamaica and Argentina. Japan has developed astrong market of Japanese language providersin South Korea and Chinese locations such asDalian. But offshore options for manyEuropean languages such as Italian, Germanor Swedish are less obvious, and capabilitiesin the market leading location - India - as areat best patchy, at worst non-existent.

Languages with a colonial past, particular-ly French and Spanish, are an exception to thisand do have some emerging offshore locationoptions. But the primary challenge of off-shoring of non-English work is not in terms offinding specific locations to service a givenlanguage, but rather in finding locations tosupply multiple languages.

Most major businesses in Europe are pan-European to some degree, and it is notunusual to see firms operating in 20 or morecountries, using 15 different languages. thereare few options to provide this multi-lingualskills base without setting up a multi-locationoffshore model. In such circumstances thechallenge is clear – how can the firm addressthis linguistic diversity, without building anew organisation so convoluted that it under-mines the cost and flexibility advantages ofgoing offshore?

Despite this challenge, a growing numberof European companies (or US/UK firms with

pan-European operations) are keen to startoffshoring, in areas such as customer care, IT,business processes such as finance, humanresources or research & development. As aresult predictions for the acceleration of off-shoring in Europe indicate 20%-50% com-pound growth rates for the next 3-5 years.

In an effort to attract this growing demand,most offshore suppliers are keen to tout theirlinguistic abilities. But when you visit the facil-ities on the ground, the reality can be surpris-ing. Far from fluency, language skills are oftenlimited to simple ‘cheat sheets’ of key words.In the leading Indian locations, most serviceproviders will privately confess to only havingcapabilities in English. The fact is there simplyaren’t enough French, German, or Italianspeaking accountants, web developers orclaims agents to satisfy demand in Europe.

The problem applies equally to ‘inhouse’operations, where the offshore ‘user’ plans toset up facilities via an internal subsidiary,rather than through a third party outsourcer.Language skills shortages are an issue forinsourcing and outsourcing alike.

Tackling the issueSo for companies operating across Europe

that are considering back office sourcing,what can companies do to address the lan-guage issue? Fortunately, there are a number

TOP_06_Aldsbridge_wp 12/7/06 4:53 pm Page 2

that it is robust enough to handle theexceptions, errors and contingencies thatarise during the course of normal business.Where linguistic skills are taken out of theback office, the company must understandand manage the risks accordingly.

4. Assess the ‘farshore’ options – For specificEuropean languages there is a growingrange of options, particularly as previouslynoted for languages with a colonial past.French-speaking back office work can beconducted for example out of Senegal andGhana in West Africa, Mauritius, or Goa andPondicherry in India. A number of Dutchcompanies are making use of historical tiesto do the same out of South Africa, andSpain can similarly tap into South America.These pairings can be highly effective, buttend to be single language, rather than pro-viding pan-European coverage.

5. Consider the ‘nearshore’ options – Formulti-lingual offshoring, there are severallocations in Eastern Europe where a widerange of European languages are availableat relatively low cost. Prague, Bratislavaand Warsaw have multi-lingual concentra-tions based on their young, cosmopolitanand well-educated populations.Significantly, as a result of economic andpolitical factors, the list of nearshoreoptions is steadily moving eastwards. 10years ago, cities such as Dublin, Brightonor Barcelona were commercially attractivefor pan-European shared service facilities.Today, outsourcing providers are startingto promote Bucharest, Sofia and even StPetersburg as prices further West continueto rise. Companies should factor thisdynamic into the long term business plan-ning for any nearshore investments.

Looking forwardFor pan-European projects, language still

remains a complex issue, and non-English lan-guage skills come at a premium. In the shortterm, because they can tap into the largestpool of offshore resources, English-speakingback offices may therefore enjoy a slight oper-ational cost advantage. This may continue thelong term trend for global and pan-Europeanfirms to take the strategic choice of establish-ing English as their standard back office work-ing language.

But the picture is not static, and as demandgrows it is likely the market will continue todevelop European language capabilities. Forexample, on a tactical level, a number of Indian

SECTION 1Strategy


43www.cxoeurope.com

of examples of offshoring success by pan-European firms, and their experience can bedistilled to reveal a few essential steps forovercoming the language challenge:1. Understand the language requirement -

Companies first need to realise that off-shoring requires different levels of languagecapability depending on the task in ques-tion. Some data processing or IT develop-ment tasks may require only very simplelanguage skills, research and report writingmay require intermediate skills that couldbe supplemented by native languagespeaking support onshore, whereas cus-tomer support typically requires fluency andcultural awareness. Any programme needsto start with a detailed breakdown of theprocesses to be offshored, mapping ontothis the level of language skills required ateach stage. Offshore planning also needs totake account of the fact that there are dif-ferent levels of language skill required atdifferent stages of the programme – forexample, a knowledge transfer activity mayrequire excellent language skills to ensurethat the task is fully understood, whereasfollowing training and transition the opera-tional role may not involve such a detailedlevel of linguistic ability.

2. Only offshore customer care where thecapabilities are excellent - It is oftenextremely difficult to find the linguisticskill, appropriate accent and culturalawareness to deliver customer servicesfrom an offshore location. Where offshoringhas failed in the past, it usually occurred incustomer support activities, often offshoredto India, that have not met the expectationsof users. Recent examples of where workhas been brought back onshore, such asPowergen in the UK, suggest that in manycases offshoring customer care doesn’tmake sense. There are of course counter-examples, but the track record indicatesthat true back office activities (with minimalor no customer interaction) are less lan-guage intensive, and therefore less prone tosignificant language issues.

3. Simplify the language requirement –Companies can aim to minimise the non-English element of work done offshore. Forexample, it is possible to set up processesto manually or automatically translatematerials (e.g. when invoices are scanned),so that the offshore component of a taskrequires only limited language skills. Thisprocess needs to be well planned to ensure

outsourcers are addressing short term spikes indemand for language skills by recruitingEuropeans to live and work in India for 1 or 2year postings – it is not unusual to see Frenchor German students working for offshore pro-jects in Mumbai or Bangalore. A longer termstrategic change is taking place in India andChina, where state-sponsored and business-driven language training programmes areseeking to overcome language gaps (in non-English and English skills respectively). Forexample, last year the Chinese governmentannounced plans to spend an extra $5.4 billionon language training to target the BPO market,whilst Indian states such as Karnataka andTamil Nadu are also taking measures to pro-mote non-English language skills.

Looking forward only a few years, we canexpect rapid developments both in the supplyand demand for European-language offshoreservices. In 10 years time, we could even seeEnglish-language sourcing no longer makingup the majority of the offshoring market. In sodoing the offshore market will be continuing todo what it has done so successfully for 20years – adapting to the needs of its customers.Language may be a barrier, but the offshoremarket will find a way around it.

About the Author

Paul Morrison is a Managing Consultant at Alsbridge,specialist advisers on outsourcing, shared servicesand offshoring. Paul’s work focuses on helping clientsto develop sustainable offshore sourcing strategies,including business case development, locationassessment and supplier selection. Paul’s advisorywork covers a wide range of sectors, including clientsboth in the private and public sectors. Amongst otherclients Paul has recently acted as an advisor to theUK Cabinet Office on BPO strategy.

Paul is a member of the Outsourcing and OffshoringCommittee of Intellect, Trade Association for the UK’sHigh Tech Industry, and he writes and speaks on arange of offshoring issues, most recently in‘Technology and Offshore Sourcing Strategies’(Palgrave, 2005). Paul can be contacted at

[email protected].

TOP_06_Aldsbridge_wp 12/7/06 4:53 pm Page 3

Outsourcing has aStrategic Role to Play

Outsourcing is a strategic tool for manag-ing change and leveraging greater value. Thechoice of an outsourcing partner has becomea critical issue, involving far more than qual-ity or cost. This is because outsourcing is firstand foremost a human partnership.Identifying an organization to share yourbusiness with, whether that means yourinfrastructure or your operational processesis far from easy. That organization needs farmore than technical expertise and industryexperience. It must be capable of under-standing your culture and be willing to sharerisks and responsibilities.

Siemens Business Services has beeninvolved in complex outsourcing relation-ships across multiple sectors from the startwith unique expertise in the public and pri-vate sectors. As outsourcing now forms acentral component of any value-drivenstrategy, our vendor independence alongthe entire IT service chain is a definiteadvantage. Our greater technology band-width also generates additional returns forour customers. With innovative delivery andcommercial models which embrace on-demand and off-shore efficiencies, we com-bine quality outsourcing with competitiveeconomics. Our global delivery capabilitiesand proven governance skills provide con-sistent service excellence wherever needed.Perfect your business performance by con-centrating on your core activities and leavethe rest to us.

SOLUTION PROVIDER

At Siemens Business Services each andevery day over 39,000 employees serve 10,000customers around the world in our operationalareas of Business Solutions, Outsourcing andIT Infrastructure Services. Our customers grantus an insider’s view of their processes and trustus with projects affecting their core businesses.Each project is unique. We adapt ourselvesaccordingly – with individually developed solu-tions and services and a concept of partnershipwith long-term perspective.

We give our customers the freedom toexcel, providing them with best of breed whenit comes to technology, supported by world-class industry know-how and continuousinnovation. Siemens Business Services recog-nizes the unique situation of each of its cus-tomers and offers them a business partnershipbuilt around their distinctive culture. No twoservice relationships are alike. Listening toyour people with an open mind is absolutelycrucial. Being a pure service company withoutan IT product agenda helps us listen to themproperly. Ongoing dialog is the basis of anysuccessful relationship and a service relation-ship is no exception. Understanding culture –not just corporate cultures but national andregional ones – is another key challenge to beaddressed. This open approach, based aroundintense dialog, is reflected in our flexible busi-ness models offering customers innovativefinancing options.

As the sourcing spectrum grows from indi-vidual IT activities to complex and volatilebusiness processes, building on trust is the keyto success.

Outsourcing with Siemens BusinessServices – Maximizing your EnterprisePerformance

Siemens Business Services is a leading IT service provider and with revenues of euros 5.4billion is one of the world’s top 10 outsourcing providers. As a subsidiary of the SiemensGroup, we stand for trust, innovation and quality. We offer all services along the IT ser-vice chain from a single source – from consulting and systems integration, right throughto managing IT infrastructures and business processes.

www.siemens.com/sbs

www.cxoeurope.com44

www.siemens.com/sbsSiemens Business Services is one of the world’stop 10 outsourcing providers serving over 200 majorclients in 44 countries.

Christoph Kollatz – CEOChristian Oecking – Head of Global Outsourcing

Siemens Business ServicesOtto-Hahn-Ring 6, 81739 Munich, GermanyTel: +49 (0) 1805 44 47 13Email: [email protected]/sbs

Business ContactSigrid ZeiszHead of Marketing, Operation Related Services

Tel: +49 89 636 55601email: [email protected]

TOP_06_SBS_pro 12/7/06 4:54 pm Page 1

Why Outsource?Outsourcing is now a strategic alternative

that is established in many businesses.Enterprises are looking for innovative ways tocreate added value through IT outsourcing.Companies that outsource their IT functionsseek greater innovation from serviceproviders. CIOs are challenging serviceproviders to help bring IT and business goalstogether through technology advancementsand deliver transformation through a struc-tured approach. As an example, SiemensBusiness Services was able to identify compet-itive advantage for one of its clients, the BBC.In 2004, the BBC became the first in the mediamarketplace to adopt an outsourcing approachto technology service provision. By focusingon strategic initiatives, the BBC is transformingthe industry by connecting customers withanywhere/anytime content and leading thecreation of a fully digital Britain.

Sectors may also decide to outsource fordifferent reasons – regulatory change in thefinancial services market or skills shortage inthe public sector – all continue to feel ongoing

cost pressure coupled with rising customerexpectation. At the same time, the growth ofutility computing is shifting technology froman ownership to a usage paradigm. Global out-sourcing can optimize information manage-ment and decision making. It can realize asteady supply of technology and businessexpertise to match the fluctuations of adynamic environment. This can reinforce thecompetitive advantage of the customer. Aswith other aspects of outsourcing, however, ahost of issues need to be carefully addressedwhen off-shoring. These include culturalrequirements as well as cost pressures.Language skills, education and security areother issues which need to be fully addressed.The best sourcing strategy, finally, is onewhich blends the complementary benefits oflocal and global service delivery.

Driving IT Excellence to yourBusiness Advantage

It is a complex task to manage the variouselements of IT, including IT Governance,Engagement Management and Service

Delivery. The management of this is our corecompetence. By navigating you through thevarious value transformation stages, we canincrease the value that an outsourcing part-nership can add to your business.

Value transformation stages with examples:Improve service quality – value increase

achieved by higher performance but minimalcost savings

Increase productivity – substantial valueincrease fulfilled by IT transformation com-bined with significant cost savings through ITrationalization

Evolve enterprise – significant valueincrease by process simplification togetherwith significant cost savings gained by processtransformation

Add competitive advantage – major valueincrease by strategically aligned business andIT development plus major cost savingsderived through process change, global sourc-ing and the strength of a Siemens partnership.

Improve your business performance byconcentrating on what you do best and leavethe rest to us. Whether it’s a question of indi-vidual activities such as desktop services,complete infrastructure operation or the man-agement of your finance or HR processes, youwill find Siemens Business Services is a part-ner you can trust. We bring 155 years ofSiemens heritage and stability, making us theright people to share your future with.

45www.cxoeurope.com

Cornerstones of successful Outsourcing

www.siemens.com/sbs

SOLUTION PROVIDER

TOP_06_SBS_pro 12/7/06 4:54 pm Page 2

KNOWLEDGE PROCESS OUTSOURCING(KPO) – OPPORTUNITIES ANDCHALLENGES

What is KPO?Knowledge process outsourcing (KPO)

refers to the outsourcing of high-end complextasks and processes to specialised serviceproviders. Unlike business process outsourc-ing (BPO), KPO delivers higher value in theknowledge process management value chainthrough domain expertise rather than processexpertise. Figure 1 compares the servicesoffered by the BPO and the KPO markets.

Outsourcing opportunities and benefitsexist in all knowledge domains and for com-panies across all segments. These includeFortune 500 companies, small and mediumenterprises (SMEs), and professional servicescompanies providing consulting services, forexample.

Marc VollenweiderEvalueserve – Austria

Alok AgarwalAditee KhaleMurali Kumar NEvalueserve – India

StrategySECTION 1


Estimated Size and GrowthIt’s predicted that the revenues from the glob-

al KPO market will grow from the 2005 estimateof USD 2.5 billion to USD 17 billion in FY2010,implying a compound annual growth rate (CAGR)of 46.7 per cent for the global KPO market.

In addition, we estimate that low-cost des-tinations, such as India and China, will be themost attractive geographies for outsourcingand will have a majority market share by 2010.Furthermore, the Indian KPO market will alsogrow to USD 12 billion in FY 2010, as repre-sented in Figure 2.

We forecast that out of the estimated USD17 billion revenues in 2010, data search, inte-gration and management services will havethe maximum market share. Furthermore,

Insurance Consulting I-Banking Industry Telecom/FS/Retail

StrategyResearch

Analytics

ContactCentres &CustomerSupport

IP PortfolioAnalytics

PatentDesign


EquitiesResearch

FinancialAnalytics

Settlement

SysthesizingReports

GlobalResearch

BPO forClients

ClaimsAnalysis

Underwriting& Asset

Management


KPO

BPO

Figure 1: Comparison of Services Offered by BPO and KPOSource: Evalueserve

TOP_06_Evalueserve_wp 12/7/06 4:55 pm Page 2

such as the US and the UK, and low-cost coun-tries such as India, China and the Philippines.For example, the average annual salary of anMBA in a developed country is USD 85,000,whereas it is USD 12,000 in a low-cost country.

Flexible Access to a Highly SpecialisedTalent Pool

We estimate that there will soon be ashortage of skilled professionals in developedmarkets such as the US and the UK. Accordingto estimates, the US will require 5.2 millionprofessionals by 2010 while the UK will haveto face a shortage of 0.7 million professionals.To overcome this, companies in developedcountries will need to focus on low-cost coun-tries with talent pools.

Partnership with KPOs provides clientcompanies with flexible access to specialisedtalent pools in developing countries, resultingin a reduction in both turnaround time andcomplexity, especially during peak loads.

24/7 Access and Geographic ExpertiseKPO vendors are expanding their operations

beyond their local boundaries to enable a glob-al presence and to tap opportunities arisingfrom globalisation in services economies. KPOvendors not only facilitate companies to work24/7 across time zones but also enable them toutilise the vendors’ geographic expertise.

Reduced Time to MarketCompanies can tap into new markets and

opportunities by their quick responses torapidly changing market requirements.However, this can only be made possible byreducing both their product cycles and theirturnaround time. Outsourcing non-core activi-ties to low-cost destinations specialising inthese activities will help companies to acceler-ate their product cycles.

Challenges for Clients

Defining Outsourcing Strategy (make versus buy)

While considering an outsourcing option,client companies first need to define theirlong-term outsourcing strategies. They alsoneed to define the objectives and benefits theywish to achieve from these outsourcing strate-gies. After defining strategies, companies needto determine their outsourcing methodologiesfor which the following options are available:• Setting up a captive unit: In this approach,

client companies can set up their own

SECTION 1Strategy


other sectors witnessing key growth by theyear 2010 will include biotech and pharmaceu-ticals, engineering and design, remote educa-tion and publishing, and animation and simu-lation services.

The important drivers for the growth in theKPO market include:• High productivity among executives as a

result of a decrease in their turnaroundtime.

• Flexible access to a highly specialised tal-ent pool with domain and geographicexpertise.

• Access to global reach without bearing theexpenses of setting up a captive unit.

• Cost efficiency for client companies.

47www.cxoeurope.com

Opportunities andAssociated Challenges forOutsourcing Clients

Opportunities for Clients

Cost EfficiencyA decrease in margins and stagnant rev-

enue growth in developed countries haveforced companies to undertake cost-reductionmeasures. We estimate that client companiescan reduce their costs by 40-70 per cent byoutsourcing them to low-cost destinationswhich have significant opportunities for labourarbitrage.

There is a significant salary differencebetween professionals in developed markets,

Hybrid ModeProject Mode

(short-term projects)

Ensuring EffectiveCommunication

Choosing the Right Partner

Duel Sourcing(captive unit and KPO)

Establishing a Captive Unit

Outsourced Research Centre(ORC)

Partnering with a KPO Vendor

Defining Outsourcing Strategy(make vs buy)

Figure 3: Defining Outsourcing Strategy (make vs buy)

2003

20

15

10

5

0

2005 (E) 2010 (E)

17.0

2.51.2

US

D B

illio

n

KPO Market - India KPO Market - Others

CAGR - 45 -50%

CAGR - 45 -50%

70 % market share

Figure 2: Expected Growth in the KPO Market – India and Others (2003-2010)


StrategySECTION 1


market growth will be a combination of newsectors being outsourced and a growth in thecurrent sectors.

Moving Up the Knowledge ManagementValue Chain

The growth in the market has provided anopportunity for vendors to move up the knowl-edge management value chain. They can shifttowards higher value-added work in areassuch as intellectual property (IP) asset man-agement, plant design, rapid prototyping anddata analytics.

Small and Medium Enterprises (SMEs)Solutions

SMEs will gain maximum cost savings by out-sourcing work to low-cost destinations. TheseSMEs with small establishments can improve theirbottom lines, as outsourcing will reduce theiroverhead costs. Therefore, vendors need to tapinto these SMEs to ensure consistent growth.

Challenges for KPO Vendors

Myth of Abundant Labour in IndiaKPO vendors will face a major challenge

while hiring the best talent in the country. Weestimate that a country such as India will facea paucity of talent in the next five years. Tocounter this challenge, KPO vendors need tospend significant time in training employeesand developing in-house skills and expertise.

Retaining Trained PersonnelAnother challenge the KPO vendors face is

of retaining their trained and skilled work-force. With the boom in the KPO market, manynew KPO vendors have started setting upoperations in low-cost destinations. This hasresulted in lucrative job offers for existingemployees, thereby increasing the challengeof retaining trained personnel within eachKPO. In order to overcome these challenges,the KPO vendors need to cater to employeerequirements of learning, career growth andother benefits.

Ensuring Quality of DeliveryQuality is most important factor fuelling

KPO growth. Maintaining high quality stan-dards across all services is the only differenti-ating factor for vendors in this competitiveenvironment. KPO vendors need to maintainquality while scaling up their operations,recruiting new employees along with ensuringmultiple levels of quality assurance.

research units in low-cost destinations.However, companies need to employ aminimum of 200 resources in each captiveunit to ensure profitability on the largeinvestments that are made with regard tofacilities, infrastructure and humanresources. Many companies, such as JPMorgan, Ford and Motorola, have set uptheir captive units in low-cost destinations.

• Entering into a Partnership with a KPOvendor: In this approach, a client compa-ny enters into a knowledge partnershipwith a KPO vendor. In such a partnership,both partners share resources and infor-mation to achieve the client’s businessobjectives. For example, many compa-nies, such as Microsoft, General Motors,Johnson & Johnson have partnered withKPO vendors in India for achieving theirbusiness objectives.

• Dual Sourcing: This is the most preferredway of outsourcing for major client compa-nies that have decided to substantially out-source their workloads. In this approach, acompany can choose one of the followingtwo options:- It can partner with two or more KPO

vendors to distribute the assigned workand put competitive pressure on eachother. For example, Wachovia hasentered into a partnership with Genpact,Infosys and Cognizant Technology fordifferent projects.

- It can set up a captive unit and then part-ner with a KPO vendor. This would putboth parties under considerable pressureto enhance their respective perfor-mances. In fact, this is the methodologythat is being adopted by most captivecentres in low-cost destinations.

Determining the Outsourcing ModeAfter the client company decides to partner

with a KPO vendor, it needs to have completeclarity about the expectations and results ofthis venture. Subsequently, the company isalso required to determine its mode of part-nership with the vendor. There are three dif-ferent modes through which a company entersinto an outsourcing partnership:• Project Mode: This mode involves one-off

requests in which both partners worktogether to achieve a short-term businessobjective.

• ORC (Outsourced Research Centre) Mode:In this mode, the client company enters

into a partnership to outsource a long-termbusiness project.

• Hybrid Mode: This is a combination of theabove two approaches, where three ormore analysts of a KPO vendor are perma-nently dedicated to a client company,working on its diverse project require-ments.

Choosing the Right PartnerAs KPO vendors provide inputs on analysis,

technical knowledge, strategic decision mak-ing, value creation and innovation, choosingthe right vendor is a client company’s mostsignificant challenge.

While choosing an appropriate partner, acompany should consider the performance ofthe pilot project completed by the vendor as itwill be an apt reflection of the vendor’s scope,capabilities and quality standards. However,the company should opt for an extended pilot-ing phase. For example, a three-month pilotwill be ideal for a company to assess a ven-dor’s suitability. A short-turnaround pilotmight not always present a true picture of thevendor’s skills.

The confidentiality and data security mea-sures adopted by a KPO vendor are two othersignificant selection criteria that need to beassessed by a company before entering into aknowledge partnership with the vendor.

Ensuring Effective External and InternalCommunication

A client company and a vendor need toensure an easy flow of information betweenthem in terms of both knowledge and data. Keyfactors that determine smooth processesinclude appropriate communication infrastruc-ture and protocol at both ends, proper meshingof office timings and prompt responses.

In addition, the company needs to promoteconfidence in the vendor within its own organ-isation. However, along with this, the compa-ny must also assuage all fears among itsemployees of losing their jobs.

Opportunities andAssociated Challenges forKPO Vendors

Opportunities for KPO Vendors

Increasing Market Opportunity and SizeThe KPO market is poised to grow at a

staggering CAGR of 46 per cent and is estimat-ed to grow to USD 17 billion by 2010. This


Section 1Strategy


49www.cxoeurope.com

Ensuring ConfidentialityAs a KPO vendor deals with a client compa-

ny’s confidential data and is responsible fordata security, it needs to have stringent physicalas well as network and electronic security mea-sures to maintain confidentiality. Therefore, aKPO vendor needs to align its security practicesto international information security standardssuch as BS7799 (ISO17799 / ISO27001).

Removing Geographical and CommunicationBarriers

KPO vendors need to develop multilingualcapabilities and geographic expertise to con-duct research in various geographies. Theymight even need to employ foreign nationalswho can provide them with multilingual capa-bility with geographic know-how. As the ven-dor is serving a global client base, its employ-ees need to be open to operating in an envi-ronment that accommodates all time zones.

Global Footprint and International MarketingTo ensure a robust KPO market share, it is

important that KPO vendors maintain a signif-icant international presence. Setting up inter-national offices also helps vendors to bridgecultural and time variations substantially.Vendors also need to have local representa-tives in international locations to understandlocal business needs and cultural differences.

In addition, KPO vendors should focus onmarketing themselves in both domestic andinternational markets as reliable internationalbrands. This will help them attract new clientsand employee talent.

KPO – When and Not ifToday, the benefits of outsourcing have

been accepted by companies worldwide. Thisis because of the significant contributionsmade by KPO vendors in carrying out high-endcomplex tasks and processes which include

valuation research, investment research, dataanalytics, patent filing, legal and insuranceclaims and processing.

Therefore, there is a significant increase inthe number of companies worldwide that areseeking knowledge partnerships with KPOvendors to develop environments in whichthey can share their resources and worktogether for their common objectives.

The stagnant growth in the global market,and decreasing margins due to competitionhave also encouraged companies to forgesuch knowledge partnerships. This has givenrise to a situation where most companies aregravitating towards seeking the services ofKPO vendors to cater for their diverse businessrequirements. Therefore, companies today arein no doubt about whether they require theservices of KPO vendors; most of them haveonly to decide how soon they need to usethese services.

DisclaimerThe information contained herein has been

obtained from sources believed to be reliable.Evalueserve disclaims all warranties as to theaccuracy, completeness or adequacy of suchinformation. Evalueserve shall have no liabili-ty for errors, omissions or inadequacies in theinformation contained herein or for interpreta-tions thereof.

KPO Vendors in Different Segments

Segments KPO vendors

Pharma Research and Development Biocon, Shanta Biotech, Vimta Labs, Ranbaxy, Dr. Reddy’s Lab, Sun Pharma

Business and Technical Analysis McKinsey, Deloitte & Touche, AC Nielsen, PWC

Learning Solutions ACS, Accenture Learning, Career Launcher, IBM Learning

Animation and Design Toonz Animation, Maya Entertainment, Color Chips

Business and Market Research Evalueserve, Scope e-Knowledge Center, OfficeTiger, McKinsey Knowledge Centre, WNS

Writing and Content Development Techbooks, Innodata, Thomsondigital

Legal Services and IP Research Evalueserve, Philips Research, Atlas Legal Research

Data Analytics Evalueserve, Inductis, Accenture, Marketics

Investment Analysis and Equity Research Evalueserve, Amba, Copal Partners, Adventity, WNS, OfficeTiger

Engineering and Design L&T, Thermax, Mahindra, Hero Global Design

Captives of Global Organisations JP Morgan, Deloitte, Goldman Sachs, McKinsey, Ford, Motorola, Texas Instruments

Source: Business India (August 29-September 11, 2005)


StrategySECTION 1


EMPLOYEE TRANSITION

3. Identify and communicate potential forprofessional growth within the new organ-isation

4. Have a clear implementation plan that hasbeen well-communicated and ensure thatproper structures are in place to managechange/transition

5. Realise that transformation is ongoingthroughout the lifecycle of the outsourcingcontract

Panelist ProfilesAnne Legallais is currently based in the ACS

office in Toulouse in the south of France. Shetransitioned two and a half years ago. Althoughshe has kept the same title (InternationalLocation Manager) within ACS’ Global HR divi-sion, the scope of her job has expanded toinvolve local management within the Toulouseoffice as well as business development

Anne-Marie Nunn is based in East Kilbride,Scotland and had been with her previousemployer for almost 20 years when transi-tioned under the terms of the outsourcingagreement. Anne-Marie previously served as the Training Administration ServicesSupervisor for EMEA operations with the buyerorganisation. Upon joining the serviceprovider, like Anne, the scope of her jobwidened. After the transition, Anne-Marie wasno longer merely in charge of training adminis-tration services, but took on a further role andnow manages the entire Employee Service

First, let’s clarify that not every outsourcingcontract comes with a transfer of employeesfrom the client to the service provider.Depending on the scope of work and requiredtransformation, some contracts involve trans-fer of employees to the service provider, whileothers involve a transfer of work withouttransfer of employees. This paper discussesthe model under which employees do transferto the service provider.

Three years ago, under a contract ACSsigned with a global manufacturing client,employees employed in HR functions in 5 coun-tries across Europe and the Middle-East transi-tioned from the buyer organisation to ACS. In apanel discussion, three of these employees por-trayed their individual experience of this transi-tion. During the panel led by David Kirkwood,himself a transitioned employee from the deal,Anne Legallais, Anne-Marie Nunn and GeraldClausen identified and discussed what they feltto be the top 5 lessons learned from their transi-tion from the client to the provider. Theselessons can serve as a guideline for employeetransition in future contracts between buyersand service providers.

Top 5 Lesson Learned1. Have a clear set of expectations for the out-

sourcing deal that has been well communi-cated to affected employees

2. Address fears head-on. Don’t allow therumour mill to run wild!

An outsourcing contract is never simple. Complicated issues such as scope, pricing and service level agreements, amongst oth-ers, are involved in every contract that is drawn up and launched into action. Employee transition is one of the most complexissues and is particularly acute in European contracts. How well a service provider and buyer engineer the proper buy-in andsupport of affected employees, and how they handle the various dynamics that come into play, can make or break a deal.

Rebecca SchollDirector of Market StrategyACS Europe

TOP_06_ACS_wp 12/7/06 4:56 pm Page 2

SECTION 1Strategy


Centre in Scotland and all HR transactional ser-vices for UK-based clients.

Gerald Clausen is located in Brussels,Belgium. He worked for the buyer organisationfor eight years prior to his transition. Duringthe transition, Gerald coordinated the activitiesof all affected employees in Germany. Today heworks in Belgium as an European IT ProjectManager for ACS, with a primary focus on theimplementation of SAP Payroll.

Highlights from the Panel

David: Your first three lessons learned inemployee transition revolve around steadycommunication. Why do you think this is soimportant?

Gerald (Germany): No employee ever volun-tarily chooses to be outsourced. For this reason,the employer has the responsibility to considerthe outsourcing venture not just from a busi-ness perspective, but also from that of an affect-ed employee and to keep them in the loop. Boththe service provider and the buyer organisationmust consider the ‘what does this mean to me’factor, and address the ramifications the dealwould potentially have on an employee’s pro-fessional life. Then once the deal is officiallysigned, both service provider and client muststrive to maintain this same level of communi-cation during the rest of the transition.If employees are aware of what is going on,fears and uncertainties are reduced.

David: So would you say that the transitionwas easy?

Anne-Marie (UK): Not exactly. In the 70s,when you joined a huge, global company…itwas for life! The idea of outsourcing is a scaryone for most employees, and all have an emo-tional response when they learn their depart-ment is being outsourced. Many in my depart-ment were very upset and felt that the compa-ny had betrayed them! For this reason, weworked hard to help integrate each employeeinto the new culture in order to facilitate anacceptance of, and adaptation to the newemployer. We tried to be as patient as possiblewith each employee and to address each oftheir concerns on an individual basis. Duringemployee transition, a manager must beunfailingly open and honest. Only when youtreat those transitioned with respect, byacknowledging their fears and addressingthem head-on, can you achieve success. One

day, they will come to you, as they came to me,and say, “I never figured it would be possible,but I feel like a part of this team now.” It’s allabout communication.

David: Gerald, you discussed keeping employ-ees in-the-know. What was your experience inGermany? Did you feel that change manage-ment and communication under this contractwas handled with efficiency?

Gerald (Germany): When a company is tran-sitioning, communication on all levels about allthings is absolutely necessary. It is important toanticipate that many ‘little things’ will becomethe most contentious issues. Obviously weknew that it was important to communicatechanges in contract terms and conditions, hol-iday entitlement, bonuses, pension, and healthinsurance and we explained each of thoseaspects in full to affected employees. I did not,however, anticipate that other things, the smallthings, the things not included in the standardpackage, would become such huge travesties.For example, could employees still use thelocal canteen? Did they still have access to thesports facilities? And did they still have free useof the water supply? The employees I personal-ly assisted throughout the transition becamevery emotional about these things. I realisedthen that although these issues might seemsmall, they should not be forgotten. The smallissues need to be addressed just as much as thelarger ones to ensure that each employee has acomfortable transition.

David: As well as addressing employees’fears, you three, who were in large part transi-tion leaders, devised several other methods toease transition. You mentioned that one ofthese methods was showing affected employ-ees within your organisation how the transi-tion might positively contribute to the growthof their professional careers. For instance,transitioning to an outside provider often pro-vides an employee with the chance to expandhis or her job description, to be part of a larg-er team, to participate in new client pursuits,and to become more engaged in the neworganisation as a whole. Did this have a posi-tive affect on your team? Anne, your transitionbrought you opportunity for further profes-sional growth, isn’t that right?

Anne (France): Yes, though I didn’t see thispotential at first. At the time we in France tran-sitioned, it was difficult for us to see how we

51www.cxoeurope.com

fitted into the grand scheme of things as we arein the business of Relocation which is a very“niche” market. However, soon after the transi-tion we became involved in many new HR pur-suits within the service provider organisation.This has proven to be an important learningexperience for me and others in my depart-ment. Clearly today my role has expanded as Ican now operate outside of a ‘one size fits allmodel’ and I can use and improve my expertisein other areas of HR and with other clients.

David: Not all employees had such an easytime identifying career opportunities as Anne.What was your experience in the UK?

Anne-Marie (UK): In the UK, many of thetransitioned management team immediatelysaw the benefits of becoming part of a neworganisation from a career perspective; thiswas not so clear for many other employees.When a decision was reached to offshore dataentry work to Asia, there was an initial panic.Would there be redundancies? Rumors spreadlike wildfire as you can imagine. The manage-ment team, who was also being transitionedto the new employer, reacted swiftly. Wepulled everyone together and explained thatrather than initiating layoffs, the managementteam saw this as an opportunity to invite allaffected employees to apply for four new roleswithin the East Kilbride operation. Suddenlyemployees had a chance to use their otherskills, such as language proficiency and SAPknowledge, and move into more diverse roles– all because of the transition. Employeesgradually became aware of opportunitiesbeyond the ones they had been used to con-sidering as fit for them.

David: It is certainly important to address theemotional aspects of transition. But the threeof you also stressed the importance of havinga clear, implementation plan and adequateresources to execute the transition. What tech-nical structures would you recommend tofacilitate a smooth transition?

Anne-Marie (UK): First, it depends onwhether the European Acquired RightsDirective (ARD) applies to your situation ornot. In order for the ARD to apply – your oper-ations have to meet certain qualifications andthese qualifications differ from country tocountry. As a general rule, the ARD applies tofunctions run with assets and employees thatare clearly separate from the clients’ other

TOP_06_ACS_wp 12/7/06 4:56 pm Page 3

StrategySECTION 1


lines of business. In principle, it provides alegal framework to protect employees, butsince it is a rather rigid framework it does notallow for employees to choose where theywant to work. It is my understanding thatmany outsourcing contracts do not involve atransfer in the context of ARD nowadays. Itdepends on the scope of work, the number ofemployees in each country, and the chosendelivery model.

For our transition, we followed the ARDrules. Since the application of ARD differs fromcountry to country, my situation was differentthan the one in France and Germany.

Anne Legallais (France): In France, the ARDis regulated by the L-122-12 Law. This obligedboth the old and new employer to follow anARD legal calendar and set up consultationswith the appropriate unions and work councilsthroughout the process. While this providedfor a sort of hand-held process for affectedemployees throughout the transition, ARD didnot address all employee concerns.

David: Was your experience with ARD muchdifferent in the UK?

Anne-Marie (UK): A little bit, yes. In the UK,ARD is better known as TUPE, the Transfer ofUndertakings. Under TUPE, employment auto-matically transfers from past employer to thenew employer on a designated date of transfer.In our case, the transition time was two years.Most people in East Kilbride saw TUPE as agood thing. The two-year time frame gavethem a feeling of protection and allowed themtime to adjust to their new employer at a com-fortable pace. While there were still concernsabout redundancies, knowing that a legal mea-sure such as TUPE was in place helped easemany into their new roles.

David: Outside of the law, however, theremust be other structures in place within thebuyer and service provider organisations tohelp facilitate a smooth transition. What wasdone in addition to what you have alreadymentioned to facilitate transition within eachof your organisations?

Anne (France): At the time of the acquisition,our French operations were already set up as ashared service centre operating as aclient/provider. This was very helpful whenwe transitioned as it meant there was less of aculture shock. Since we had already had some

experience in viewing our employer as aclient, the transition felt much more naturalthan it otherwise might have. Even with ARD,the service provider was responsible for creat-ing and communicating its own guideline forcontinued transition after the legal time-frame. The more clearly defined the processwas, the easier it was on affected employees.

David: Gerald, what structures did you feelwere put in place to help smooth employeetransition?

Gerald (Germany): Contrary to the situationin France, our employer became a client underthe terms of the outsourcing deal and ourworking relationship changed from perform-ing an internal service for them to being anexternal service provider. During the transitionphase, we needed to define and formalise ournew service delivery relationship through aSOW (Statement of Work). This SOW provedvery important in setting and understandingthe parameters within the operating model ofour new employer. Since the deal, we havecontinued to move further into the serviceprovider model. Although it was not exactlyeasy or entirely comfortable, overall I wouldsay that our transition was a success.

David: How are things in your organisationsnow? All three of you agreed that you felt the5th top lesson learned was to realise thattransformation is ongoing.

Anne-Marie (UK): Initially, everything feltslightly strange. We left the office building oneFriday afternoon being employees of one com-pany and reentered the building the nextMonday as employees of another. I had thesame desk, phone number, email address andused the same canteen that I had used previous-ly. All that had physically changed was mybadge. But since then, we have moved into ourown office and have gradually gained our ownidentity within our new company. All of usACSers are together in one building and are nowfeeling the effect of the new culture. And we areall doing great. We see our previous employer asa client now, and what’s very exciting is that weare gaining new clients and more professionalexperience than we ever have before!

Anne (France): In France it was slightly dif-ferent, but no less strange. Our previousemployer is very well known global manufac-turing company in France and throughout

Europe. When I started talking about my “newemployer” to my friends and family, it wasstrange having to introduce the company com-pletely as no one knew who the company was!Since then, I have come to realise that theorganisation I am a part of now is one of thelargest worldwide BPO companies, and a com-pany I can feel pride in working for. Also, Ihave since understood that there is a lot ofopportunity for me within my new company. Ifeel that my transition is ongoing. My job iden-tity has changed, albeit positively, and Iassume it will continue to transform as I growwithin my new organisation.

Gerald (Germany): I agree with both Anne-Marie and Anne. My role changed after mytransition, and it was hard to make a switchfrom my old mindset to another. I moved froma non-core business of my previous employerto a core business of my new employer. Thatwas quite a difference. It was an exciting one.My role has already grown exponentially sincemy transition, and I am sure that it will con-tinue to transform over the next few years.Transition is ongoing. It’s important to realisethat. Luckily, in my case, I have gained theopportunity to achieve a management posi-tion and a higher level of responsibilitythrough this outsourcing deal and my conse-quent transition.

ConclusionEmployee transition is arguably the most

complicated issue in an outsourcing contract.An outsourcing deal is not just the migrationof systems and the transformation of process-es, but it often includes the migration of peo-ple from one organisation to another. As wehave seen through this panel, employee tran-sition is something that must be handled withdelicacy and care. A company can only trulybe successful if it has happy, healthy, satisfiedemployees. Thus, it is important to gatherfeedback from those who have lived throughsuch a transition. The experience of suchindividuals and the lessons learned theyshare assist us in the development of bestpractices which guarantee the success offuture outsourcing contracts.

TOP_06_ACS_wp 12/7/06 4:56 pm Page 4


53www.cxoeurope.com

INLAND REVENUE’S ASPIREPROCUREMENT EXPERIENCE

BackgroundThe Inland Revenue’s prevailing contracts

with IT partners, EDS and Accenture, were dueto expire in 2004 (although there were somelimited options for extension). The IT serviceswere critical to Inland Revenue business func-tions so replacement for those suppliers wasessential. The replacement options for provid-ing on-going IT services were examined andthat of bringing the IT services back in housewas discounted as sub-optimal for such alarge scale and complex technology require-ment. External suppliers were to be selected inan open competition badged ASPIRE (acquir-ing strategic partners for Inland Revenue).

ASPIRE ProcurementProcess And The LessonsLearned

Objective of the CompetitionThe object of the competition was to

appoint a strategic technology partner capableof meeting the Department’s needs for a peri-od of 10 to 18 years.

Changes to Inland Revenue business direc-tion prompted by H M Treasury initiativesencapsulated in the Gershon and O’Donnellreports had led to a revision to the require-ments of the technology partner. These were:• to provide technology enabled change and

innovation to facilitate business transfor-mation

• to continuously improve performance, pro-viding a flexible source of supply that deliv-ered value for money

• to ensure rapid access to up to date skillsand technologies

• to ensure continuity of Inland Revenueoperational services at all times.

Don Brown Former Commercial Director Inland Revenue

Commercial StrategyBased on successful experiences with the

partnership relationships developed in theoriginal outsourcing contract with EDS signedin 1994 and subsequently with Accenturewhen the NIRS2 contract was inherited fromDWP in 1999, the preferred commercial strate-gy agreed with Inland Revenue Board was fora strategic technology partner to take respon-sibility for the totality of the technology ser-vices supporting Inland Revenue business.That partner could not be expected to provideall of those services directly and would need toengage significant levels of industry partiesand specialist skills.

In order to provide the opportunity for asuccessful relationship and delivery pro-gramme and to encourage investment inimproved productivity and efficiency the termof the contract was set at 10 years with possi-ble extension(s) up to a further 8 years. Thiswould provide some flexibility to InlandRevenue in the timing of the next procure-ment. This proposal controversially conflictedwith the H M Treasury commercial preferencefor short term (3-5 year) IT contracts usingregular market competitions to obtain bestprice. Inland Revenue successfully argued thatthese were inappropriate for their scale andcomplexity and that other mechanisms suchas benchmarking and co-partnering clausesshould be used to retain the advantage ofmarket movement. Any short term super prof-its beyond proposed margins for the technol-ogy partner would be shared with theDepartment under a contractual performancegain sharing process.

The commercial strategy needed to becompliant with H M Treasury Public FinanceInitiative (PFI) strategies and directives whilst

TOP_06_DonBrown_wp 12/7/06 4:56 pm Page 1

Evaluation of OffersThe intention was to award the contract to

the bidder with the most economically advan-tageous offer, this being the best combinationof price and ability to fit the Department’s pre-dicted needs.

In order to assess the financial value of theoffers Inland Revenue created a ‘Does CostModel’ to represent the prevailing contractcharges and from independent professionaladvice a ‘Should Cost Model’ to represent thebest industry prices available. In line with theopenness and trust elements of the prescribedpartnership relationship principles InlandRevenue released the ‘Should Cost Model’ tothe bidders with the ITT and required access tobidders’ commercial pricing models in order toachieve confidence in their proposed prices.The successful bidders’ commercial pricingmodels would be incorporated into the con-tract. Analysis of the bidders’ pricing modelsprovided further insight into the technicalsolution and the viability of their 10 year pricereduction programme. In the event the ‘ShouldCost Model’ showed a saving over the ‘DoesCost Model’ and both of the short-listed bid-ders’ pricing models showed a further savingover the ‘Should Cost Model’.

In order to achieve the best outcome and tohold to timetable the Department recognisedthe advantages of maintaining competitivetension at all stages of the competition.However, the bidders commercial positionneeded to be respected and they were to bestood down from the competition if at anypoint they were not seen as having potential tosucceed. The Department was resistant to theconcept of holding a bidder in the competitionjust to maintain the competitive tension as itwould have conflicted with it’s ethical view ofa partnership relationship. In the event therewere two highly effective and economic bid-ders right to the point of appointment.

In order to keep the level playing field underactive review the CIO and his senior team metregularly with all bid management teams to lis-ten to their issues and concerns and address asmany as those as possible without disadvan-taging the rival bidders. Where beneficial to thecompetition outcome Inland Revenue madecontributions towards bidders costs in accor-dance with OGC guidelines.

TimetableInland Revenue wished to demonstrate

professional standards for the procurementand maintain bidder confidence by publishing

StrategySECTION 1


fully supporting collaborative partnershipworking between the Department and suppli-er(s). To this end Inland Revenue decided tomove towards a contract where the paymentsfor IT services were to be on the basis of theoutputs delivered – an output based contract,and to be prepared in the course of the 10 yearterm to move to business outcomes basewhen achievable. This presented a particular-ly arduous exercise to the Department indefining the output measures and applyingappropriate control mechanisms so thatmeaningful output statistics could be suppliedin the Invitation to Tender (ITT) in alignmentwith the costing analyses.

The procurement was let in accordancewith EC Procurement Regulations using thenegotiated procedure so that the best practicesfrom the market place could be taken into aprocess designed to achieve the most advanta-geous commercial proposition and encour-aged bidders to parade their innovative solu-tions. At the bidders’ request an element ofdemonstration was introduced into the com-petition. This ‘Design and ImplementationStudy’ presented a real business problem tothree bidder teams who in two stages analysedthe problem, designed and implemented thepreferred solution in the Inland Revenue envi-ronment using Inland Revenue business con-tacts. The exercise was onerous to manage butgave invaluable insight into the engagementprocesses of the bidders.

Risk ManagementProject Management was underpinned by

an active risk management process that wasregularly and routinely reviewed.

The major risk to the procurement was thattwo world class suppliers had been engaged insuccessful delivery of IT services for up to 9years. This position as well-established incum-bents was recognised as a major inhibition toopen competition. The IT industry were pre-dictably suspicious that the existing supplierswould be impossible to remove and pressspeculation contended that Inland Revenuewere locked into prevailing contracts and thatit was a futile exercise to purport to be willingto appoint new suppliers. Inland Revenue’sstrategy needed to determine the differencesrequired in the new contract and to activelyengage in ‘making the market’.

‘Making the market’ took the form of aninitial series of meetings with board level rep-resentatives of the top 15 technology suppli-ers at which the Inland Revenue CIO stressed

the increased requirement for technologyenabled change and innovation to supportbusiness transformation and attempted tounderstand how they could be encouraged toparticipate in the competition. InlandRevenue’s policy was to ensure as far as pos-sible that the competition was fair and open toall major suppliers and was committed, as faras possible, to ‘levelling the playing field’. Thecommitment to provide such a level playingfield was challenged by the suppliers’ concernthat in addition to establishing that replace-ment suppliers could provide better servicethan the established incumbents the extracost of transition (of perhaps £50m) wouldhave to be absorbed in their price offering. Asa consequence Inland Revenue agreed at theoutset of the competition to fund separatelythe unique costs of transition and take it outof the price comparisons.

Throughout the procurement exerciseInland Revenue intended to apply the partner-ship relationship ethics enshrined in the com-mercial strategy in all dealings with the bidteams. In this way we expected to build thecollaborative spirit that would be the founda-tion of the long term delivery relationship.Such a relationship would be especially criti-cal in the event that a new supplier wasappointed in order to foster the necessary co-operation required in the period of transitionto the new contract. A possibility that was tocome to fruition.

Inland Revenue were aware that there wassignificant interest in ASPIRE as a major gov-ernment second generation procurement. Acommunication strategy needed to be estab-lished to engage stakeholders outside theDepartment, especially Ministers, HM Treasury,Office of Government Commerce (OGC) andPartnerships UK. Managing the politics wasrecognised as a significant component of theproject and considerable effort was required topersuade those parties that the commercialproposition represented the most effective ITservice solution and that the risks of transitionto a new supplier were manageable.

Alert to the high degree of interest andspeculation in the press, IR created a commu-nication management strategy that incorpo-rated a website for the project. On this web-site we attempted to demonstrate progresson a professionally managed procurementexercise and to address the major distrac-tions and speculations that were arising inthe media and threatening to undermine thecompetition.


SECTION 1Strategy


55www.cxoeurope.com

consortia with Fujitsu and British Telcomms.One in the eye for the cynical press specula-tion, which at one time had seriously threat-ened the competition by undermining bidders’confidence, and a huge fillip for re-competitionin government procurements overall.

The final test of the relationship with all thesuppliers was whether the levels of co-opera-tion required for the transition of over 3000 staffand in excess of 200 major live systems couldbe accomplished. Despite the issues thatinevitably arose in the course of such a complextransfer, which were routinely addressed andovercome, the new service contract started on1 July 2004 without incident and completelyunnoticed by internal and external customersand has maintained service levels since.

About the Author

Don was a career civil servant who joined InlandRevenue from accountancy and who retired in April2006 to provide a consultancy service.

After 20 years in software development and projectmanagement he moved to IT contract management in1993. He was the contract manager for the 10 yearEagle contract with EDS and, as commercial director,was responsible for running the replacement Aspireprocurement that was awarded to Capgemini in 2004.He is a strong advocate of a partnership relationshipbetween client and supplier and has been in demandfor conference presentations on the subject.

He lives in Shrewsbury with his wife, the youngest ofhis three children and two cats. His spare time inter-ests are arts, theatre, cinema, tennis and golf in addi-tion to armchair sports spectating.

the major milestones in the timetable and bymeeting those target deadlines. We were con-scious of the economic and political pressureswithin the bidders organisations and wished tominimise potential disruption to their approvalprocess and budgets.

The timetable provided for contract signa-ture in December 2003 allowing 6 months leadinto transition for live service from 1 July 2004.Contingency for slippage could be provided byextending the EDS contract by 6 monthsand/or the Accenture contract by 12 months.

Despite pressure on the various stages ofthe procurement process the approach thatwas taken was to ensure that the tasks werecompleted to adequate quality for the purposeand that the bidders had had sufficient time torespond. The timetable was not to be sacri-ficed to the pursuit of absolute quality. As aresult the overall timetable was held and anew technology partner appointed inDecember 2003 - 22 months after the publica-tion of the formal advertisement in theEuropean Journal in February 2002. This wasdespite unanticipated political deliberationsdelaying the issue of the ITT for 6 weeks.

ResourcesA business plan formed the basis of plans

and budgets and project management disci-plines that were to be applied to the procure-ment.

Professional advisers were engaged inorder to ensure that best procurement, com-mercial and legal practices were employed inthe procurement and in order to satisfy minis-ters that the public purse was judiciously pro-tected. These advisors were fully integratedinto the project in order that appropriate skillswere available as required.

Throughout the competition the residualmanagers within the Department who wouldbe responsible for making the new contractwork on a day to day basis were fully engaged

in the procurement processes. This includedthe construct of the operational and commer-cial strategies, the preparation of the ITT, thedefinition of the evaluation criteria, the exam-ination of the proposals and the evidence ofcapability, the verification of the solution, thecontract negotiations and the evaluation rec-ommendation. As a result of their involvementthe bedrock of the organisation was fully com-mitted to the new contract arrangements andto the eventual change of supplier.

Building the RelationshipIt was important to recognise that from the

start of the competition the client was estab-lishing the relationship with the supplier. Thedesired balance of risk and reward needed tobe incorporated into the commercial strategiesthat underpinned the ITT and eventually thecontract and control mechanisms. The InlandRevenue had developed a model of partner-ship relationship with the suppliers in the firstgeneration outsourcing contracts that formedthe basis of the replacement contract. Thisrelationship was based on honesty, opennessand reliable ethical behaviour from all partiesin addition to a recognition of and support forthe main objectives of the other parties.

The contractual mechanisms to incentivisethe desired behavioural model included profitshare, open book, joint governance and escala-tion procedures together with clarity anticipat-ed from the intelligent customer role in theDepartment. The projected practical manifesta-tions of these provisions were regularly testedby the bidders throughout the competition so itwas important that the departmental represen-tatives were able to demonstrate how a policyof ‘firm but fair’ would operate consistently.

The carefully crafted relationship with thebidders successfully secured their commit-ment to the competition which eventually in aclosely fought race gave rise to a recommen-dation for a change of supplier to Capgemini in


BUSINESS CHALLENGESNetwork Rail has to deliver the highest

quality of service to its customers under astrict UK regulatory framework: any failureresults in severe financial penalties. Itsmission critical business applications supportthe required levels of safety and operationalefficiency, but running such applications is notthe heart of its business. To enable NetworkRail to focus its energies and resources on thetask in hand – meeting the challenging targetsimposed upon it by the government – it wascrucial to find a partner to manage its coreapplications environment.

Network Rail not only wanted service levelguarantees, but also the assurance that itsapplications would always operate atmaximum efficiency through continuousimprovement and innovation and that its ITexpenditure would be strictly controlled.

SOLUTIONNetwork Rail chose Atos Origin because of

its proven experience in running missioncritical applications for the transport industry.With a portfolio of clients including VirginTrains, National Express and Stagecoach,

Atos Origin hosts and manages critical business applications around the clock, helping Network Rail offer a safe and reliable service to its customers.

BACKGROUND

Employing over 30,000 people, Network Rail owns 21,000 miles of track and 2,500 stations in the UK. The company is responsible for all aspectsof the national rail infrastructure – planning and coordinating the movement of trains, producing a workable timetable and providing access to therail network. It is working to rebuild Britain’s railway and is spending £14m a day to provide a safe, reliable and efficient rail infrastructure forfreight and passenger trains.

The availability and integrity of its IT systems and business applications is critical to the achievement of Network Rail’s service obligations to the TrainOperating Companies (TOCs) and for the service to – and safety of – the traveling public and the freight companies who use the UK rail network.

Strategy

Case Study

SECTION 1


serviced by some 700 highly skilled personnel,it was clear that Atos Origin had thecredentials.

Throughout the lifetime of the relationshipwith Network Rail, Atos Origin’s focus hasbeen on transforming service delivery throughongoing investment, and simultaneouslyreducing costs.

The transformation program has included:• Relocation of mainframe services to a tier

one purpose built data centre• Updating of connectivity infrastructure

• Upgrading the operating system on themainframe therefore providing a platformfor future enhancements

• Introduction of a new back up/storagesolution that removed the need for storingdata on tapes

• Implementation of a new Disaster Recovery(DR) solution that supports a recoverywithin four hours where previously therecovery time was up to 28 days.

Applications hosted from the Atos Origindata centre, crucial to the provision of a safeand reliable train network, include: • Train planning applications that enable

Network Rail to produce and publishworkable timetables. The train planningsystems provide plans for 214,000 end-to-

end passenger and freight train journeys ayear which are planned through 8,726geographical train planning points

• Train operations applications that monitorwhether 30,000 trains a day are in the rightplace at the right time.

ATOS ORIGIN HOSTS AND MANAGES CRITICAL BUSINESS APPLICATIONS FOR NETWORK RAIL

Network Rail has to deliver the highestquality of service to its customers under astrict UK regulatory framework: any failureresults in severe financial penalties.

TOP_06_Network rail_cs 12/7/06 4:57 pm Page 2

SECTION 1Strategy


57www.cxoeurope.com

Service charges have been reduced by 30%while stringent service level agreements(SLAs) have consistently been exceeded. “Weaim to surpass Network Rail's expectationsand have consistently achieved high levels ofservice availability and customer satisfaction,”says Jeremy Nuttall, Service Delivery Directorfor Transport Operations at Atos Origin. “Weare 'a safe pair of hands' when it comes tooperating business critical applications due tothe expertise and dedication of our staff andthe close working partnership that operatesbetween Atos Origin and Network Rail.”

A significant factor in that success is that theAtos Origin personnel involved have the skillsetsrequired and have also achieved CapabilityMaturing Model Integration (CMMI) Level 3 andITIL (IT Infrastructure Library) accreditations.

Atos Origin is continually drivingimprovement through collaboration with

Network Rail. Continuous ImprovementMeetings are held once a quarter and newideas with their potential costs and benefitsare discussed.

One recent application enhancementproactively suggested by Atos Origin assistedusers who were having difficulty identifyingtrains that had changed the start of theirjourney several times (typically foroperational reasons). This was done byadding a new database key. This hassignificantly eased problems that NetworkRail were having in their downstreamperformance management systems.

The current service improvement programincludes plans to web enable the legacysystems, so that these systems have a modernlook and feel and are more familiar to newusers, therefore reducing the trainingrequirement. Both the high quality of service

and process innovation have been key factorsin annual savings on operational IT costs –amounting to millions of pounds per year.

BUSINESS BENEFITS• Multi-million pound savings over the

contract term due to Atos Origin’sApplication Management service –together with its own working practicesefficiency drives – enabling Network Rail torealize cost benefits of 30% since 2000.

• An improved disaster recovery service hassignificantly reduced the risk to Network Railby having a faster recovery time and singlerecovery mechanism for all mainframeapplications should a disaster occur.

• Atos Origin consistently exceeds requiredservice levels for application availability, inturn enabling Network Rail to honor itsservice obligations to its own customers.

TOP_06_Network rail_cs 12/7/06 4:57 pm Page 3

CRITICISM, EMPOWERMENT AND THEGROWTH OF ORGANIZATIONS

Contemporary organizations form a con-tinuum, which begins with a group of threeindividuals connected by internet communica-tions and ends with the United Nations,Catholic Church and multinational corpora-tions. No matter what their size, nor thedegree of formality in codifying and coordinat-ing streams of interactions between theirmembers and stakeholders, they all cruciallydepend on criticism, which breeds creativityand empowerment, which breeds democracy.Creativity and democracy form indispensablepreconditions for desirable and sustainableorganizational growth. Criticism is important,because it allows organizational members todistinguish between facts and their fictionalshadows. Empowerment is important,because it allows organizational members todistinguish between fairness and its illusorysubstitutes. Growth is important, because itallows our increasingly complex and volatilesocieties to improve quality of life of manymore individuals in many more locations formuch longer periods of time than in any previ-ous period of settled human societies. Havingexamined organizational solutions for sustain-ing criticism (1.Evo Devo or evolutionary epis-temology of professionals), for securingempowerment (2.Crowded at the top or tam-ing managerialist megalomania) and for gen-

“As has been amply demonstrated in empirical studies, (…) market outcomes are massively influenced by public policies in edu-cation and literacy, epidemiology, land reform, microcredit facilities, appropriate legal protection, etc. and in each of these fieldsthere are things to be done through public action that can radically alter the outcome of local and global economic relations. Itis this class of interdependences that have to be understood and utilized to alter the inequalities and asymmetries that charac-terize the world economy. Mere globalization of market relations can, on its own, be a deeply inadequate approach to world pros-perity.” (Amartya Sen, Identity and Violence.The Illusion of Destiny, Norton, New York, 2006, 138)

Prof. dr Slawomir J. MagalaRotterdam School of ManagementErasmus University RotterdamThe Netherlands

[email protected]

StrategySECTION 1


erating growth (3.Mobile multitudes or net-working connected nomads), the reader isintroduced to a crash course in critical andmainstream literature on organization theory(OT), organizational behavior (OB) organiza-tional change (OC), and organizational devel-opment (OD).

Evo Devo or evolutionaryepistemology of professionals

All contemporary theories of organization(OT, OB) and of organizational change (OC,OD) reveal profound traces of the dominantevolutionary mode of thinking in social,behavioral, managerial sciences. Evolutionand development (Evo Devo) are perceived asthe core mechanisms of both biological andsocial change and the latest descendants ofthe Idea of Progress. This shift towards EvoDevo has been universally noticed and accept-ed and most typologies of theories on organi-zational change list different perspectives fromthe point of their relation to the evolutionaryapproach. However, what is being understoodunder ‘evolutionary approach’ also changesover time. ‘Social Darwinism’ of the early post-Darwinist is still being revived as a tacit beliefthat survival of the fittest is the invisible handguiding the capitalist market. Nevertheless, it

TOP_06_Magala_wp 12/7/06 4:58 pm Page 2

drawn as to the evolution of organizationalforms. If we compare the companies involved incar manufacturing around Detroit between1920 and 2000, one can draw some conclusionsas to their becoming larger or smaller, morespecialized or flexibly generalized, more cen-tralized or decentralized, more focused or dis-persed, etc. Researchers will develop thisknowledge, package it and sell to the top man-agerial teams. Managers, who know how toride the waves of evolutionary change, willhave a competitive edge. No need to empower.

The interpretivists/constructivists andorganizational learning theoreticians claimthat in order to understand organizationalchange we have to understand how peoplemake sense of their organizations and envi-ronments, how they share, negotiate, compro-mise, legitimize and learn together with theothers. Researchers will involve theresearched in generating this knowledge, thenthey will facilitate spreading it throughoutorganizations, and top managerial teams maygrasp their chance of becoming welcomecoaches. Managers who know how to coach inorder to exploit emergent windows of evolu-tionary opportunities, will have competitiveedge. Empower or lose.

Theoretical perspectives are not politicallyinnocent; the ecological one is based on aview of an organization as an army under sin-gle command, while the intepretive oneevokes the football team discreetly coachedfrom behind the field, but crucially dependenton commitment and improvisation of teammembers in action. If criticism is essential forsafeguarding the growth of knowledge, which,in turn, is essential for the evolutionary devel-opment of organizational forms, then our pref-erence should clearly point towards a moredemocratic organizational form. Democracybegins at home, but should not stop at the fac-tory door. Is the choice as simple as that?

A word of caution should be sounded –empirical evidence of a major shift of organi-zational forms away from professionalbureaucracy and toward a more flexible,democratic, coached and learning organiza-tion is contradictory. Critics warn against pre-mature acceptance of a thesis that we hadmoved beyond bureaucracy:

“Far from demonstrating that the direction oforganizational change is uniquely or over-whelmingly towards the post-bureaucratic,epochal claims rely on scattered, contestable andanecdotal descriptions of organizational prac-tice. The epochalist vision is one of total trans-

SECTION 1Strategy


arrives in an ideological disguise under thepolitical formula of TINA (there is no alterna-tive) and does not reflect the present under-standing even of the processes of evolution in‘nature’, let alone ‘society’ and ‘culture’. It isobsolete and reflects a political project, not the‘factual truth’.

The most important changes introduced toour understanding of natural evolution by thepast century research in genetics are linked tothe deciphering of the genetic ‘codes’ underly-ing biological growth of living organisms andeven more importantly to the better insightinto the mechanisms of ‘switching’ particulargenes on and off in different molecular land-scapes. Thus can the same genes produce dif-ferent effects in different organisms:

“genes remain intact, but under new patternsof control. Their function is altered. Complexityand variety are created, at least in part, by com-bining the activities of old genes in new ways.”

(Israel Rosenfeld and Edward Ziff, EvolvingEvolution, The New York Review of Books,vol.LIII, No.8, May 11, 2006, p.15)

This complexity of clusters and collectivesof living organisms’ is increased by their sociallearning, which results in exploratory behavior(exemplified by ants foraging for food). As aresult of random search actions undertaken byindividual ants, some of which – if successful -establish road maps for others to follow, acomplex atlas of roads leading to foodemerges – as if it was put there by intelligentdesign (although it is only a consequence ofrandom searches and memorization or reten-tion of successful ones).

A shift from ‘survival of the fittest’ as thecore conclusion from Darwin’s biological doc-trine to the doctrines of ‘facilitated variation’and ‘organizational learning’ in ‘knowledge-based economies’ can be traced in contempo-rary theories of organizational change. In arecent study under the Evo Devo title of“Organizations Evolving”, the authors reviewsix major theoretical perspectives in organiza-tion studies and compare them from the pointof their evolutionary explanations of organiza-tional change. The theories are thus comparedfrom the point of their explanation for ‘varia-tion’ (where does change or innovation comefrom), ‘selection’ (how does a change or inno-vation get accepted) and ‘retention’ (whichchanges or innovations survive and prosper).The authors distinguish the following theoreti-cal perspectives (which one might be temptedto call ‘paradigms’):

59www.cxoeurope.com

- ecological- institutional- interpretive- organizational learning- resource dependence- transaction cost economies

Summing up their review of these six per-spectives, the authors conclude that organiza-tions evolve and come to prosper as a result oftwo dominant, core processes; that of techno-logical innovation (‘genetic mutation’) andthat of community legitimation (‘road-map-ping and learning’):

“The co-evolution of organizational commu-nity depends on simultaneous processes of vari-ation, selection, retention and struggle at thepopulation level, aggregated across the multiplepopulations constituting the community. (…)Organizational evolution is intertwined with thedynamics of community legitimation. The devel-opment of technological, normative, or legalstandards for a particular population haswidespread consequences for the entire commu-nity to which it belongs. In some cases, innova-tions may represent a form of collective learningthat can be distinguished from direct learningfrom experience by individual organizations.”(Howard Aldrich and Martin Ruef, OrganizationsEvolving, Sage, London, 2006, 265)

Crowded at the top ortaming managerialistmegalomania

Six theoretical perspectives mentionedabove can be reduced to two major ones andone minor. The minor group is representedby the transaction cost economies andresource dependence – both are traces ofpast conquests of social sciences by theeconomists, who imposed their model of‘rational choice’ on theories of organization-al change. The economists lost; decoloniza-tion of social sciences is taking place, ‘TheWealth of Nations’ is replaced by ‘TheTheory of Moral Sentiments’. The other fourperspectives can be grouped under the head-ing ‘population ecology’ (ecological andinstitutional) and ‘contructivist’ (interpretiveand organizational learning). What is the dif-ference between them?

The ecologists and institutionalists claimthat in order to understand organizationalchange we have to compare thousands ofcompanies, offices, organizations and institu-tions across time and space – in order to accu-mulate data, from which conclusions can be


StrategySECTION 1


(Matthew Nitecki, Evolutionary Progress,The University of Chicago Press, Chicago,1988, 22)

Let us conclude by invoking the art and sci-ence of architecture, since designing and man-aging organizations can be compared todesigning and maintaining urban spaces.Modernist designs of decent working classhousing produced by European leftist archi-tects in the 1920s promised more democraticand egalitarian interactions. New uses theEuropean modernists found for their skillsafter they had been chased away from Europeand settled in the United States (a movementdescribed by Tom Wolfe as a transition “FromBauhaus to our house”) produced corporatehigh-rise headquarters scraping the skies andhiding Enron’s bureaucratic labirynths.

Likewise, mobile citizens, customers andemployees sustaining virtual commonspromise a more democratic future, but fearnew Big Brothers and Matrixes on the move.What will it be, CEO’s of today? Empoweringconnected nomads or caging mobile multi-tudes? Up to all of us.

formation. It cannot incorporate pluralism andforecloses any search for deeper conditions ofpossibility. This vision also denies the complex,diverse, coexisting and interpenetrating nature oforganizations.”

(Brendan McSweeney, Are we Living in aPost-Bureaucratic Epoch?, Journal ofOrganizational Change Management, specialissue on Organizations in the age of post-bureaucracy, vol.19, no.1, 2006, 31)

Two possible causes of a relatively slowand uncertain shift towards less authoritarianand less bureaucratic organizational forms arethe institutional expectations of accountabilityon the part of broader society and profession-al interests of managers forming a top class incontemporary organizational structures. Thedemand for accountability and transparency ismuch better satisfied by bureaucratic organi-zational forms (where responsibility can clear-ly be traced and assigned) than by more flexi-ble and networked, open ‘adhocracies’ (impro-vised organizational forms). Subconsciousresponse to this tacit demand explains in-builtresistance to the dismantling of bureaucracies.Unity of command secures authority muchmore efficiently than coaching (which requirestop managers to demonstrate and ‘prove’ theirqualities in actual work with employees and to

be ready for challenges to one’s own authori-ty). Subconscious reluctance to submit oneselfto an on-going total quality control explainsin-built resistance of top managerial teams toswitch to a more democratic mode of operat-ing. However, even if we avoid choosing, achoice is there in many guises. For instance,when Microsoft, Google and Yahoo supportthe Chinese government’s curbing of demo-cratic aspirations of China’s virtual communi-ties of Internet-surfers, they are making achoice, which may influence their evolutionarychances in future. What about empoweringChinese Internauts?

Mobile multitudes or net-working connectednomads

Most handbooks on organizational devel-opment and change begin with praise ofprogress. The end of history? It makes sense toproceed more cautiously with respect to thelabeling of evolutionary change processes:

“in order to show the total universal progressin human history and in the nonhuman biologi-cal realm , we must show that the sum ofprogress in totality of all specific areas is greaterthan the sum of all regressions in human (andnonhuman) history.”


What We DoWe remain large enough to keep pace with

the speed of changing technology, yet we offerthe responsiveness and flexibility that help ourclients do what they do best.

ACS delivers technology-based resultsthrough two major service lines, whichsupport the model shown in Figure 1.

Business Process Outsourcing – Our BPOgroup handles most back-office functions,including finance and accounting services, HR,check processing, loan administration, claimsprocessing, customer contact centers, orderfulfillment/procurement, print/maildistribution and shareholder services. Thesetasks are resource-intensive and contain oneor more technology-enabled processes. Bycontracting with ACS, clients can concentrateon their key business strategies, while wemanage and operate the 'non-core' businessprocesses that may not be essential to their offerings.

Technology Outsourcing – ACS' technologyoutsourcing services include IT outsourcingand systems integration support. Our ITservices include data center operations,network management and security,desktop/seat management, help desk servicesand application services. We providetechnology infrastructure outsourcing servicesacross mainframe, midrange, distributed anddesktop platforms. IT outsourcing represents25 percent of ACS' revenue.

ACS' systems integration solutions includeapplication development and implementationand integration of platforms, software andtechnology such as decision support systemsor benefit management systems, networkdesign and installation services. Other servicesinclude project management, Web hosting andinformation security.

Technology-based results

www.acs-inc.com/emeaACS is the leading provider of diversified, end-to-endbusiness process outsourcing (BPO) and informationtechnology (IT) outsourcing solutions to commercial and government clients worldwide. With $4 billion inannual revenue, a blue-chip client base, and more than43,000 employees supporting operations in nearly 100countries, ACS is a rapidly growing FORTUNE 500Company. ACS makes technology work for our clients.

NYSE: ACS. www.acs-inc.com

Jeff Rich – Chief Executive OfficerMark King – President and

Chief Operating OfficerLynn Blodgett – Executive Vice President,

Commercial SolutionsBrian Stones – Senior Vice President, ACS Europe

ACS Europe Marketing54 Avenue Hoche, 75008, Paris, France

Business ContactRebecca Scholl – Affiliated Computer Services, Inc.Tel: +33 (0)1 56 60 52 64Mob: +33 (0)6 10 44 25 37email: [email protected]

End-to-End Business Process Outsourcing Efficient Information Technology Outsourcing

Data C

enterO

perations

Netw

orkM

anagement

Help

Desk S

ervices

Ap

plication S

ervices

State of the Art Technology, Call Centers and Global Facilities

Security S

ervices

Desktop

Managem

ent

Hum

an Resources

Finance andA

ccounting

Ad

ministration

Sales M

arketing andC

ustomer C

are

Figure 1 – ACS Service Offerings

www.acs-inc.com/emea

61www.cxoeurope.com

SOLUTION PROVIDERwww.acs-inc.com/emea

TOP_06_ACS_p.qxd 12/7/06 4:59 pm Page 2


EXECUTIVE VISIONS

LOOK BEFORE YOU LEAP INTO OUTSOURCING

ness be improved if you ruthlessly streamlined your processes?You should always re-engineer your processes for efficiencybefore you decide how you are going to get the work done, andwho will do it, and where it should to be done.

Automating and integrating your processes can eliminate alot of work and cost. If you outsource your inefficiencies you willlose the opportunity to reap the related benefits - either becauseyour outsource partner won’t have an incentive to implementthem, or because he will keep the related benefits for himself.Either way you lose.

And, don’t forget that, frequently, your best outsourcingopportunity is to get your customers to do the work. Customerself service is becoming the norm in many areas and many cus-tomers prefer Internet self-service to travelling to your businesssite or to dealing with your bureaucracy over the phone. Whenyour grandmother wanted a can of beans, the grocery man prob-ably got them for her - but you simply pick a can from the super-market shelf, or order them over the Internet. Are you still gettingthe beans for your customers?

Your strategy needs to address the fact that bricks and mortarlocations will deliver a rapidly decreasing portion of customercontacts and service delivery over time. But, you will need to makeself-service easier to use. And, you will especially need to learnhow to cross-sell using self-service channels and the Internet.

It took most companies 10 years to evolve their call centres fromcost centres to profit centres by introducing effective cross-sellingtechniques. Organisations that outsourced their call centres havehad a particularly difficult time making this cost-to-profit-centretransition because they lost control over the evolving marketing ele-ment of their cost centre operations. They viewed their call centresas service rather than sales outlets. You should be working now tolearn how to cross-sell effectively on the Internet because this skillwill largely determine your future cost structure and profit margins.

TYING SOURCING DECISIONS TOYOUR ORGANISATION’S STRATEGY

I am pleased to have the opportunity to present some ideas Ihave developed during my decades of experience with world widesourcing decisions as I participated in the global automation ofthe international airline, manufacturing and financial servicesindustries. The last decade of my executive career was virtually acase study in getting sourcing decisions sorted at HSBC bank.When I was head of technology in Asia for HSBC in the mid 1990’swe were forced to open an ‘offshore’ processing centre 200 milesnorth of Hong Kong in China because Hong Kong was boomingand we could not get sufficient Hong Kong staff or space to pro-cess each days customer instructions on time. We learned manylessons that have since been used to replicate the offshore pro-cessing model around the world.

The key lesson learned is that you need to look carefully beforeyou leap into any outsourcing or offshoring activity – or you riskmaking a bad decision that will be difficult and expensive to fix.

It is always essential to tie any sourcing decision to your organ-isation’s strategy – your overall strategy should always drive yoursourcing policy – not vice versa. This will help you avoid doinganything particularly stupid and it may actually keep you focusedon overriding business issues rather than falling prey to vendorhype or unrealistic cost saving promises.

Frequently the worst thing you can do is become very efficientat performing tasks that you shouldn’t be doing at all. The firstrule of outsourcing is: Never outsource a problem. Streamlineyour processes internally and eliminate unnecessary activitiesbefore you consider outsourcing.

Question every activity and every process. Why are you doingit? Does it add customer value? Do your customers care, or evenknow you are doing it? Would your organisation come to ascreeching halt if you stopped doing it? Or, might your effective-

An interview with Robert L (Bob) CarlsonFormer HSBC Global Head Of IT Operations and Telecommunications

Currently Visiting Industry Associate at the Oxford Internet Institute (OII)at Oxford University

TOP_06_Carlson_EV.qxd 12/7/06 5:00 pm Page 2


As the saying goes…‘If you don't know where you are going,any road will get you there.’ But, you may find you’re gotten to adead end street, with no way to get to a better place. So, your over-all strategy should always be the key driver. Should you automatemore? Should you outsource more? Should you off-shore more?Should you concentrate on fewer product lines or delivery chan-nels? You should always look to your strategy for the answers. Yoursourcing decisions should support your strategy, not drive it.

AVOIDING THE CORE VS NON-CORECOMPETENCY PITFALL

Unless your business started out as a virtual operation wherea small internal core team manages many outsourced operations,you will experience great difficulty in adopting a virtual operatingmodel. The business magazines are rife with examples of organ-isations that discovered too late that their outsourced ‘non-corecompetencies’ were indeed critically core to their business prof-itability and their customers satisfaction with their products andservices. And, increasingly, it is becoming illegal to outsource riskmanagement activities – so you will need to maintain internalmanagement competence even if you outsource the related pro-cesses. This will mean duplicate costs that will make outsourcingsavings harder to achieve.

Frequently it is a matter of whether your organisation is fullyintegrated or not. Do your customers expect connected and inte-grated services? Will they be upset, or even notice, if your prod-ucts and services aren't seamlessly delivered? Is your industryand your organisation driven by integrated products?

If you run a portfolio of separate organisations or divisionsyou may want to keep them separate and manage and rewardthem as individual units. Or, you may want to keep flexibility tobuy and sell parts of your organisation, which will be easier if theyare run separately than if they use tightly integrated systems andsupport processes.

UNDERSTANDING YOUR CHANGE DRIVERS

Change is always difficult, painful, and expensive. So, youmust have a good reason to change or your change process willinevitably fail, or fail to provide the expected benefit. Your organ-isation must be faced with the proverbial equivalent of Jumpingoff a burning oil platform in a storm, at night, where staying putis simply not an option - if you don't jump you will surely die. Ifyou do jump you probably will die anyway but you might get luckyand survive. How compelling is your reason for changing?

Is it a SURVIVAL issue like the over capacity automotive indus-try where standardisation and outsourcing are key survival issues?

Is it a STANDARDS issue? Is your industry standardising, orintegrating, or globalising so you won’t be able to compete as astand-alone organisation?

Is it a COST issue? Are your costs rising faster than yourcompetitors?

Is it a CUSTOMER SERVICE issue? Are your customers dissat-isfied and if so, do you know why?

Is it a PROFITABILITY issue? Are your margins shrinking dueto more efficient competitors?

Is it a STAFF or SKILLS ACCESS issue? Are you having diffi-culty attracting the number of staff or the specific skills you needto run your organisation, at an affordable cost?

Is it a SHARE PRICE issue? Do the stock analysts think yourcompany lacks the innovative drive or flexibility to compete?

Has your chief executive been listening to outsourcing adsand salesmen who promise the world to any CEO with a gullibil-ity problem?

There are many OTHER reasons to change, but the key issue isthat you should understand why you want to change. And, youshould make sure the reason is strong enough to drive the changeprogramme to successful completion.

OUTSOURCING IS A PARTNERSHIP –IT ISN’T PURCHASING

If you outsource you take on a partner in your organisation.Partnership is difficult because it involves relationship buildingthat requires significantly different skills and attitudes than thetraditional command-and-control management style normallyassociated with purchasing.

Any outsourcing must be viewed as a long-term partnershipcommitment. And, your partner must share your objectives andyour cultural values or the partnership will fail to live up to yourexpectations. You must anticipate continual change. People willcome and go so your processes and procedures must anticipatestaff and management changes on both sides.

Your business and your partners business must retain the flex-ibility to evolve and accommodate changing customer needs andpreferences or the way they use your products. And your objec-tives and strategy will need to evolve to accommodate or exploitcompetitive market developments. Your partner will change, andevolve, and grow, or merge, or get taken over, or go public basedon your outsourced processes.

Technology will continue to change dramatically, and yourability to leverage customer self-service through technology willprobably determine your organisation’s success over time. And,the law and regulations will change in un-foreseeable ways andbecome more restrictive and your organisation will need to beflexible, just to survive.

A key issue involves what will happen if the partnership ends.Many partnerships end, not due to the fault of either party, butbecause the changes noted above prevent realising the anticipatedbenefits. It is always essential that the contract should make effec-tive provision to return the outsourced process and all related infor-mation and skills to your control. And, your partner should be prop-erly remunerated to make the process as painless and smooth aspossible. A real practical test of cultural compatibility is to negotiatethe exit clause first. If you encounter problems with this when yourpartner is still in marketing mode, you can well imagine the traumait will involve after you have committed to the partnership.

Many partnerships fail to live up to expectations due to inap-propriate governance structures or differing objectives. So, evolu-

63www.cxoeurope.com

EXEC

UTI

VEVI

SION

S


An interview with Robert L (Bob) Carlson, Former HSBC Global Head Of IT Operations and Telecommunications


EXECUTIVE VISIONS

tion must be built into the partnership governance process. And,relationship management is essential for both parties becauseflexibility and good will are more important to ongoing successthan initial price or service level agreements. Relationship skillsare necessary to develop trust and to address the inevitable prob-lems with a spirit of mutual responsibility for finding appropriatesolutions and for sharing the related costs and benefits.

Service level agreements are important, but it is critical thatthey accurately reflect the real needs and values of your customersand your organisation. Benchmarking is a valuable tool that canhelp in understanding best practices and identify areas that shouldbe re-engineered before you before you consider outsourcing.

So, if you do decide to outsource you should anticipate thatcontract re-negotiation and termination will probably beinevitable and these should be key considerations in every out-sourcing agreement. In any event, the outsourcing contract willneed to evolve; and the problem resolution and escalation pro-cesses will also be critical to your organisation’s business conti-nuity. You should remember that the law courts are expensive andtime consuming, and should only be an option if your business isalready dead. A problem mediation process is usually faster andless expensive and far less damaging to the partnership.

Outsourcing can never be a panacea b ecause there is a funda-mental dichotomy of interests between you and your partner. In thefinal analysis, to you outsourcing is a commitment; to your vendorit is a transaction. This is your business and your partner must havethe same outlook as you have or the partnership will fail.

SMART OUTSOURCING IS INCREASINGLY A WAY OF LIFE

Every organisation outsources some activities because verti-cal integration is simply too unwieldy and inflexible in a fast mov-ing and competitive marketplace. You always need to optimiseinternal, external, partner, outsource, insource, offshore, and self-service resources to best achieve your organisation’s strategy.

It will always be horses-for-courses and there is no one rightanswer that will fit every organisation. Clearly, some options willbe a better fit with your strategy than others. But, you should look

before you leap into outsourcing, because when your skills aregone, your options and perhaps your future may be gone withthem. And, you must always remember that, frequently, the bestway to get a big problem is to outsource a small problem.

Outsourcing can be expensive, and many attempts fail todeliver to expectations; but this may not be worse than internalincompetence, or inefficiency. Outsourcing can provide access toscale economies but may entail the loss of internal managementcompetence to control your critical business processes. If you arenot competent, outsourcing can keep you competitive; but by def-inition it cannot give you product or service differentiationbecause these require specific innovation rather than ‘me-too’purchased solutions.

The regulators, and legislators, and courts aren't static andthey continue to develop new proposals and to extend old onesinto new areas. You must be prepared for rules changes that mayrender your organisation’s processing arrangements obsolete -sometimes retroactively. These issues will impact your partner aswell, and may render his business strategy untenable.

Your partner must share your objectives and values becauseeverything will change continually. Your organisation will need toaccommodate change at a rate equivalent

to drinking from a fire hose. If you decide to outsource, theonly sensible structure to accommodate all this change is a flexi-ble and collaborative partnership.

Summary In summary, you cannot stop change but you can manage

your reaction to change and compete effectively. Outsourcingcannot substitute for a sound business strategy and it will alwaysbe essential to match your strategy to your capabilities as well asto your aspirations. The simple issue is to Leverage YourStrengths and get help for your weaknesses.

Bob [email protected]



65www.cxoeurope.com

AGFA EUROPE SHARED SERVICECENTRE CHOOSES A DATAMANAGEMENT CAPTURE SOLUTION TOIMPROVE A/P PROCESS EFFICIENCY

Agfa-Gevaert has two large and focusedbusiness groups, Agfa Graphics and AgfaHealthCare, and a smaller business unit, AgfaSpecialty Products.

Agfa Graphics offers a complete prepresssolution, including consumables, equipmentand software. With a wide product assortmentof electronic and photographic systems andconsumables, Agfa is a leading player in thenewspaper market, the packaging industryand the commercial printing market.

Agfa HealthCare supplies conventional X-ray equipment as well as a state-of-the-artrange of diagnosis and communication sys-tems. Hospital radiology departments are tra-ditionally Agfa’s target market in the health-care sector. Over time, Agfa has improved thequality of X-ray images and developed X-rayfilms for specific medical specialists, for exam-ple mammography.

The company uses its experience in radiol-ogy to penetrate other clinical applicationssuch as cardiology, ophthalmology,orthopaedics and women’s healthcare.

Agfa Specialty Products focus on a numberof consumables, in particular film for themotion picture industry and microfilm

About Agfa

The Agfa-Gevaert Group develops, produces and distributes an extensive range of analog and digital imaging systems and ITsolutions, mainly for the printing industry and the healthcare sector, as well as for specific industrial applications.

Luc Le BrunCorporate Finance Process ManagerAgfa-Gevaert

Agfa’s headquarters and parent companyare located in Mortsel, Belgium. The companyhas production facilities around the world,with the largest production and research cen-tres in Belgium, the United States, Germanyand China. This global production networkenables the company to meet the specificneeds of each market, to limit the risk of cur-rency fluctuations and to reduce transporta-tion costs.

Agfa is commercially active worldwidethrough more than 40 wholly-owned salesorganisations organised into four regionalorganizations Europe, NAFTA (USA,Canada, Mexico), Latin America andAsia/Oceania. In countries where Agfa doesnot have its own sales organization, themarket is served by a network of agents andrepresentatives.

In 2005, Agfa-Gevaert Group’s net turnoverwas €3.3 billion. The company employs 14,000people worldwide.

Problem positioningAgfa set up a Shared Service Centre (SSC)

for its European region in September 2000, toprovide financial services on a common SAP

platform to 22 legal entities. The services pro-vided include accounts payable, accountingreceivable, asset accounting, general account-ing, internal reporting to headquarters, masterdata and VAT compliance.

The roll-out took about 18 months and notmuch time was left to re-engineer the process-es during that period. This happened in a sec-ond phase. After the consolidation of financialactivities in the Shared Service Centre, differ-ent projects were started, one of which relatesto the handling of vendor invoices.

The re-engineering of the accounts payable(A/P) process included three major parts, eachwith its own foibles: 1. Vendor payments. Agfa Europe had

dozens of different banking systems withdifferent access procedures and differentstatement formats, often supplied onpaper. An in-house banking system wasdeveloped and Agfa now works with onebank. This project was managed byCorporate Treasury.

2. The introduction of the purchasing facilityof SAP has been completed in all countriesby Procurement Europe.

3. The accounting process whereby vendor

TOP_06_Agfa_wp 12/7/06 5:01 pm Page 1

15,000 active vendors from 19 countries andspeaking 15 different languages.

The analysis of the number of invoices pervendor showed that 50 per cent were one timeinvoices with an amount equal to or lowerthan €1,000, and that 85 per cent of the ven-dors sent one to nine invoices a year.

The invoice rate of 3,200 per FTE was verylow when compared with the other companiesin the same industry segment and the through-put time from the receipt of the invoice to thebooking in the system was 30 to 40 days, someway off the benchmark.

The number of countries and languages, aswell as the relatively high volume of vendors witha very limited number of invoices per vendor, andper year, was a real challenge for the implemen-tation of a data management capture solution.

In conclusion it was obvious that the pro-cess was inefficient and time-consuming andthat it needed to be re-engineered.

Understanding the scopeand the business drivers

The scope covered third party supplierinvoices of which 90 per cent related to ser-vices including freight and 10 per cent togoods for resale. The solution was implement-ed across all Agfa Business Groups forEuropean sales organizations only.

25,000 manual inter-company invoices fornon-trade activities have been added in

StrategySECTION 1


invoices were posted manually. As oftenaccounting is at the end of the chain ofevents, using multiple banking systems andhaving no purchase order system integrat-ed with the accounting system generated alot of inefficiencies.

These three parts were introduced at differ-ent speeds and overlapped each other, espe-cially purchase order creation and vendorinvoice handling.

When the A/P process was analyzed onefinding was that in most of the countrieseverybody could place an order, since therewas no system in place to manage this activi-ty. There was no real vendor selection proce-dure, and every step in the process was man-ual. Invoices were received on paper, circulat-ed for approval, often lost and usuallyuntraceable.

When the activities were integrated in theShared Service Centre invoices were parkedlocally in SAP, and sent to the SSC afterapproval. In most of the countries small, low-speed scanners were installed and invoiceswere sent attached to an e-mail. This made theprocess even slower because each invoice hadto be printed in the SSC and was manuallyposted. The payment was the only automatedpart of the process.

At the end of 2001, Agfa Europe handled120,000 third party vendor invoices sent by

DocumentManagement

OCR/ICR SAP

Opticalarchiving

Invoices parked in SAP

Approval process

Invoices with PO processed directly

in SAP/MM

Physicalarchiving

Outsourced

Validatin

SAP workflow

linked to

Lotus Notes

Invoices

w/out PO

Figure 1:

January 2005 and the solution is being extend-ed to manufacturing in 2006.

Agfa Europe was looking at a solution thatwould:• Replace the manually intensive process by

use of one of the best technical solutions inthe field of optical character recognition(OCR) to improve accuracy and efficiency,generating significant cost reductions anddramatically increasing the number ofinvoices per FTE.

• Automate the approval process for invoic-es without purchase orders and allow effi-cient tracking of the invoices via an elec-tronic workflow.

• Take advantage of the images archive fea-ture to make them available to the Agfastaff anywhere, at any time, and preparefor the migration from physical to digitalarchiving.

Transferring to new procedures

The new process is divided into two dis-tinct flows. The first flow concerns invoiceswhich don’t have a purchase order, createdin SAP.

Procurement activities and the receipt ofgoods or services remains a local responsibili-ty. The paper invoices are received centrally inthe SSC, scanned, read and interpreted by theOCR, parked in SAP FI and sent electronicallyto the local sales organization for approvaland coding. When this is completed, theinvoice can be posted and paid.

However, the goal is a minimum of 50 percent invoices with an SAP purchase order.

The second workflow represents our bestpractice when a purchase order is created inSAP. It has several advantages from anaccounting viewpoint : • The approval is given at the beginning of

the process when the PO is created.• The financial information is available in the

PO.• The charge to the Profit and Loss

Statement (P&L) is booked based on goodsreceived; it is more dynamic because it isnot necessary to wait for the invoice toupdate expenses.

• When the invoice is scanned, read by theOCR and parked in SAP MM, it can beimmediately compared with the PO at lineitem via the SAP invoice verification func-tionality. If there is no difference, or if thedifference is in the limit of the tolerancefactor, it can be posted immediately.


SECTION 1Strategy


67www.cxoeurope.com

At the moment the input is only paper-based, but an XML (extensible markup lan-guage) reader is being installed this year in orderto capture input from electronic invoicing.

Data can be classified into three categories :• Structured data: you can configure the OCR

to find the information at a certain place, itwill always be on the same place, forexample, the delivery number on despatchnotes.

• Semi-structured data: the system alwayslooks for the same information, for exam-ple the date of invoice, but it can be in dif-ferent places on different documents.

• Unstructured data, the system looks forunstructured information: free text, forexample.

Below are the different main modules of e-Flow 3.0

The FilePortal (ScanGate or FileGate) inputsthe images into the system automatically andcreates batches. Scanned invoices are the entrypoints and are then processed in e-Flow.

The Freematch does the matching on rulesbased on scripts. It finds the field locations.Language scripts for 15 languages have beenwritten to identify the fields to be recognized.

The FreeProcess uses OCR engines andadvanced algorithms to improve the characterrecognition rates.

The FreeLearning is part of the installation ofthe new e-Flow v3.0 last year that provides learn-ing functionality. This module receives input fromthe FreeProcess and remembers the fields and thelayout of the invoice from a given vendor. Thisfeature improves significantly the quality and thespeed of the character recognition. The hit rateimproved from 70 per cent to 85 per cent andcould free up time to handle additional volume.

The Freecompletion is used for the valida-tion of invoices. In Agfa, it was decided tocheck each invoice independently of the levelof recognition. Rejected information, forinstance low confidence characters, unrecog-nized fields and failed validations are resolvedby an operator. From 1st January, 2005, thisactivity was outsourced as well. The scanningand the validation are processed by an exter-nal service provider.

The FreeException contains informationthat need to be flagged for supervisor resolu-tion. For instance, you may decide that allinvoices exceeding €5,000 must be checked bya supervisor.

The SAP Export module connects theengine to the backend application.

Looking at the SAP workflow

An electronic workflow is the logic exten-sion of the OCR and is mandatory in gettingthe documents circulated for approval andposting. Agfa Europe uses the SAP workflowthat is linked to Lotus Notes, since mostapprovers (sales and service managers) tendnot to be familiar with this system.

When a PO is created in SAP, the invoice issent to the inbox of the SSC accounts payableaccountant, who links the two documents atline item level and makes the posting. If thequantity or the price difference exceeds thetolerance factor, the SSC A/P accountant con-tacts local procurement.

When no PO exists, the document is sent tothe SAP inbox of the local accounts payableaccountant, who forwards it to the approver torelease the invoice for payment. Basic vendordata, the image of the invoice, financial data(GL account, cost centre), notes history andwritten comments are all available on thesame screen. When the document is released,it comes back automatically to the SSC A/Paccountant for posting.

Designing the technicalsolution

Scanned invoices are delivered in taggedimage file format (TIFF). They are scanned inblack and white at 300 dots per inch, givinggood resolution, and then are sent to an Agfafile transfer protocol (FTP) server.

They are uploaded in e-Flow. After vali-dation, the metadata are transferred to SAPvia batch input and the images of theinvoices are stored in the electronic archiv-ing system.

The document management starts with theopening of envelopes and ends with the deliv-ery of a file containing the images of theinvoices.

When the images are delivered, they areprocessed in an OCR or intelligent characterrecognition (ICR) application called e-Flow,from Top Image Systems (TIS) that readsand interprets the information on theinvoice that needs to be parked (pre-regis-tered) in SAP.

When the invoice passes this validation,step the image is stored on the optical archiveand the data is sent to SAP.

Invoices with purchase orders (POs) areparked in SAP MM and can be processedimmediately.

Invoices without POs are sent to the localorganization for approval and coding. TheSAP workflow is linked to Lotus Notes so thatthe approver gets a notification when aninvoice is waiting for approval. By clicking onthis e-mail, the releaser is automaticallylogged onto SAP.

The invoice is automatically sent to theSSC after the approval is given, and the finan-cial data (GL and cost centre) is validatedbefore posting.

The two major features in the new processare e-Flow and the SAP workflow.

Looking at e-Flow fromTop Image Systems (TIS)

The data capture uses OCR/ICR to:• Read the scanned documents.• Transforms the information into usable for-

mats for other systems (SAP for Agfa).• Deliver the extracted data to enterprise

resource planning (ERP) or workflow back-office applications.

End

ScanGate

FileGate

FreeMatch FreeProcess

FreeLearning

FreeCompletion

FreeBuild

SAP_Export

FreeException

Start

Figure 2:


StrategySECTION 1


Major implementationsteps

The project started in February 2002 andGermany, the pilot country, went live in Junethe same year. It was rolled out to 19 coun-tries and the project was completed byDecember 2003.

This project was challenging for variousreasons:• Agfa closed a distribution contract with

Top Image Systems (TIS) in 2001 and it wasits first e-Flow installation.

• No SAP workflow knowledge existed in-house.

• The project was developed by a more orless virtual team, working in their sparetime.

• The solution includes many interfaces,which increase the risk of failures.

• It was the first business process outsourc-ing experience within Agfa Europe.

Several factors helped to contribute to thesuccess of this project: • A European Key User (A/P team-lead) was

appointed from the first day (Project KickOff meeting) as well as local coordinators.

• A kick-off meeting was run in each country,and rolled out with the backing of managingdirectors, accounting managers, and headsof department at purchasing and logistics inorder to support the change management.

• Good planning and respected due datesbrought credibility to the project.

• A clear-cut overview was in place and SAPauthorizations were adapted.

• Vendors were informed about the changeby mail or by phone and from start-up, alocal call centre was set up to deal with anypossible questions.

• Achieving an adequate level of userunderstanding of the process was key tothe success.

• The enthusiasm and willingness of theteam to succeed were the fuel of the enginethat led to a successful implementation.

Users’ feedback and pro-ject benefits

Due to its simplicity and reliability, the projectwas accepted by the users. They rated the project4 on a scale of 5 and commented on its ease-of-use, simplicity and user friendliness, as well asthe outstanding image resolution of the invoice.

From a functional standpoint it is a low-risk project with limited complexity while itoffers a strong and reliable solution. AgfaEurope is now able to track efficiently theinvoices from scanning to posting via specificreports and through key perofmance indica-tors (KPIs) on a higher level.

Most vendors cooperated by sending theirinvoices directly to the SSC in Belgium and byadding the required information such as pur-chase order number or the SAP vendor codeon their invoice.

The project deliveredwhat it set out to do.

There is one A/P standard process inEurope implemented in all legal entities inde-pendent of their size and volume of invoices.

The project brought a significant cost-reduction: over €1 million per year, mainlyrelated to headcount reduction with a pay-back period of 25 months.

There is a drastic improvement in efficien-cy from 3,200 to 10,000 invoices handled perFTE. However, Agfa is still looking forimprovements to bring it closer to best-in-class averages. This will come from further re-engineering, supported by the extension of e-Flow 3.0 functionality.

Invoices can be tracked at any stage in theprocess and the solution provides a reasonableaverage throughput time of about 20 days.

Agfa in Europe managed to reduce vendorcalls by paying more often on time.

Figure 3:


BENCHMARKING OVERVIEW

69www.cxoeurope.com

And that’s what we think the discussion is evolving to. It’s notpossible to have the discussion anymore with the CFO saying “Well,of course we can cut cost but it will then reduce quality.” CFOs todaywill say “no, I want to be in a competitive position in the cost areawithout losing quality, or at least the quality required to run theorganisation. Maybe not the highest possible one but one that is suf-ficient.” That is the task that is often given to the finance function:increase quality and decrease cost at the same time. And that’s whatmakes their lives so difficult because that’s a hard job.

Therefore, I think sourcing options have come into the gamebecause many finance functions just aren’t able to do that basedon the fact that they are in a certain framework situation and theydemand certain drivers which they have to live with. But some-body from the outside might have different demand drivers andcould offer something better and for lower cost.

CxO: Are we focusing too much on efficiency and cost andneglecting effectiveness?

TB: We were focusing a little bit too much on efficiency. Let’ssay we were driving it too fast on the timelines without being ableto do all the reengineering on the effective side. You could alsosay we did not put enough resources into the effective side tokeep it up with the speed so it’s not necessarily true that the speedwas too fast, but the focus was, perhaps, too one-dimensional.Now the focus has shifted to two-dimensional and we get a lot ofcompanies announcing that they have a world-class target basedon the Hackett benchmarking they have done. Either in a certainfunction or across the functions.

CxO: As a thought-leader in this market place, what are theTop 10 benchmarking practices?

TB: The highest one is a delivery model which looks like asourcing grid when you think of the components of how you pro-vide services in which area, and in what way. The discussion isnot about shared services versus outsourcing, or good and bad,

CxO: Is it ever wise to sacrifice quality for lower costs?TB: No, not really. And the point, in my view, is that the ques-

tion is wrong because that is the perception of many people, whenyou show them the benchmark metrics their perception is thatsure we can cut costs but then we will lose quality. That is a com-mon perception of how things work but in reality it doesn’t haveto be that way because that will only happen if you do cost-cutting.Cost cutting is that you take off 30 per cent of the resources with-out doing anything else and that’s assuming that you’ve got someleeway. And if you don’t then the quality goes down. Re-engineer-ing is thought to be something where you change the focus and, ifnecessary, you change the technology and organisation in linewith that to get the same output with lower cost and even betteroutput with lower cost. So when you do a reengineering project,and any solution project is supposed to be a reengineering project,it should not have that relationship.

If you look at how Hackett measures world class, which inour terminology is a two-dimensional metric, it’s companieswho are all about core size efficiency and effectiveness that wewould describe as world-class. You can be as cheap as youwant and be really good on efficiency but if were not so effec-tive, we would call that cheap and useless. You are basicallydoing it at lowest possible cost but there is no useful output andthe target obviously is to have good quality output at the low-est possible cost.

An interview with Tom Olavi Bangemann Vice President Business TransformationThe Hackett Group, World-Class Defined.

EXEC

UTI

VEVI

SION

S

EXECUTIVE VISIONS

It’s not possible to have the discussion anymore with the CFOsaying “Well, of course we can cutcost but it will then reduce quality.”

TOP_06_Bangermann_EV.qxd 12/7/06 5:02 pm Page 1

An interview with Tom Olavi Bangemann, Vice President Business Transformation, The Hackett Group, World-Class Defined.


but it’s about all these components working together in a networkthat delivers an overall optimum solution. The delivery model isthe key solution, the other big driver is an enterprise resourceplanning (ERP) platform. Still the metrics show us that if you haveone common platform in place it provides a major advantage andif you don’t it is a major disadvantage.

Both of these run at around 40% benefit. So if you are neglect-ing those two then you’ll have difficulty in achieving good perfor-mance. To look at it another way, we know that we can achievemedium performance without having those two factors, but afterthat, that’s it.

Those are the major ones and within them I think there are alot of best practices on different levels. You can say that if welooked at how world-class companies do things, obviously bestpractices are based on what companies are doing that are reallysuccessful. We would see that in addition to using these plat-forms, they are simply more productive - they design processes ina way that makes them more productive. They have higher pro-ductivity with fewer errors. That means that getting that donerequires having very good processes designed and needs the rightpeople in the right place. You could say if you looked at world-class companies and their people management techniques theytypically invest significantly more in people, whether it’s hours oftraining per staff or a retention strategy that they have in place, orwhether it’s technology per employee, especially in finance. Youcan see that companies invest more in technology than an aver-age company.

Another best practice is self-service. It spans all functions butis especially effective in finance and HR. The key there is that self-service is good but the requirements on usability of those pro-cesses are higher than the process which is serviced.

CxO: What are likely to be the best practices of the future?TB: I don’t think in finance the things will change too much in

the next few years, although outsourcing in the finance area ispredicted to double in the next three years. The captive sharedservice solution will still be the dominant delivery model. In threeyears time over half of the companies will still have a captiveshared service as the major delivery platform. So the ratios willchange inside the finance function and outsourcing will grow inpercentages radically, but coming from a relatively small plat-form, at least for an overall business process outsourcing (BPO)it’s not going to take over. It might take over in 10 years, but with-in the next three years we think we will be dealing with the same

issues. By then however, standardisation and globalisation will betaken much more seriously and you will see companies reduceservice levels in certain areas.

This will be painful in the beginning and people will bescreaming and yelling because they don’t understand what thebenefit of that is, but that will take place. Then there needs tobe more reliance on technology running these things because alarger proportion is automated and as we will have a dwindlingnumber of people in finance in general, as more of it becomesautomated and more of it is done by a third party. I think thekey question for the finance people is how will they keep theirpositioning inside the company, which has typically been themost important support function in most companies. In manycases the CFO is one of the strongest contenders for the CEOjobs. If the CEO does not come from the business, which isprobably the first priority, then he or she will come out of thefinance function. It’s very rare that a HR director or IT directormakes it to CEO.

Finance will struggle in keeping that role and that requiresthem to move firmly into the decision support areas and get rid ofthe transaction work which they have been doing for 10 years.But they should also re-examine how they reposition themselves,because often they still think in terms of armies of people theycontrol, or locations they have and the number of entities they areresponsible for.

They need to change the model of thinking about the mergersand acquisitions activity that they have contributed to, and givensupport for or made decisions on, and mergers that they havehelped to make successful, businesses they have given materialto help improve.

All the CFO surveys, in terms of what is relevant for the nextfew years, always come up with the same kind of thing. If yousummarise very briefly then you will see that the CFO will alwaysbe responsible for: 1) helping the revenue increase, 2) reducingcosts, and 3) staying out of jail. After that you have a long list ofthings that constantly change, depending on what kind of mar-kets they are in, as sometimes people are number four, or tech-nology is more important.

CxO: How has the Sarbanes-Oxley act affected shared serviceand outsourcing governance?

TB: The Sarbanes-Oxley act has, in certain ways, helpedshared services to become successful because a platform of con-solidated process is more suitable for defining key controls in asuccessful way. On the other hand, if you’ve got your services inplace you spend significantly less on compliance with theSarbanes-Oxley act and world-class companies in general spend57 per cent less than a medium company. The effect is positive inboth ways. The effect on the CFO’s work life is not perceived bythem to be positive. Some of them say they have a certain under-standing of why some of that was necessary and if you ask aEuropean CFO most of them still have the view that it was some-thing that was necessary for the US because they didn’t do theirhomework and it’s just a nuisance for Europe.

EXECUTIVE VISIONS

Another best practice is self-service. It spans all functions

but is especially effective in financeand HR.



I think they have come to terms with it now because they wentthough the work that was necessary, and it’s probably a little bitoverdone, but they have put a good platform in place to take upnew requests when they come around and there will be Europeancountries coming out with similar ideas. France has developedsomething like this already.

CxO: What major mistakes have companies recognised andlearned lessons from?

TB: The biggest mistake has been not to give the shared ser-vice organisation sufficient scope and autonomy to run more orless like a business and be able to make those improvements thatyou are expecting from them. I think it depends on the organisa-tion, but as a trend, companies are not trusting the shared servicesolutions enough, even if you go through the evolutionary path toincrease the scope fast enough and give them autonomy, espe-cially in dealing with customers and outside vendors. Insteadmost companies are utilising the shared services centre as atransaction centre or factory to deal with sub-processes that theydon’t want to deal with themselves.

That will never lead to a real change in delivery model. Itreduces costs but it doesn’t change the operational model… andthat’s the biggest mistake. Looking at the shared services purelyas a distant world of centralisation and consolidation and notreally utilising it to its fullest extent. And companies that havefacilitated more autonomy are significantly more successfulinside their finance function and even more so to the outsidebecause the real benefits reach the outside world based on thefinance it delivers to the rest of the organisation, not just basedon the internal cost reduction.

CxO: What advice would you give to those looking to set up ashared service or looking to outsource their finance function?

TB: The advice would be do not jump to any conclusionsbefore you have thought about the options. It would be wise tohave some sort of a sourcing strategy research, either internallyor by an outside body, to get transparency, on what it is that youwant to achieve. If you are not clear about the target then you arenot going to have the right solution in place. The biggest mistakein any shared service, offshore, outsourcing project is to select asolution based on something but it does not link up with youractual target. In simple terms, a company’s benchmark resultsindicate a real need for reducing cost, but when they do a loca-tion search they go by a totally different criteria, suddenly empha-sizing criteria such as existing presence and quality issues and soon. The cost factor, which was the main driver for it, gets dilutedand you land in a location that won’t enable you to achieve yourprimary goal.

The key advice is to be clear about the main targets you wantto achieve, then align the approach and the delivery model toachieve them.

The other bit of advice would be not to look at things in termsof benchmarking being bad and outsourcing being bad but lookat all the options that are out there. Put together a sourcing gridwith all the functions and all the processes on one axis and all thesolutions on the other. Just have an overview of what makessense of what. For example, payroll – maybe local outsourcing isthe right solution for payroll.

71www.cxoeurope.com

EXEC

UTI

VEVI

SION

S


BUSINESS CHALLENGESStandard Chartered Bank was looking to

achieve greater leverage of its IT resources forthe business across the Asia Pacific region. Italso wanted to move from its currenttechnology and mode of operations in the AsiaPacific Data Centers to a new technology baseand mode of operations that would delivershigher service and quality levels to itscustomers at an improved Total Cost ofOwnership (TCO).

There was also a desire to improve theresilience of the services and to be better ableto support the future growth plans of thebusiness. And, as one of the world’s leadinginternational banks, achieving this with apartner they could trust and with the minimumrisk to both the business and their customerswas a top priority.

SOLUTIONTogether with Standard Chartered, Atos

Origin developed a Transition Program toprepare for and deliver this major changewhich has involved around 34,000 end users,650 servers and 190 applications across 19countries. Central to this was the migration toa new mode of operations. This includedconsolidating the data center from 4 locationsto a twin Data Center location based in HongKong and integrating with the bank’s own IT

Atos Origin and the Standard Chartered Bank have entered into a seven year international outsourcing agreement covering the managedoperations of the bank’s Data Center infrastructure. Atos Origin will deliver an improved level of performance and reduce costs through thedeployment of new technologies and greater standardization and consolidation. The new relationship and framework will also allow StandardChartered Bank and Atos Origin to explore other areas of cooperation.

Strategy

Case Study

SECTION 1


service centers. From these centers, AtosOrigin now runs the majority of the banks coreconsumer and wholesale banking platforms,as well as systems linked to ATM's. Servicesinclude mirrored disaster recovery facilities,and new storage and service desk facilities.

Another feature of the solution has beentechnology refresh (hardware and software)covering nearly 95% of the mainframe, midrangeand storage platforms for Standard Chartered’sbusiness operations. New processes, proceduresand supporting tools for Data Center operationshave also been deployed. This includes AtosOrigin’s own ITIL-based Continuous ServiceDelivery Model which ensures globallyconsistent processes and service delivery and

Global Enterprise Management System (GEMS)tool, which enables distributed monitoring aswell as technical and service support fromregion-wide service centers.

The first Phase of the program to establishthe new infrastructure (facilities, technologyand process) began during 2004 with thesecond Phase, completing in 2005. This wasstructured as a series of migrations in whichindividual country’s processing facilitiesmoved to the new location in Hong Kong andwhich also involved the decommissioning of 3other facilities.

BENEFITSStandard Chartered was looking to achieve

greater leverage of its IT resources for thebusiness across the Asia Pacific region. Its newtwin Data Center mode of operations now hashigher resilience and disaster recovery

capability across all production systems andAtos Origin has agreed to, and is delivering,higher performance targets within the ServiceLevel Agreements (SLAs). Furthermore, there

ACHIEVING SIGNIFICANT COSTREDUCTIONS THROUGH DATA CENTER CONSOLIDATION FOR STANDARDCHARTERED BANK

In terms of TCO, the Standard Charteredhas been able to realize a 50% reductionin cost of mainframe operations and a30% reduction in cost of midrangeoperations.

TOP_06_Standard_cs 12/7/06 5:03 pm Page 2

SECTION 1Strategy


73www.cxoeurope.com

have been no single points of failure within thesupported infrastructure.

In terms of TCO, the Standard Charteredhas been able to realize a 50% reduction incost of mainframe operations and a 30%reduction in cost of midrange operations. Andas part of this long-term agreement, AtosOrigin has been able to offer more flexible andscalable pricing, giving even greatereconomies as the business grows.

“This is a long term partnership that willleverage the latest technology to deliversignificant cost and capability benefits to theBank.”

Peter Sands, Finance Director of Standard Chartered Bank

About StandardChartered Bank

Standard Chartered is one of the world’s most

international banks, employing over 40,000 people,

representing 80 nationalities, across its network.

Standard Chartered operates in over 1,200 locations

(including subsidiaries, associates and joint

ventures) in more than 50 countries in the Asia

Pacific Region, South Asia, the Middle East, Africa,

the United Kingdom and the Americas.

Standard Chartered serves both Consumer and

Wholesale Banking customers. Consumer Banking

provides credit cards, personal loans, mortgages,

deposit taking and wealth management services to

individuals and small to medium sized enterprises.

Wholesale Banking provides corporate and

institutional clients with services in trade finance,

cash management, lending, securities services,

foreign exchange, debt capital markets and

corporate finance.

Standard Chartered PLC is listed on both the

London Stock Exchange and the Stock Exchange of

Hong Kong and is in the top 25 FTSE-100

companies, by market capitalization.

TOP_06_Standard_cs 12/7/06 5:03 pm Page 3

Section 2 www.cxoeurope.com


Section 2

Section 2www.cxoeurope.com

Governance


OUTSOURCING RELATIONSHIPSAT WORK: SETTING GUIDELINESFOR BEHAVIOUR

Leslie WillcocksLondon School of Economics

Sara CullenCullen Group

GovernanceSECTION 2


IntroductionIn trying to identify what makes for success

in outsourcing, practitioners invariably higlight ‘relationships’ - but there are few precisefindings on how such successful relationshipsshould be developed. Successful relationshipsdon’t just happen. Our most recent researchinto over 500 organizations (Cullen, 2005;Willcocks and Lacity, 2006) demonstrates thatoverall strategic business intention mustdetermine the nature of the relationship andthe contract. A detailed design is essential tobuild effective relationships throughout the lifeof the deal. This determines the key underlyingdrivers of behaviour, and whether powerbasedor trust-based relations emerge. Positive inter-vention by top management is vital to makethe ‘chemistry’ work (Willcocks and Cullen,2005). In this paper we also point to the criti-cality of establishing targets, and of proactiveassessment. In particular we highlight how arelationship values charter can set a bench-mark for behaviour, and how regular healthchecks and contract card monitoring to assessthe success of the relationship are crucialthroughout.

Diagnosing TheOutsourcing Relationship

Relationships are not just about subjectivefeelings - ‘feel-good’ or ‘feel-bad’ factors.Establishing outsourcing relationships, keep-ing them on track and getting the most out ofthem means measurement. All parties willbenefit from negotiating and clarifying a rela-tionship values charter at the beginning of thedeal, from regular health checks during its

course, and from monitoring - using a contractscorecard - the alignment of strategy, service,relationships and financial outcomes. But get-ting the right culture between the parties hasproven to be one of the most difficult aspectsof an outsourcing agreement.

The Relationship ValuesCharter

For this reason, experienced outsourcingclients have adopted a form of agreement,called a ‘Relationship Values Charter’ or a‘Code of Conduct’ that describes and agreesthe behaviour to be demonstrated during thecourse of the relationship. Modelling thedesired behaviours at this stage is invaluableas it significantly contributes to selecting asupplier that best ‘lives’ these values. Gettingthe right value and culture between the partieshas proven to be one of the most difficultaspects of an outsourcing agreement.

A relationship values charter agreedbetween a communications manufacturer andits Tier 1 IT infrastructure supplier is shown inFigure 1. This charter was designed andapplied early on in the outsourcing lifecycleand was used throughout to evaluate the rela-tionship on a bi-annual basis. As a result, theclient selected a supplier who had demonstrat-ed the behaviour with other clients, and theparties had a mechanism for gauging thedegree to which the behaviour was exhibitedin their deal.

Clients that do not specify the behavioursthey seek must work with the behaviours theyget, as well as the behaviours the client itselfexhibits.

TOP_06_Willcox_wp 12/7/06 5:05 pm Page 2

perform only the letter of the contract and relyon the client’s instructions as opposed tointroducing the potential innovation ideasthat were enthusiastically thrown about dur-ing negotiation. The client then interpretedthis behavior exhibited by the supplier as ‘typ-ical: say anything to get the deal, then run itthe way they like’ and the adversarial rela-tionship began.

Client-SupplierRelationships Diagnostic

Given the importance of the relationship, a‘health check’ diagnostic is vital for determin-ing whether an outsourcing relationship isexhibiting vital signs of health. Figure 2 pro-vides an abbreviated diagnostic as used in onesuccessful arrangement we studied.

Case ExampleAn electric utility evaluated the relation-

ship every quarter, and had an improvementagenda to focus on the key gaps. In fact, therelationship was deemed so unusually superi-

SECTION 2Governance


77www.cxoeurope.com

Case ExampleIn one case, the spiraling adversarial

behavior initially occurred from the client. Aproperty company and a supplier agreed to an‘outsourcing alliance’ – a partnering style ofrelationship. They all worked very welltogether during negotiation and planning thetransition. Then, on the first day of the con-tract, the supplier walked into the client’soffice asking where the relationship managerwould be accommodated (expecting an officenext to the director in the spirit of ‘partner-ing’). The director was quite surprised - hehad expected the supplier’s staff to be offsiteand certainly was not going to provide freeoffice accommodation. Reluctantly, the direc-tor gave the supplier an office in the base-ment. The supplier was wounded by what itthought was an overt gesture normally foundin a ‘master-slave’ relationship. Rather thandiscuss expectations of partneringbehaviours, the supplier went on the defen-sive stating that “if that’s how they’re going totreat us, fine.” The supplier instructed staff to

• Service - We do not desire to apply penalties. The Services will be of a consistent high standard, comparable to market standards, and customers will be delighted.

• Financial - We will achieve our financial goals:

o Client – reduce cost over time and have competitive pricing at all times

o Contractor – reasonable profits

• Communication - We will communicate frequently, openly and honestly with each other.

• Meet Needs - We will be both proactive and reactive to each other’s needs.

• Creative Solutions - We will constantly search for better ways of doing things.

• Conflict - We recognised conflict as natural and will focus on solving the problem, not apportioning blame. We will resolve conflict at the lowest level.

• Fairness - We will be fair to all parties.

• Time - We will provide each other time and management focus.

• External Relations - We will project a united front and will not discuss sensitive issues outside of the relationship.

• Industry Model - Our relationship will be seen as an industry model.

• Enjoyment - We enjoy working together and respect one another.

• Added Value - We will both derive more value from our relationship than just the exchange of money for services.

• Works Seamlessly - The services value chain will appear seamless.

• Technology Leadership - We both wish to have recognised technology leadership

Figure 1: Example Behaviours in a Relationship Values Charter

or that an independent consultant wasbrought in when a new general manager tookover at the client. This was to verify that it was,in fact, arms-length (no collusion, etc) andgood governance was in place. Nothingunseemly was found. Only minor ‘tweaking’ ofprocess transparency (forms and signoffs) wasrecommended, stating ‘the commercial rela-tionship and behaviours exhibited were whatparties everywhere aspire to’.

The Contract ScorecardOutsourcing is not a goal in itself, but a

management technique for achieving anynumber of business goals - and whether out-sourcing has achieved these goals cannot beassumed, it needs to be monitored and kept ontrack. Organisations that are veterans at theoutsourcing game know that the success of adeal is more than a single dimension. Theyknow it is not just the cost, but also the quali-ty of the service that matters. They also knowit is more than just getting what you pay for,but whether the relationship is productive ordysfunctional. Further, they know outsourcingis not just an operational exercise; there arestrategic goals to achieve, or at least not todisable, as well. It is very unwise to assumethat goals are achieved inherently upon sign-ing an agreement. Since outsourcing is rarelya reversible option and can consume a largepart of the budget, management’s ability todrive and demonstrate success has become abasic expectation.

To assess the myriad criteria that an out-sourcing deal may need to demonstrate to bedeemed ‘successful’ - we regularly find organ-isationspursuing five or six major objectives,and some up to 17 - the industry is now recog-nising the value of applying a balanced score-card approach. Our own contract scorecard isa method used to evaluate the success of thearrangement in a more holistic manner thanjust meeting KPIs (key performance indica-tors) (e.g. availability) and reducing cost. Thecontract scorecard helps the parties to estab-lish how the quality of the service will be eval-uated, but also how the financial outcomeswill be judged, how the relationship is con-ducted and if the outsourcing deal is achievingits strategic aims. In sum, it provides a valu-able senior executive dashboard for repre-senting the overall success of the deal from aholistic perspective.

The four quadrants for assessing an out-sourcing deal are service quality, financial,relationship, and strategy.


practices, enabling applications and busi-ness improvement initiatives.

• Business contribution – what the partieshave achieved out of the deal above justthe exchange of cash for services (e.g. jointproduct offerings, R&D initiatives, knowl-edge transfer).

• Corporate alignment – the extent to whichthe supplier conducts business in line withthe client’s wider corporate goals (e.g. SMEuse, workforce gender balance, environ-ment).

When an organisation uses the contractscorecard, it will tend to publish the results ona very high-level dashboard. This is then sup-

Service QualityService quality embodies the operational

metrics representing the fundamental out-comes of service delivery. Examples include:• Accuracy – the degree information is cor-

rect (e.g. data entry error rate, processingexceptions, record audits).

• Reliability/availability – the degree servicesare accessible (e.g. uptime/ downtime,abandon rate, outages)

• Completeness/compliance – the degreeactivities are done in full, typically deter-mined via compliance or verificationchecks (e.g. processing, documentation)

• Efficiency – the speed of activity (e.g. cycletime, processing rate)

• Response rate – the speed of reactions (e.g.service initiation, turnaround time, resolu-tion rate)

• Timeliness – the degree deadlines are met(e.g. processing, payments, reporting)

• Satisfaction – the degree customers arepleased.

Financial Financial embodies the monetary metrics

comparing current costs to different fiscalpoints. Examples include:• Historical – current cost compared to previ-

ous periods.• Baseline – current cost compared to an

agreed baseline (typically costs underinsourcing or under an earlier supplier).

• Budget – cost compared to an agreed bud-get.

• Competitiveness - current cost comparedto market rates (typically assessed throughsome form of benchmarking).

• TCO (total cost of ownership) – contribu-tion towards reducing entirefunction/asset costs.

RelationshipRelationship embodies the perception met-

rics assessing behaviours exhibited by oneparty in the eyes of the other. Examples include:• Communication – frequent, honest.• Meeting needs - proactive and reactive.• Creative solutions – continuously search

for better ways of doing things.• Conflict resolution – focus on problem

solving, not apportioning blame.• Fairness – act even-handed to each other.• Management time – provide time and focus

to each other.• External relations cohesion – project a

united front.

• Industry model – the relationship seen asan industry model.

• Positive interaction – enjoy workingtogether, mutual respect.

• Integration – the supply chain appearsseamless.

StrategyStrategy embodies the high-level metrics

that go beyond the letter of the agreement.Examples include:• Objective achievement – the degree to

which the reasons behind the outsourcinginitiative are being met (e.g. core focus,standardisation, knowledge transfer).

• Innovation – the introduction of better

GovernanceSECTION 2


Category Diagnostic Questions

BehavioursExhibited

Perceptions of the parties regarding one another

Investment in the relationship

Communication

Relationship processes

1. Do both parties display ethical behaviour? 2. Is there an “us” vs. “them” mentality? 3. Are both parties proactive? 4. Does either party blame the other when problems arise? 5. Does either party misrepresent the relationship to others? 6. Do the parties give each other recognition when it is due? 7. Are there key individuals who dislike each other?8. Do both parties respect one another? 9. Do both parties think the other party is a good listener? 10. Do both parties believe the relationship is a role model for the industry? 11. Do both parties use the relationship as an example of good practice within their respective organizations? 12. Are both parties reliable? 13. Are there unfulfilled promises by either party? 14. Does either party think the other party is not pulling their weight or living up to their accountabilities? 15. Do the parties think of the other party as trustworthy? 16. Does either party display the NIH (not invented here) syndrome (i.e. “it’s not our problem, it’s their problem”)? 17. Do both parties understand each other’s business, underlying drivers and motivations, politics? 18. Are both parties investing management time and effort? 19. Are there solid relationships at all appropriate levels? 20. Does each party get the management attention it needs from the other? 21. Is the client organization an enthusiastic customer reference site for the supplier? 22. Is there regular communication? 23. Is there regular feedback? 24. Do the parties provide early warning to each other? 25. Do the parties suggest improvements to one another? 26. Are there clear protocols between the parties? 27. Does each party assess the satisfaction of the other party? 28. Do the parties plan together? 29. If the contract has financial rewards for superior performance, have such awards been applied? 30. If the contract has financial consequences for poor performance, has such recourse needed to be continually applied? 31. Do the parties continuously seek better ways of doing things?

Figure 2: Relationship Health Check Diagnostic


SECTION 2Governance


ported by a comprehensive performancereport describing, at a minimum, the detailedmetrics, root cause, and actions to be taken.

Whether you choose to use a balancedscorecard approach to evaluate the overallsuccess of an outsourcing deal will dependupon: (1) how actively you intend to ensure themyriad of desired outcomes are achieved and(2) what the key stakeholders to the deal wantto know on a regular basis. There are fourstakeholder perspectives that an organisationmay adopt when assessing success using acontract scorecard:

Contract Value For MoneyPerspective

The ‘value for money’ perspective repre-sents what you get for your money (servicequality + financial). Ideally, an organization isgetting the minimum service metrics agreed toin the contract at a price that meets its finan-cial expectations. This is base expectation formost stakeholders, but particularly for the userbusiness groups that receive the service andend up paying for it.

Contract ContextPerspective

The ‘context’ perspective represents thesetting surrounding how the contract is deliv-ered (relationship + strategic) regardless ofwhat is delivered and how much it costs.Ideally, the contract outcomes are being con-ducted in such a way that the parties worktogether very well and, by virtue of having theparticular supplier providing outsourced ser-vices, you are in a better position than had you

not outsourced. This is of particular interest tothe CEO and senior management.

Contract OperationsPerspective

The ‘operations’ perspective representshow the contract is conducted in practice (ser-vice quality + relationship). Ideally, the con-tract is being conducted such that the serviceoutcomes are being achieved in a way thatstrengthens the commercial relationship andinteraction (nonadversarial). This is of particu-lar interest to stakeholders directly involvedwith the supplier, either as service recipients(users), part of the contract management func-tion, or part of the retained functional organi-sation.

Contract AgendaPerspective

The ‘agenda’ perspective represents howthe contract fits in the bigger picture (financial+ strategic). Ideally, the contract not only isfinancially effective, but is also achieving yourwider corporate goals. These wider goals areoften of most interest to senior management.

You may choose not to use all the quad-rants for all deals. For example, the only suc-cess criterion for infrequent transactions suchas a desktop refresh may be price. However, asa deal becomes strategically more importantand longer in duration, more of the scorecardis likely to come into play. The expectations fora 10-year whole-of-IT deal, for example, willtypically be more than purely financial andsuccess will be based on at least the value-for-money criterion if not the entire scorecard.

79www.cxoeurope.com

Once the decision to outsource has beenmade and the deal bedded down, it is easy formany to just let the deal run and manage it ata low level. However, such organisations willnever know if they have gotten the outcomesand total value they wanted. For the CEO, anoutsourcing contract scorecard is one tool thatthat has proven eminently successful, and iswell worth implementing.

About The AuthorsLeslie Willcocks

Leslie Willcocks has an international reputation forhis work in outsourcing, IT and change. He is Professorof Technology Work and Globalization at the LondonSchool of Economics. Email - [email protected] Sara Cullen

Sara Cullen is a former national partner at DeloitteTouche Tohmatsu (Australia), and is now CEO of theCullen Group. Email - [email protected]

ReferencesLeslie Willcocks and Mary Lacity (2006).

The Global Sourcing of Business and ITServices (Palgrave, London)

Leslie Willcocks and Sara Cullen (2005)Outsourcing Enterprise 2: The Power OfRelationships. (Logicacmg, London)

Sara Cullen. (2005) Towards ReframingOutsourcing: A Study of Choices in Process,Structures and Success (Melbourne University,Melbourne)


TRANSPARENCY IN OUTSOURCING

Business Drivers andResponses in the ITServices Landscape

The IT services market landscape is con-stantly changing due to a number of criticalbusiness drivers. They are pushing both serviceprovider and recipient to respond with a num-ber of solutions to address these issues, andthese require transparency on both sides to betruly effective. Generally, the business driversfall into three major areas: technology, businessdemands and regulatory compliance issuessuch as Sarbanes-Oxley, IFRS and TUPE.

Technology Technology changes are affecting IT capa-

bilities in areas such as networks, bandwidth,processing power, storage, packaged solu-tions. They are removing any limiting factorsand barriers to what can be achieved and areeven pushing enterprises towards implement-ing certain solutions.

The advances in processing power and vir-tualization technology that have taken placeover the last few years have given extra impe-tus towards recentralizing IT. This enables therationalization of enterprise IT infrastructuresbeyond what has previously been possiblethrough consolidation. Virtualization technol-ogy also helps to keep costs, as regards disas-ter recovery and business continuity to a min-

The push for more TransparencyThe drive to outsource has been going on since the late 1980s as companies strive to reduce their costs, take advantage of tech-nological developments and develop long-term IT strategies. Outsourcing always involves long-term relationships and when suchan agreement is made the outsourcing service provider is often selected on their reputation and a series of expectations.

In any such relationship it is completely normal that problems may occur from time to time. Furthermore, there is nothing wrongin admitting that sometimes living up to those expectations can be difficult. Situations change continuously and the outsourcer cansometimes encounter similar issues as those that occur between the parts of any enterprise and their in-house IT department.

Here transparency is crucial in maintaining trust and a sense of perspective. In fact the role that transparency plays in the waythat these problems are dealt with and resolved will ultimately lead to a stronger and more effective partnership.

John Dain Senior Vice President Global Managed Operations,Atos Origin

GovernanceSECTION 2


imum, and many enterprises use it as the firststep in a move towards a Utility BasedComputing (UBC) environment.

Technology has also led to the develop-ment of the more flexible service-orientedarchitecture (SOA), with a mixedinsourced/outsourced, onshore/offshorestaffing model. Open-source software hasbecome mature and accepted and is becomingincreasingly important. But despite suchadvances, security remains a core concernwithin user companies and vendors.

Wireless communication technologies,with RFID leading the charge, will connectobjects to each other and to data collectionenvironments. Mobile users in all but theremotest regions will be able to exploit signif-icantly improved wireless transmission ratesand seamless domain roaming, supporting thecontinuation of a wireless session across dif-ferent networks (for example, from a wirelesshot spot to a WAN).

Finally the Internet has created a muchmore ‘connected’ way of doing business. Manyservice providers, including Atos Origin, canincrease transparency through web-based ser-vice portals or extranets. These can enable theclient to see exactly what is going on in thecontract and even be able to influence it as wellby indicating the changes they want. In effect,a ‘Management Dashboard’ which can grow in

TOP_06_John Dain_wp 12/7/06 5:05 pm Page 2

The IT Services market has reacted to thechanges in these 3 areas with solutions thatare moving the IT Landscape towards:• More centralization• A return to mainframes• Virtualization• Utility-Based approach• Application rationalization• Global Sourcing

With so many different drivers and influ-ences affecting the IT landscape today, it ishardly surprising that enterprises are lookingfor greater transparency from a serviceprovider.

The importance ofTransparency in aRelationship

Transparency is important in many areas ofthe relationship. To begin with there is often agraduated level of dependency between theservice provider and the customer. Each needsto know exactly who is responsible for what,as any ‘grey areas’ can lead to confusion anddissatisfaction. For example, some businessmay be concerned about a possible lack ofcontrol due to subcontracting by their out-sourcers. The customer is ultimately responsi-ble for its own business, despite certain areasor processes being outsourced, and so needsto retain full control and clarity over all infor-mation and processes. Here, transparency pro-vides a single view of the services on offer and

SECTION 2Governance


line with new developments and allow for ser-vices to be added or amended at any time.

To be truly effective, work needs to beparameterized on the delivery side in such away that the requested changes can be imple-mented either automatically, or with onlyminor human intervention. This is typically awin-win situation. It enhances the customerexperience because they feel that the requestfor change is part of a solid procedure and nottreated as exception, and on the supplier side,it both decreases cost and potentially increasesturnover through making it easier to provideadditional (or less) volume and functionality.

Business Demands Business demands are changing very

quickly and more unexpectedly meaning thatbusinesses must become more flexible.Furthermore, being able to link businessdemands and emerging technology in a trans-parent way demonstrates value, attracts man-agement attention and secures resources forinnovation.

Businesses are more and more calling for aflexible technology infrastructure, one wherebusiness demands for IT resources can beautomatically met. They want an efficient, self-managing infrastructure where fixed costs arereplaced by variable pay-per-use costs and theenterprise can move expensive, rapidly depre-ciating assets off its balance sheet. They alsowant to take advantages of the advances inservice-oriented architectures and the poten-tial of on-demand sourcing models.

A key driver for an enterprise's businessstrategy is its ability to adapt to a changingbusiness environment. IT executives mustcreate an evolving governance architecturebased on an organizational structure, princi-ples and decision making processes that candeliver the greatest advantage to the busi-ness. Traditional IS organizations must adoptnew, agile and flexible governance mecha-nisms to support changing business process-es and IT managers must understand how thebusiness environment and technology ischanging in their specific industries. Here,transparency in customer and supplier rela-tionships is an ever-more essential part ofoperating a business.

Finally, the ongoing need for enterprisesto reduce IT spending in terms of Total Cost ofOwnership (TCO) and execute change has ledto the drive to harmonize IT services andoperational processes, with service levelsbeing defined across regional, international

81www.cxoeurope.com

or global organizations. Furthermore, suc-cessful commoditization and consolidationenables these services to be moved offshorewithout impacting on flexibility and qualityeven more effectively, thus delivering evengreater savings.

Regulatory ComplianceCompliance issues have seen many enter-

prises struggling with how to contain costs foradhering to regulations such as SOX, IFRS,FDA, Basel II, HIPAA etc, and it is expected thatthis will account for some 15% of IT budgets in2006. This has also caused the market torecentralizing IT as a well-structured, stan-dardized and consolidated IT environmentthat can make the implementation and main-tenance of systems to support such regulatoryrequirements less costly.

As the pressures of regulatory changerelated to enterprise risk management and thedesire for information transparency intensify,managers and directors need to attain a deep-er view and increased control of operationalrisks and compliance execution. Transparencymakes the business's operations moreauditable by increasing visibility into core pro-cesses and this is critical to maintaining trustand keeping performance in line with client,investor and regulatory expectations. It alsoprovides the basis for being able to plan andcarry out continuous improvement and allowsfor the creation of a baseline that can be usedfor future comparisons.


GovernanceSECTION 2


Another condition is that contracts haveto allow flexible volumes and quality changeswithout any renegotiations. They needdetailed and accurate price information to beable to order or cancel services as required inresponse to changing business needs.Furthermore, customers need to be able tohave a real-time insight into the services theyare receiving to be able to see the status ofthe ‘kitchen’ of the outsourcer! They need tohave control over these and to be able toaudit them easily.

All these areas can be best facilitatedthrough the ‘Dashboard’ model where the cus-tomer is fully empowered to drive or controlthe relationship to respond to the dynamics ofits own particular business situation. AtosOrigin has established web-based portals orextranets which enable the client to see exact-ly what is going on in the contract and influ-ence it as well.

SummaryUltimately both the service provider and

the customer need each other to achieve theirbusiness goals. However, in the case of out-sourcing, the relationship itself is the mostcritical aspect. To be successful it must belong-term and open, and ideally grow to thebenefit of both parties.

Transparency is vital in creating these con-ditions and the trust required to make therelationship work. However, a serviceprovider must not only demonstrate the inten-tion to be transparent but must be able toactually deliver transparency in a tangible andpractical way, based on a sound governancemodel. This can ultimately lead to the‘Dashboard’ model where the customer isfully empowered to drive or control the rela-tionship to respond to the dynamics of its ownparticular business situation.

Finally, if transparency is seen as a seriouselement of an outsourcer’s service deliveryapproach, this can be a major factor in influ-encing a client’s decision to select a serviceprovider as a long-term outsourcing partner.

the projects being supported. This helps cre-ates the atmosphere in which a long-term andmutually beneficial relationship can flourish.

Traditionally a relationship was deter-mined by a set of pre-defined rules that lastedthroughout the duration of the contract gov-erning that relationship. Any changes, (be theyprocess, functionality and sometimes evenvolume), were seen as exceptions that neededcontract negotiations to discuss and accept,and often work-groups and project teams toimplement. But today there is a need for moreflexibility in response to a more dynamic busi-ness world. So more transparent contracts areconstructed to accommodate change andmake the financial consequences predictable.This radically reduces the need to negotiateand therefore the total time to effect therequired change.

Changing service requirements, be it totake into account holidays, industrial disputes,sudden changes in product demand or suppli-er issues all mean that it is critical that the cus-tomer has a real-time and accurate picture ofwhat IT services it is buying, and how much ofit, and can vary these to fit demand through an‘ondemand/UBC’ delivery model. Such amodel also allows a customer to see if it ismaking the most efficient use of its IT services,and the ability to fine tune the situation adds totrust and confidence in the relationship.

Finally, innovation is a much-used wordtoday and often a key commitment from theservice provider. Within an outsourcing rela-tionship, there has to be the ability for the cus-tomer to actually openly check that the serviceprovider is aware of the potential of any newinnovation and is actually following the latesttrends and doing something about it!

Transparency can providea Win-Win Situation

It might be assumed that by introducingmore transparency in outsourcing that itwould mainly be to the benefit of the client.However, if properly structured and managed,transparency can be of equal and possiblyeven slightly greater benefit to the serviceprovider. But whatever the degree of benefit,the mutual benefits to the overall relationshipare considerable.

Client benefits include:• Greater control leading to better trust and a

‘what you see is what you get’ situation(See Gartner report ‘Trust and Control’).Congruency, where perception and realityare the same.

• Reduced TCO.• Better consistency of services.• Greater management/end-user satisfaction.• Integrated management processes across

both companies in areas such as invoicing,service orders, communication, etc.

Service Provider benefits include:• Improved client satisfaction and long-term

relationship – Measurable/Manageable.• Lower technical admin costs.• Improved quality of invoicing and

improved DSO (Daily Sales Outstanding).• Lower cost of implementation through

standardization.• Improved internal communication by

breaking down barriers between deliveryunits.

• Resolving the client ‘catalogue’ issue.• Enhanced end-user experience allowing

more one-to-one marketing and up-sell-ing.

• The ‘Shared Values/Goals’ approach is acommercial USP.

Creating the Conditionsfor Transparency

There are a number of conditions that helpa service provider to maximize the benefitsfrom transparency. An outsourcer has to havethe established skills and competencies in orderto be able to deliver flexibility at low cost. Theyneed to have an application portfolio properlyin place and to be able to deliver standard pro-cesses. Also they need to be able to leveragemassive synergies and to be able to partneracross the customers complete value chain.

A clear governance model is also an essentialprerequisite to achieving transparency. This is acornerstone of Atos Origin’s approach to out-sourcing and is well documented in our whitepaper on Demand Supply Management whichwas also published in the Outsourcing Project in2005 and is available on Atosorigin.Com.


SECTION 2 – Governance

83www.cxoeurope.com

ESTABLISHING/LIVING A SUCCESSFULSTRATEGIC PARTNERSHIP

IntroductionIn late 2004, Atos Origin and

KarstadtQuelle AG announced a long-termoutsourcing agreement under which AtosOrigin took over the Infrastructure Division ofItellium Systems and Services GmbH,KarstadtQuelle’s IT subsidiary. Around 900staff transferred to Atos Origin under a busi-ness transfer arrangement.

For last year’s edition of the OutsourcingProject, my former colleague UlrichEngelhardt, then CIO, Over-the-Counter Retail,KarstadtQuelle, described how the outsourc-ing agreement with Atos Origin came about.Now, some 18 months into the agreement, it isworth considering where the partnership is,what lessons have been learned and what thefuture holds!

Meeting the challengesThe original outsourcing deal between

KarstadtQuelle and Atos Origin was negotiat-ed according to a very tough schedule. Aspart of this, Atos Origin took over theInfrastructure Division of Itellium Systemsand Services GmbH, KarstadtQuelle’s IT sub-sidiary and internal service provider. Here,because of the historical development of thissituation, many of the services and servicelevels were only partially fixed in contracts.However, it was also clear that, generallyspeaking, Atos Origin would take over andcontinue to provide the services as Itelliumhad done before.

KarstadtQuelle AG, based in Essen, Germany, is Europe’s leading department store and mail order group. The Group achievedsales of EUR 15.7 billion in the financial year 2005. The Group’s business segments include Over-the-Counter Retail, Mail Order,Services, Real Estate and Tourism. The KarstadtQuelle Group employs around 62,500 staff.

Dr Peter PatzinaCIO Mail Order KarstadtQuelle and ManagingDirector of Itellium GmbH

The key challenge for Atos Origin was toestablish its services under strong and imme-diate cost cutting pressure while maintainingthe quality. They have also had to integrateover 900 people, establish their own proce-dures and processes and consolidate their ser-vices and portfolio in line with other deals inorder to achieve the necessary economies ofscale for delivering cost reductions.

Meanwhile, also as a direct result of the needto reduce costs, KarstadtQuelle closely exam-ined all the IT services it received concerningboth quality and quantity. This meant that short-ly after the deal we began to change ourdemands for IT services at a time when bothparties are normally trying to establish a stablerelationship between demand and supply!

Establishing Transparencyas a key success factor inOutsourcing

KarstadtQuelle has also had to establishwhat is called ‘Vendor and ServiceManagement’. This was in order to not onlyguide the transformation project, but also toestablish a healthy relationship with the serviceprovider and ensure that our business needswere met. Here we believe that establishingtransparency in the relationship is one of thekey success factors for achieving effective andefficient service-delivery, and therefore also forcreating a stable and successful partnership.

The first important task for VendorManagement was the creation of a detailed

TOP_06_Peter Patzina_wp 12/7/06 5:07 pm Page 1

Taking the partnershipforward

When we look at where we stand after 18months of our partnership, we can state thatthere has been a very smooth transformationwithout noticeable problems in the quality ofexisting services. Of course, new applicationsand new services bring new challenges, butwe are sure that we will be able to managethese also. Some things are always unexpect-ed or need time and one (probably under-estimated) issue was, and partly still is, theestablishing of the new invoice processes andclear reporting structures. However, by main-taining an open dialog with each other we areable to not let it detract from the overall goalsof our partnership.

Together we have been able to achievesignificant cost-reductions right from thestart of our partnership. For the future wehave to face the challenge that our businessdemands are constantly changing and there-fore so are our needs for the IT support ofour business processes. This brings newchallenges for the partnership (e.g. out-sourced services, which become unneces-sary) but also new business opportunities(e.g. new services for our business or newpossibilities through new technologies). Andin a successful partnership, both sides needto focus on both aspects.

I am clear that the basis for building asuccessful relationship, one that is capable ofnot only surviving, but also developing andgrowing to the benefit of both parties, is theestablishment of stable services in an atmo-sphere of solid trust and transparency.

About the AuthorPeter Patzina

Dr. Peter Patzina is Managing Director of ItelliumSystems & Services GmbH, responsible for consul-tancy and systems integration for the mail-orderbusiness of KarstadtQuelle and also CIO of the mail-order business of the group.

After studying business administration and com-pleting a post-graduate-study, Peter Patzina startedas a management trainee at Quelle in 1990. Afterseveral management positions in IT he became CIOof Quelle and Neckermann, the two big mail-ordercompanies of KarstadtQuelle. In 2003 he becameManaging Director of Itellium.

GovernanceSECTION 2


overview over all the services and relation-ships so that both parties knew exactly whatwas involved and their responsibilities. Basedon that and the existing requirements, bothsides could then work on establishing exactlywhat was required from the demand side andthen work on delivering the necessary quanti-ty and quality of these services through agreedService Level Agreements (SLAs).

For a successful transition process a num-ber of project teams and steering committeeson different management levels had to beestablished. Special importance was given tothe structuring and defining of clear process-es for reporting and also for the ordering andinvoicing of services. Thus VendorManagement became the link between the

business units and IT-Management on theone side and the supplier(s) of IT-services onthe other.

Another aspect of a successful partnershipis that it is normally based on two principles,trust on the one hand and ‘challenging thepartner’ on the other. From our side this meansthat we are looking to see improvements inspeed, the establishment of new processes,

reduced costs, as well as system stability andquality improvements. However, we must bearour responsibility and realize that our partnerhas taken over a certain structure and history.Finally, both parties must accept the need tolook for future opportunities to develop therelationship, be they from a business opportu-nity or technology innovation point of view.

When we look at where we stand after 18 months of our partnership, we can state that there

has been a very smooth transformation without notice-able problems in the quality of existing services.

TOP_06_Peter Patzina_wp 12/7/06 5:07 pm Page 2


85www.cxoeurope.com

THE EMERGENCE OF DYNAMICSOURCING PARTNERSHIPS - A COLLABORATIVE BUSINESS MODEL DELIVERING INCREASED BUSINESS IMPACT, AGILITY AND INNOVATION

It’s no secret that the main driver behindmost traditional outsourcing arrangementshas been to lower costs. Many companieshave recognized that third party organizationscan fulfil many of their IT requirements lessexpensively than they can, with as good orbetter quality. Third party organisations haveadvantages in expertise, experience and scaleeconomies that have been successfullybrought to bear on a wide range of IT projectswith a generally satisfied customer base. Ourresearch shows that the great majority of out-sourcing customers are satisfied with theiroverall cost/delivery experience.

But these days controlling costs is notenough. Having survived the fears of Y2K, theexcesses of the dot.com bubble and the trau-ma of 9-11, businesses are once again focusedon top line growth, business innovation andcompetitive advantage. They are also sensingrising business pressure. While it is normal forevery generation to feel that its own chal-lenges are ”unprecedented,” there is consider-able evidence that business today has in factbecome more turbulent. Products changemore quickly; customers seem less loyal; thecompetition is more difficult to pin down; mar-gins are under constant pressure; and, perhapsmost importantly, information technologyitself has made the boundaries between indus-tries much less clear.

In this environment of both expandingopportunities and rising challenges, it is onlynatural that customers should begin todemand more from their sourcing strategies

David MoschellaGlobal Research Director of the Leading EdgeForum, Computer Sciences Corporation (CSC)

and partnerships. In particular, today’s busi-ness environment increasingly requires sourc-ing partnerships to address a broader businessagenda encompassing business growth, agilityand risk management, as well as cost controland operational efficiency. Information tech-nology is now either driving or supporting justabout every major business initiative, andtherefore it can no longer be just put in a boxand managed by the numbers. It requiresalignment, flexibility, empowerment, creativityand governance. Few companies can fulfiltheir potential with a go-it-alone IT strategythat does not leverage the capabilities of busi-ness partners.

However, thus far, in these more strategicareas, the outsourcing story has often beenless successful, and both service providers andcustomers have come to realize that they needto improve the ability of the partnership to sys-tematically add value, just as they have usedoutsourcing to systematically lower costs.Many major outsourcing contracts have beenannounced with a great deal of fanfare aboutlong term partnerships, but making these part-nerships really work for both parties has oftenproved difficult. When the subject of innova-tion is brought up, the basic reaction of manysuppliers seems to be “tell us what sort ofinnovation you want, and we’ll give it to you.”

To be fair, this problem is not at all uniqueto outsourcing relationships. Many businesscustomers say similar things about the IT workthey do in house. The reality is that demon-strating IT value, maintaining flexibility, and

TOP_06_Moschela_CSC_wp 12/7/06 5:07 pm Page 1

GovernanceSECTION 2


top management to think past tactical con-cerns and opportunities, and factor in thefull strategic consequences of their out-sourcing decisions.

• Technology usage as a core compe-tence. Companies shouldn’t waste timedebating whether IT is core or not. Instead,they must decide whether outsourcing isthe best way to fulfil their ongoing need forIT competency.

• A shift from cost saving to cost effec-tiveness. Most IT is not a commodity andcheap IT can prove to be very expensive,with many hidden and opportunity costs.Consequently, value, quality and innova-tion must be brought back into the out-sourcing price/performance equation byusing a much more systematic ‘balancedscorecard’ type of approach. This is theonly way that meaningful cost effective-ness can be achieved, and it is the only waythe capabilities of the outsourcing partnerscan be effectively leveraged.

• The alignment of customer and sup-plier interests. Contracts must bedesigned to motivate suppliers to do theright thing and be pro-active in support ofthe customer’s business. Close alignmentof financial interests is the only provenway to sustain productive long-term busi-ness partnerships.

• Flexible, fixed contracts. Flexibilitymust be built into the design of outsourc-ing contracts so that they are capable ofaddressing changing customer prioritiesand objectives, without requiring complexnew negotiations. Currently, this type of adhoc work usually takes place outside of theformal contractual framework, which canbe risky for both parties. Future contractswill be based around a broader set of guid-ing principles as well as specific servicelevel agreements.

Of course, all of this is much easier saidthan done. Nevertheless, over time, we believethat most complex, long-term sourcingarrangements will incorporate these and otherdynamic components, enabling a new phaseof business and technology partnering. Thisapproach to improved partnering will be bene-ficial regardless of the specific sourcing strate-gy and goals. In other words, the principles ofdynamic sourcing will apply whether the goalis transformation, innovation or cost-cutting.Consider it to be a means of optimizing yoursourcing strategy.

stimulating innovation has proven problemat-ic in many large and complex IT environments,whether they are outsourced or not. There areoften no easy solutions and answers, and thetrue value and power of IT often only becomesobvious over time.

But since we believe that external sourcinghas great potential in these areas, the reasonsbehind its current shortcomings are of particu-lar interest. Most importantly, we believe thatthese problems do not stem from the failuresof individuals, teams, or companies, either onthe customer or supplier side. Rather they areoften rooted in attributes inherent to the out-sourcing contract experience itself. Thus, inthe first half of this paper we will identify theunderlying causes that explain why outsourc-ing has struggled with the business impactside of the equation. Only by understandingthese causes can we then turn to developingthe systematic response.

Understanding theChallenge

While many (perhaps even most) businessalliances, partnerships, mergers, and acquisi-tions do not achieve their full potential, thereare also many specific reasons why increasingthe business impact of IT outsourcing hasproven so elusive. Readers can get a goodsense of the challenge by thinking about thefollowing five issues:• Customer governance. Many compa-

nies have decided to outsource becausethey were having problems with IT. Butthese problems often stemmed from thecompany’s internal management anddecision-making culture, and such highlevel governance issues did not go awayjust because IT was outsourced. Unlessthey are addressed, the outsourcing rela-tionship can easily suffer from the sameunderlying causes.

• ‘Core’ competency. The often mistakenuse of this popular business managementidea allows companies to pretend that out-sourced IT is not central to their business.However, the reality is that IT is now sopervasive and so essential to businessoperations that companies need to becompetent in IT whether they outsource ITfunctions or not.

• Tactical orientation. Both buyers andsellers have been attracted to the short-term financial and management gains thatoutsourcing contracts often offer.However, the long-term strategic implica-

tions typically get less consideration. Weare reminded of the story of the CIO whowas asked to assess the implications of aproposed outsourcing decision only tolearn that the deal would be done beforethe assessment was complete.

• Contract rigidity. There is obviously aconflict between the desire for detailed,long term measurable contracts and theneed for flexibility, innovation and respon-siveness. If the relationship focuses toomuch on contract compliance, other prior-ities will suffer.

• Shifting bargaining power. Customershave maximum leverage before the con-tract is signed and use it aggressively todrive down costs. Once the contract issigned, leverage shifts to the supplier whouses the associated lock-in to restoreacceptable margins. Neither situation isgood for the relationship.

Our point is not to get bogged down withthese formidable problems. Our goal is toset the stage for what we think is the neces-sary and inevitable path forward. We pro-pose a series of steps that both customersand service providers can take to bettermanage the sourcing process so that cus-tomer and supplier interests are betteraligned in both the short and the long term.We call this process of developing a morecollaborative, mutually contributive andsustainable enterprise sourcing partnership“Dynamic Sourcing”

The Dynamic SourcingApproach

Dynamic Sourcing is our term for the over-all partnering mindset and underpinning com-mercial, contractual and Governance process-es needed to resolve these dilemmas and helprealise the true potential of external sourcingrelationships. Implicit in this idea is our beliefthat it is often the very nature of seemingly dif-ficult problems that points the way toward theeventual solution. For example, we believethat the five problems listed above will even-tually be resolved by implementing the follow-ing five changes:• Strategic and tactical governance.

Ultimately, outsourcing must be about thebusiness, not the IT agenda. Outsourcingcontracts must be grounded in a clearsense of where the business needs to goand how this is related to what is asked ofany outsourcing partner. This will require


SECTION 2Governance


87www.cxoeurope.com

business impact issues whether they out-source their IT or not. It is simply a question ofwhich path is right for your company.

Thus far, most outsourcing has been in theIS improvement category. But now the focus isshifting toward business impact and commer-cial exploitation. The one thing we know forsure is that the march of IT remains relentless,and those companies that stand still willinevitably get left behind. That’s why webelieve that enabling truly dynamic sourcingpartnerships will be one of the defining ITchallenges of our time.

About the AuthorDavid Moschella is Global Research

Director of the Leading Edge Forum –Executive Programme. The Leading EdgeForum (LEF) provides clients with access to apowerful knowledge base and a global net-work of innovative thought leaders whoengage technology and business executives onthe current and future role of information tech-nology. For more information about theLeading Edge Forum, please visithttp://lef.csc.com.

Computer Sciences Corporation is a lead-ing global IT services company.

Components of DynamicSourcing

While the concept of dynamic sourcing isrelatively new, many companies are looking atthe overall challenge, and a number ofapproaches and techniques are emerging. Inthe past, companies have often used the con-tract to govern costs and used the relationshipto spur innovation. We believe that companiesmust use the relationship to soften the con-tract, and use the contract to firm up the rela-tionship. Among some of the key tactics weare seeing are:• Executive and board level governance of

outsourcing relationships• The establishment of dedicated innovation

funds and staff• Gain sharing arrangements with real bene-

fits for suppliers• Risk/reward and other results based con-

tracts• Codes of practice and other general

behavioural principles• Trigger and refresher clauses• Continuous improvement programmes• Smaller, more focused sourcing partner-

ships

It is our belief that the real progress indefining, establishing and proliferating thesetypes of ideas will come over the next few

years. The history of the IT industry shows thatinterest in innovation tends to run in cycleswhich last from three to seven years. Duringthese periods, new norms and practicesbecome established and form the platformupon which future progress is built. Solvingthe problems associated with dynamic sourc-ing will likely follow a similar path.

Looking to the futureIt is important to see dynamic sourcing as

part of the natural evolution of the sourcingindustry. Many of the early outsourcing rela-tionships focused on basic systems, infrastruc-ture and support. It is hardly surprising thatover time the focus is shifting toward higherlevel strategic and business-related issues. Inthis sense, outsourcing is merely following thesame path as IT usage itself. We see this evo-lution occurring in three main phases:

Phase 1 – IS improvement. Upgrading ser-vices, improving capabilities, lowering costs

Phase 2 – Improving business impact.Reengineering processes, driving businesschange

Phase 3 – Commercial exploitation.Developing new technology-enabled businessproducts and services, and selling IT capabili-ties to others.

In other words, companies and their ITdepartments will focus on these higher level


DOES TECHNOLOGY MATTER IN BPO RELATIONSHIPS

Also, buyers should realize that service level agreements(SLAs) cannot cover all areas where quality performance maydecrease. And ultimately, any BPO provider operating underduress might ask to renegotiate the contract price and SLAs.

BPO is not the purchase of a commodity service: it is a partner-ship, and in order for it to deliver sustained performance, it mustrely on sound business foundations – not just contractual clauses.Process automation and related technology should be allowed toplay a role here. Unsurprisingly, in a recent SAP and Equaterraglobal survey of HR and Finance directors, IT systems rankedamong the top 5 enablers of a successful BPO relationship.

The far-reaching impact of technology

To understand this aspect better, consider that softwarelicenses typically represent no more than 5% of the overall coststructure of a BPO deal, but drive a great deal of its benefits.

Software licenses, of course, impact overall IT (20% of the totalcost). Think about software update costs, complexity of relatedoverall software landscape, infrastructure cost due to solutioncomplexity and scalability, initial migration costs and portability ofIT infrastructure in case of scope change and contract expiration.All of these items can raise your project costs considerably – andunpredictably – depending on the technology choices.

Look under the hoodA common myth once prevailed that buyers of BPO services

could just rely on contractually-agreed price and service levelagreements to deliver the expected business case and quality lev-els. Thus, buyers saw no need to worry too much about relatedtechnology implications; they assumed the BPO provider wouldsteer these to meet the contract’s objectives. But as evidenced bynumerous BPO relationships that failed to meet expectations, thisdoes not always happen. In today’s volatile business environ-ment, survival requires agility and control, and cost and qualitycan indeed spiral out of control over the course of the company’slife span. For instance, what about workforce services after amerger, or what if you want to introduce company-wide talentmanagement or workforce analytics? We have compiled a fewmore examples.

The untold story about cost reduc-tion and quality improvement

Consider the overall cost structure, which is not easy to con-trol contractually and may exceed planned levels: • A part of the process, cost is generated by the retained orga-

nization (people, process, technology) and is not controlled bythe BPO contract

• Not all of the outsourced cost is fixed: time and materialsexpenses, governance costs, one-off projects, other ’inciden-tals’ as well as ‘change control’ may add substantial costs

• Not all savings are easily guaranteed: negotiated ‘gliding costpaths’ may be difficult to achieve if the BPO relationship is notfunctioning perfectly

• Even if the excess cost is not explicitly transferred to the buyer,it generates a strain on the BPO provider that ultimately putspressure on the quality of delivery

An interview with Bernhard Fischer VP Solution ManagementBusiness Process Outsourcing – SAP AG

Powerful software, its standardized deployment and fulluse, the software vendor’s support to the BPO Provider, andsoftware vendor viability are necessary to capture value inan BPO relationship.

Contract clauses alone are not a guarantee of a healthy BPO relationship.Leveraging the standardized deployment of technology is the key to realiz-ing the value of Outsourcing: less risk, lower cost and better quality.Buyers are best advised to ensure that this is what they are getting.


EXECUTIVE VISIONS

TOP_06_SAP_EV.qxd 12/7/06 5:08 pm Page 2


Even more importantly, software impacts the cost, risk andquality of process delivery through process standardization,automation and optimization – thanks to embedded best-in-classapproaches. Smart, user-friendly and integrated employee andmanager self-services determine user acceptance of the out-sourced HR functionality and thus directly influence an BPO pro-ject’s ROI. Software can strongly enhance process control, gover-nance and portability of processes after contract expiration. Itfacilitates efforts in case of any scope change, such as the inclu-sion of an additional organizational unit, country or process.

Locking in the valueIn light of these observations, what technology tenets are need-

ed to avoid value leakage? Powerful software, its standardizeddeployment and full use, the software vendor’s support to the BPOProvider, and the software vendor viability. 1. Powerful software that is able to serve global, country- and

industry-specific processes. It must also be scalable so thatpeak loads, organizational growth and adoption of Web-basedself-service tools can be absorbed seamlessly; Must also beintegrated across processes so that adjacent functions or sub-functions can be powerfully leveraged to generate a virtuouscircle (for example, HR changes communicated in real time toall relevant stakeholders: shifts planning, projects, generalledger, facilities). And in the best case, it also has a multi-ten-ant architecture that enables one-to-many platforms ifrequired.

2. Standardized deployment and full use of that software, lead-ing to best-practice processes while catering for buyer’sunique business requirements.

3. Software vendor’s BPO-specific support and quality control ofBPO partners’ technology-based services in order to minimizethe risks during initial migration and ongoing execution, andto safeguard state-of-the-art deployment

4. And last but certainly not least, software vendor’s long-termviability and predictability: a viable company with sustainedfocus on process innovation can help ensure customers’ busi-ness continuity

The importance of IT within BPO is substantial, but historical-ly difficult to articulate in requests for proposals (RFPs). BPO RFPdocuments should include sections with explicit, IT-related

requirements. SAP has compiled best-practice examples on howthe technology requirements can be made explicit. These exam-ples are available free of charge from the author.

A better BPOAt SAP, we understand the critical aspects of an BPO relation-

ship and we have aligned our solutions and services to the relat-ed requirements so that our select BPO partners can deliver bet-ter services ‘Powered by SAP’. This, in return, helps clients gen-erate sustainable business value – by dramatically reducing risk,lowering cost and improving quality. It is no wonder that marketdata show SAP is the most likely choice in BPO relationshipsworldwide.

About the Author

Bernhard Fischer is responsible for SAP’s solution strategy in regards toBPO. Prior to the Solution Management responsibility for BPO Bernhardowned solution strategy, solution delivery and customers support at SAP’sB2B-subsidiary SAPMarkets and SAP’s succeeding Business Unit“Marketplaces” .Bernhard has been with SAP since 1990 executing a variety of responsibili-ties including software development for the R/3 system administrationsuite of tools, R/3 implementations in Europe and North America, founda-tion of the Regional Support Centers in Walldorf, Singapore and Shanghai.Before joining SAP he was member of a design team for the operatingsoftware of PBX systems with German vendor Siemens-Nixdorf.Bernhard holds a masters degree in Physics at the Technical University ofKarlsruhe.

89www.cxoeurope.com

Standardized deployment and full use of software lead tobest-practice processes while catering for buyers’ uniquebusiness requirements.

EXEC

UTI

VEVI

SION

S

TOP_06_SAP_EV.qxd 12/7/06 5:08 pm Page 3

World Class Solutions thatCreate Value across anEnterprise

Atos Origin understands that it is vital for ITservices and solutions to add value and to be apositive enabler for the future. As manycompanies today are developing into pan-European or global businesses, they also want tofocus on their core activities and drive down ITcosts. We respond to these issues by unlockingthe potential of new business systems – deliveringcompetitive advantage through improvements inproductivity, speed and control.

We have the global reach and presence tohelp enterprises achieve this by providingcomprehensive support, and IT services and

SOLUTION PROVIDER

solutions that add real value and act as a basefor future growth. And to maximize their effectwe can provide all the ‘design, build, andoperate’ elements of a solution across ourchosen specialist market sectors and for globalor multi-national clients.

We create complete business solutions,which deliver real business benefits throughthree balanced Service Lines – Consulting,Systems Integration, and Managed Operations.These Service Lines are the heart of ourapproach to the marketplace. They enable us tofocus on the particular needs of our clients,providing personal service, attention to detailand true day-to-day partnership, combinedwith direct access to unrivalled internationalexpertise and resources.

Atos Origin is a leading international IT servicescompany for enterprises worldwide. Our business isturning client vision into results through the applicationof consulting, systems integration and managedoperations.

John Dain – Senior Vice President Global Managed Operations

Atos Origin HeadquartersHigh Tech Campus Building 52, 5656 AG Eindhoven, HTC-51-5R09The NetherlandsTel: +31 (0) 40 21 57509

Business ContactJohn Dain – Senior Vice President

Global Managed OperationsE-mail: [email protected]: +31 (0) 40 21 57509

www.atosorigin.com

ATOS ORIGIN - A LEADINGBUSINESS AND TECHNOLOGYINTEGRATOR

Atos Origin is a leading international IT services company for enterprisesworldwide. Our business is turning client vision into results through theapplication of consulting, systems integration and managed operations.

We offer truly global solutions in over 40 countries worldwide and are one ofthe few companies that can provide all the ‘design, build, and operate’ elementsof a business solution. More than 60% of the revenue base is recurring, derivingfrom multi-year outsourcing and application maintenance contracts.

Our business approach is based on establishing a long-term partnershipapproach that encourages success through mutual benefit. We aim to developclose relationships with all our clients through either joint ventures or otherforms of long-term associations. We believe that this is the most productive wayof developing business today, with both parties sharing the risks and rewardsof the association and helping to develop and shape the future.

www.cxoeurope.com90

TOP_06_Atos Origin_p 12/7/06 5:09 pm Page 1

SOLUTION PROVIDER

91www.cxoeurope.com

Atos Consulting – A KeyEnabler for BusinessTransformation

Atos Consulting offers advice and apragmatic, realistic approach to addressingclient needs. It provides ‘end-to-end’ services

and solutions, ranging from supportingstrategy development through to enterprisesolutions and technology decisions. Thisenables our clients to become increasinglyeffective and to generate more value throughan innovative approach to business processes,well-integrated supporting technologies andstrategic investments in people.

Our consultants have an in-depthunderstanding of their clients and theirbusinesses and a proven track record ofdelivering solutions in many industrysectors. By focusing on these specificindustries, Atos Consulting ensures that allaspects of a client organization – people,processes, and technology – are fully alignedwith business strategy.

Systems Integration –Delivering Clarity fromComplexity

At Atos Origin, Systems Integration is notjust about integrating new solutions, butincludes getting the most out of legacyapplications to prolong returns from existing ITinvestment. Successfully combining new

solutions with established ones can transformthe complete enterprise architecture into asingle, seamless business system. Our extensiveexperience in integrating people, processes andtechnologies enables us to design, build andoperate practical and robust solutions.

Our specialists work with our clients to

develop, implement, and maintain systemsthat will support and enhance their overallbusiness strategy. We work with a carefullyselected group of strategic partners andvendors, such as SAP, Oracle and Siebel, todevelop and implement end-to-end offeringsand standardized packaged solutions incomplex environments using best of breedtechnologies. We also perform projects usingcustomized software, open source, and legacyapplications, including various languages anddesign methods.

Managed Operations –Strategic AlternativesAddressing Cost and Risk

Our highly successful outsourcingoperations manage core IT infrastructures forclients, including datacenters, desktopsupport, server farms and networkcommunication systems. We provide 7x24‘follow the sun’ infrastructure and applicationsupport through our global network and thecompany has unrivalled experience in majorenterprise programs covering complex and

multi-site solutions. Our Continuous ServiceDelivery Methodology (CSDM) guides ourclients through the process of assessment,planning, implementation, transition, andensures consistent, high quality servicedelivery worldwide.

We also provide Business ProcessOutsourcing (BPO) and specialist processingservices on a global basis and are a keyEuropean player in payment and cardprocessing services, CRM and multi-channelcontact services through Atos Worldline.

The combination of market expertise,innovative solutions and Service Lines is thehighly successful formula that has allowedAtos Origin to become the long-term partnerof choice for an ever growing list of Europeanand multi-national enterprises.

Global Sourcing -Optimizing BusinessValue, Rationalizing Costs

Supporting and delivering these solutions,Atos Origin offers different engagementmodels, such as through Global Sourcing,according to the needs of your organization.We believe that partnerships are the mostproductive way of developing business, withboth parties sharing the risks and rewards ofthe association by working together for futuresuccess.

Successful Global Sourcing is all about

getting things right first time. We can provideyour organization with the right resources, atthe right location, at the right time, with theright price and performance. Our offshoreteams comprise true professionals and weensure an exact match in the skills andcommitment to quality that our clients require.We can offer you new offshore servicesbeyond application development and

The combination of market expertise, innovative solutions andService Lines is the highly successful formula that has allowedAtos Origin to become the long-term partner of choice for anever growing list of European and multi-national enterprises.

As many companies today are developinginto pan-European or global businesses,they also want to focus on their coreactivities and drive down IT costs.


maintenance, ranging from applicationportfolio rationalization to full IT services.

Properly implemented, Global Sourcingcan bring several major benefits to clients:

• Sustainable TCO reduction• World-class quality• Flexible global delivery capabilities • Business continuity • Ease of working / transparency

When considering Global Sourcing, it isimportant to realize that ‘low wage’ is notequivalent to ‘cost efficient’. Many otherfactors combine to determine the costperformance of the service delivery such as acommitment to quality and continuousimprovement. And implementing a GlobalSourcing approach brings with it a majororganizational impact. Its successful executionrequires the support of a service provider withglobal experience, maturity, organizationaland cultural alignment, as well as stronggovernance and delivery capabilities.

Ensuring world class quality and servicedelivery is a key success factor forimplementing Global Sourcing strategies. AtosOrigin India has been assessed at CMMI Level5 and all our Global Sourcing Centers to thehighest levels of ISO 9001:2000 and the SEICapability Maturity Model (CMM and CMMI).Furthermore, Atos Origin’s ITIL compliantContinuous Service Delivery Model (CSDM)framework provides top quality services basedon global tooling and infrastructure. Withcurrently over 3,000 staff working in centersassessed up to CMM level 5, our goal is togrow this number at least threefold in order tocontinuously develop our reputation forconsistent worldwide service delivery.

Our Global Sourcing Centers (GSC) in Asia,South America, and Europe provide globalcoverage and delivery scale that leverage ourclient facing units around the world. This

enables Atos Origin to provide a unique blendof customer intimacy, industry and domainexpertise, high responsiveness and GlobalSourcing performance.

Understanding the Issues– Maintaining theCompetitive Edge

Atos Origin knows that choosing the rightpartner is critical for success. You have to beable to trust your partner and a close culturalfit needs to exist between the two companiesfor any partnership to work effectively.

Our strong values - client dedication,commitment to execute, entrepreneurship andconviviality – are reflected across all elementsof our company and have often been adeciding factor in the selection of Atos Originas a partner. In many instances, we believethat joint ventures and other forms of long-term association with clients are the mostproductive way of developing business, withboth parties sharing the risks and rewards ofthe association and helping to ensure a stable,profitable and growing relationship.

Our strategy is based on our provenindustrial heritage and well-balanced mix ofservice offerings in carefully chosen marketsectors. This approach enables us todemonstrate an in-depth understanding ofmarket issues and offer comprehensive anddedicated services and solutions across allindustry sectors including CPG/Retail, DiscreteManufacturing, Financial Services, Process

Industries, the Public Sector, and Telecom,Utilities, Media.

Atos Origin has a strong and balancedpresence in all the major IT spending markets

of Europe and we provide comprehensive ITsupport operations in The Americas and AsiaPacific for our multinational client base.

www.cxoeurope.com92

SOLUTION PROVIDER

Atos Origin – Atos Origin is a leading international IT services company for enterprises worldwide.

About Atos OriginAtos Origin is an international informationtechnology services company. Its business isturning client vision into results through theapplication of consulting, systems integrationand managed operations. The company’s annualrevenues are more than EUR 5.5 billion and itemploys over 47,000 people in 40 countries.

Atos Origin is the Worldwide InformationTechnology Partner for the Olympic Games andhas a client base of international blue-chipcompanies across all sectors. Atos Origin isquoted on the Paris Eurolist Market and tradesas Atos Origin, Atos Consulting, Atos EuronextMarket Solutions and Atos Worldline.

For more information send an email [email protected]

or visit the company’s web site athttp://www.atosorigin.com

www.atosorigin.com

When considering Global Sourcing, it is important to realize that ‘low wage’ is not equivalent to ‘cost efficient’. Many otherfactors combine to determine the cost performance of theservice delivery such as a commitment to quality andcontinuous improvement.



93www.cxoeurope.com

THE FUTURE OF FINANCE…USING BPO/KPO TO FIX THE BUSINESS PARTNERING PROBLEM

In 2015 the future of finance for largeFortune 500 firms will have many familiaraspects but also many new elements.

P2P, R2R, T&E will be delivered by one ofthe large BPO delivery firms from a combinationof on shore, near shore and offshore sitesaround the globe. Order to cash could well bedelivered by E-bay who could offer channels tothe market and secure collections.

With the swing back of the compliancependulum firms will become more comfort-able with transferring the transactionalaspects of areas such as Internal audit,External audit and local compliance to whichever of the big four firms still exist. Risk man-agement will be handed over to the expertssuch as Munich Re or some other large insur-ance players with real experience of under-writing and risk management.

Firms will rely on global service providerssuch as IBM, HP and Accenture to managetheir global ERP capability and these providerswill drive process enforcement in an ‘ondemand’ world of ERP applications.

The global payments cash managementactivities of the firm’s internal bank will havebeen outsourced to Citi/BOA/HSBC. The CFOrole will have been split into a chief controllerwho manages the SSC/BPO/compliance andrisk relationships and the Chief financial

With the relentless march towards Business Process outsourcing it is useful to turn our attention to the question of how much ofthe Finance function we can conceivably outsource. While the vast majority of FAO deals to date have focused on areas such asPurchase to Pay, Order to Cash and Record to Report more innovative firms are embracing outsourcing across a much widerrange of finance activities and processes. We can draw tentative conclusions of what the finance function of 2015 might looklike by combining the more recent trends of leading organisations into a composite picture.

Dr. Martin FahySenior Lecturer in Accounting and Information SystemsNational University of Ireland

strategist who manages investment financingand shareholder value issues.

Smart firms will have embedded so called‘business partnering’ in the business units and those with professional accounting quali-fications will work as commercial managerswith Line of Business (LOB) responsibility.Small teams of specialist ‘quants’ will supportbrand, product and customer analytics whilecorporate centre will have a small team of taxand financing/investment specialists.

Strategic finance in areas such mergersand acquisitions and capital allocation will bedominated by former investment bankers andstrategy consultants, from McKinsey, Marakonand Goldman Sachs.

The question we must ask ourselves how-ever is will these developments lead to thepurely lower costs finance functions or can wealso look to improvement in business decisionsupport and improved value creation.

The rhetoric reality Gap in BusinessPartnering and Strategic Finance

While ‘Business partnering and so calledStrategic Finance‘ is a popular rhetoric formany finance functions it remains a scarcereality. In the last five years firms have beensuccessful in moving routine transaction pro-cessing to sharing service centres (or out-

TOP_06_Fahy_wp 12/7/06 5:10 pm Page 1

will lead to an industrialisation of many of theso-called extraction/classification/filteringand reporting activities that make up businesspartnering. In time we may even see the emer-gence of so-called world-class business part-nering processes being imbedded in theemerging corporate performance managementand BI technologies.

BPO/KPO is unlikely to deliver the contextspecific analytics close to the market

While BPO/KPO providers will have a costand size advantage in the areas outline aboveit is unlikely that this will extend to the contextspecific and more un-structured ad hoc analyt-ics associated with optimising and configuringthe business model. In the case of analytics tosupport brand and marketing effectiveness,strategy and product introduction the highlycontextualised nature of the knowledge need-ed to support these decisions will erode anylabour arbitrage. As global firms have discov-ered in the so-called war for talent, world-classbusiness analysts come with a world-classprice tag regardless of where they originate.

The high end BPO/KPO and theconsulting/advisory space will be harder todistinguish

While the previous point suggests thatfirms are unlikely to engage in the large scaleoutsourcing of strategic analysis they will con-tinue to use consultants/investment bankers,and others to address shortcomings in theirown decision support capability on a case bycase basis. This will lead to a blurring of thedistinction between KPO and consulting asconsulting firms particularly the boutique firmsextend their use of offshore talent for grindingthe numbers and the PowerPoint.

Finance leadership Development Our work at CIMA has provided valuable

insights into the initiatives to influence/trans-form the orientation of the finance organisa-tion. Our investigations have highlighted threeoften-neglected challenges that firms mustaddress if they are to succeed in the deliveryeffective business partnering using BPO/KPO

Talent.Within the new model of finance, based

around the delivery of expert services anddecision support above the transactional level,there is a pressing need to find and cultivatethe talented finance professionals who candeliver the strategic insight and analysis

GovernanceSECTION 2


sourcing it to 3rd party BPO providers) but theyhave struggled to refocus the remainingfinance resources around the business part-nering agenda. While the more demandingregulatory and compliance environment (SOX,IFRS, and Basel II for example) has detractedCFO attention wider organisational challengescontinue to hamper the fulfill of the partneringmodel which has been advocated since themid 1990’s. Research from Booze AllenHamilton suggests that the obstacles to effec-tive business partnering include:• Outmoded or missing business intelligence

and forward-planning capability• Multiple, fragmented technology architec-

tures preventing seamless enterprise integration

• Inadequate resource firepower, unsophisti-cated processes for resource/capital prioritisation

• Resource constraints• Highly customised or unreliable financial

processes supported by underdevelopedanalytical tools

• Uneven depth of leadership and consulta-tive smarts within the finance organisation

• Inability to change a decades-old corporateculture

• Strongly autonomous business units and anarm’s-length managing corporate centre

• Finance bogged down in transaction pro-cessing and crises

• Stature and influence of finance leadership

An on going study being undertaken by the Chartered Institute of ManagementAccountants (CIMA) suggests that firms willlook to business process outsourcing or moreparticularly knowledge process outsourcing(KPO) to address the issues which have ham-pered CFO’s in delivering on the BusinessPartnering agenda.

HOW BPO/KPO WILLHELP FIX BUSINESSPARTNERING

Bpo/kpo providers will provide lower costmulti-shore data scrubbing/cleansing of datato support analytics.

As Drucker pointed out many organisa-tions find themselves data rich and informa-tion poor. Our study suggests that the singlebiggest constraint on improved financial anal-ysis is the lack of clean reliable data. MultipleERP instances and poor data capture have ledto a situation where much of the effort byfinance staff is directed not at analysis but in

manually extracting and scrubbing data fromunderlying operational systems. Discussionswith Finance professionals suggest that in thefuture they will look to outsource this cleans-ing to BPO providers who have in any casealready taken over the transactional activitiesassociated with the data. Under this model theaspirations of self service access to clean datafor financial analysts and others in the busi-ness units will be met by teams from BPOproviders who will prepare ‘Data Cubes’ and‘Decks’ which those in the business units canthen subject to analysis. Under this approachshortcomings in data and systems delivery areovercome using labour cost arbitrage.

BPO/KPO will take over the structured insti-tutionalised analytics and reporting.

In those cases where the analysis to be car-ried out is highly specifiable and not novelfirms will seek to transfer the production ofthis analysis and reporting to BPO/KPOproviders. Examples of this type of work arelikely to include, costing, inventory account-ing, pro forma scorecard production, cost bud-gets and other forms of traditional manage-ment accounting. Under this approach thedaily weekly and monthly burden of extractinginformation from operational ERP applicationsusing tools such as data marts and businesswarehouses will be transferred to BPO teamswho will have in-depth knowledge of the tech-nology and data architectures and they willuse this to put in place slicker data to desktopreporting processes.

BPO/KPO will drive a harmonisation ofManagement accounting and business ana-lytics

As firms seek to exploit the service ofBPO/KPO providers there will be strong eco-nomic arguments for the global harmonisationof management accounting and reporting/anal-ysis processes and outputs. Fixed price volumebased charging for these services by theproviders will force firms to stop, simplify andstandardise much of the current anarchy of busi-ness unit and operating site reporting and man-agement accounting.

BPO/KPO Providers will bring the disciplineof process improvement to the businesspartnering space

Just as they have used six sigma and pro-cess redesign to achieve breakthrough processimprovement BPO/KPO providers will applythese techniques to the analytics space. This


SECTION 2Governance


95www.cxoeurope.com

impact in decision support. Managing theexpectations of finance customers on the pro-posed new approach and selling what financeshould/should not be doing

High level multiple sponsorship so thatthe FD is not alone in driving and selling thevision. Defining a clear vision, customers offinance and expectations of the potentialfinance service delivery (in finance and in theclient community) and securing strong leader-ship and sponsorship are important buildingblocks to the transformation process.

Disciplined project management sothat an overarching programme board directsand steers the project in a defined timelinewith a range of defined activities

Open feedback from finance’s customersgauging their performance and their cus-tomer’s perceptions of finance service deliveryand challenge from the finance function ontheir approach.

The finance function needs to agree itsbusiness model from within before discussingenabling factors such as BPO/KPO better sys-tems and processes. Tools and techniques canbe brought to the table when required and out-sourced if necessary. In the light of under-standing business needs and what finance cus-tomers are lacking at a particular time, financecan better judge its role. Finance has been ableto shift its focus over time from merely mea-suring outputs to deciding on inputs and thecontrol environment. In this context, it isimperative for senior management to set outthe finance agenda and the scope of their roleso to create a clearer view on the changesrequired. Finally remember the Anna KareninaPrinciple and successful KPO processes

Tolstoy wrote “happy families are all alike;every unhappy family is unhappy in its ownway“. In the same way successful BPO/ KPOoutsourcing relationships are all alike whileeach unsuccessful outsourcing relationship ismessed up in its own unique way.

required of a genuine business partner. Ourresearch suggest that many finance functionswill struggle to attract and retain the talentedstaff that have the coaching, analytical, con-sulting and facilitation skills which partneringrequires. Our study suggests that effectivebusiness partners bring four key competenciesto decision making.

Managers for Value: They are committedto managing for value and understand thatshareholder value is the governing objective inassessing alternative strategies and options.

Keepers of the Business Model: Theyare custodians of the business model and pro-mulgate that model across the organisation

Relentless pursuers of efficiency: Theyare relentless in driving efficiency from theinvestment base particularly in such areas asworking capital, cap exp, brands, R&D etc.

Executors not strategists: They under-stand that flawless execution trumps elegantstrategy every time and that strategy formula-tion is not an end in itself.

In the absence of specific programmes tofoster the necessary talent finance will contin-ue to struggle to meet business expectations

Effective TeamingFreeing up finance’s time by removing activ-

ities such as internal control can have the effectof reinforcing the silo mentality as, expert ser-vices lose touch with business requirements.Recent moves to shared services/BPO architec-tures have in some cases increased the ghetoi-sation of finance within the organisation. A consequence of encouraging finance teamsto support the business is that finance andaccounting can become isolated from the busi-ness reality and become little more than a blue-sky strategy group. Real business partneringrequires that finance staff get their hands dirtyin the business units and develop a close affin-ity with those they are supporting.

If those finance professionals engaged inbusiness partnering are to have an impactthey need to develop effective teaming skills.Changing what finance people do where they have recently adopted, a decision sup-port/analyst role requires changing theirbehaviours. This involves addressing a rangeof factors such as company culture and sub-culture, their geography, own identity and

beliefs. Leadership of the finance organisa-tion needs to recognise the appropriatelevers of change and make a strong case forbetter teaming as part of finance transforma-tion projects.

Getting traction for the new finance deliverymodel – Prerequisites for BusinessPartnering under a BPO/KPO Framework

Where Finance has a holistic view of thebusiness it can help ensure coherent consis-tent decisions across functional areas bylinking processes, activities and perfor-mance in support of improved value cre-ation. But effective business partnering canonly occur where senior executives and inparticular the CFO has created the climatefor change. In this regard our study identi-fied the following prerequisites to effectivebusiness partnering;

Perceptions and credibility - anything ispossible when you have it, it is tough if youdon't. Without proper management of expec-tations the business can end up with a verygeneric rather than specific expectation ofwhat finance can/is going to do with KPO.This impacts expectations v performanceassessment usually negatively. CFO’s need tobe clear about where the point of articulationbetween external BPO/KPO providers will beand what activities will remain captive inregional shared service centres and what willbe delivered in the business units.

Avoid the land grab. At the outset manybusiness managers often view the BPO/KPO‘movement’ as little more than a strategicdecision support ‘land grab’ by a powerfulgroup-finance professionals that have beendisenfranchised by technology, shared ser-vices, outsourcing and increasingly offshoring. CFO’s need to address this concernearly on.

Under promise – Over deliver: Financehas in the past over promised and under deliv-ered on business partnering and is seen bybusiness units as spending inordinateamounts of time on those ‘traditional’ areas(such as capital investment and budgeting)that do not drive the most value. In additionwhile they see Finance as being strong intransactional activities and expert servicessuch as tax, treasury, internal control, andfinancial reporting, for a range of reasonsfinance has not always made a significant


GovernanceSECTION 2


SHAPING RELATIONSHIPS THAT LAST –PRINCIPLES OF DYNAMIC SOURCINGSM

The Changing Context forOutsourcing

Today, over half of the Fortune 500 haveoutsourced two or more IT functions, and thescope of outsourcing arrangements is everbroadening to encompass infrastructure andapplications and a wide range of business pro-cesses and back office operations.

There are many more potential suppliersthan there were even five years ago, offeringoutsourced services in some or all areas of ITand business process activity. This supply sideexpansion produces a fiercely competitivemarket driving lower prices and more spe-cialised or niche services. As a consequence,we are seeing a renewed interest in variousforms of multisourcing, where several ‘best ofbreed’ providers are contracted to deliver dis-crete ‘towers of service’.

Taken together these trends are often inter-preted as signs that the outsourcing market iscommoditising. However, more profoundchanges are also underway.

The outsourcing proposition as we know ittoday was designed to address a businessagenda dominated by the quest for opera-tional efficiency. The proposition was attrac-tive – transfer IT to a specialist that wouldapply economies of scale, scope and skill toprovide services at lower cost and higherquality, with a greater degree of cost variabil-ity and enable management to focus on thecore business without the distraction of run-ning an IT department.

Today, the business agenda is broader andpriorities are changing more quickly than ever.Business configuration is being transformedthrough mergers and acquisitions, divestments,joint ventures and geographic expansion, andtechnology is shifting rapidly with ‘break-through’ changes that offer new capabilities andpossibilities, now common place within the lifeof any outsourcing contract.

Major structural changes in the globaleconomy, coupled with new advances in tech-nology are bringing about an increasinglycomplex business, technology and sourcingenvironment and a requirement for companiesto simultaneously address the twin challengesof near term performance and value creation,whilst also adapting to meet new challengesthat lie ahead.

In this challenging environment there is anincreased expectation that strategic sourcingneeds to achieve not only “best in class” per-formance in specific IT or business processdomains, but also enable the business itself toachieve superior competitive performance.

CSC believes that any viable strategicsourcing partnership needs to embrace thesewider business goals and has applied its manyyears of experience in successful, value-creat-ing client relationships to develop a new andunique approach to enterprise IT and businessprocess sourcing. CSC’s approach, called“Dynamic Sourcing”, is designed to directlyaddress the wider business agenda for innova-tion, adaptation and value creation whilst alsosimultaneously addressing the limitationsoften associated with the traditional outsourc-ing model.

Whilst Dynamic Sourcing is a newapproach it draws on CSC best practicederived from successful client relationshipswhere the ability to change the structure andcontent of the relationship over time to main-tain alignment, relevance and contributionhas been critical. We believe that the princi-ples outlined in this paper set a real founda-tion for organizations seeking to developsourcing relationships capable of dynamicallyadjusting to changing business priorities overtime and which offer the potential to createvalue well beyond that associated with tradi-tional outsourcing and conventional transfor-mational offerings.

David Thomas Vice President Strategy and MarketDevelopment EMEA, Computer SciencesCorporation (CSC)

Principles based on research undertakenby CSC’s Leading Edge Forum –Executive Programme

TOP_06_CSC_wp.qxd 12/7/06 5:11 pm Page 2

SECTION 2Governance


In this new business context, whilst oper-ational efficiency is still important it is hardlya competitive differentiator. Firms must alsodemonstrate that they can grow quicker thantheir competition in both the short and longterm, accommodate a burgeoning compli-ance agenda (corporate governance, regula-tion and security), bring innovation to profitand deploy agile business models capable ofreacting to a constantly changing market.

In short companies must achieve near termexcellence (operational efficiency) and longerterm adaptation (strategic effectiveness).

The traditional outsourcing model con-tributes to the agenda for operational efficien-cy but is not designed for those companiesseeking a contribution to strategic effective-ness – to applied innovation, to the creation ofbusiness value beyond the scope of the ser-vices contract, to the development of collabo-rative solutions to business problems. Indeed,Ovum (a leading global ICT sector analyst firm)has recently reported that approximately 90%of existing IT outsourcing deals could be cate-gorised as ‘efficient’, whilst only 10% of dealsapproach ‘effective’.

Moreover the current trends in outsourcingtowards price commoditisation, deal fragmen-tation and shorter terms are incompatible withthe goals of companies seeking to build part-nerships that address this wider businessagenda. Whilst it may be true that there arenow many suppliers capable of contributing tothe old business agenda for operational effi-ciency, there remain very few who can con-tribute to the new agenda for both efficiencyand effectiveness.

The Challenge ofCollaboration

Whilst the current trend towards multi-sourcing is producing unintended conse-quences in terms of coordination cost and risk,it is clear that across the wider sourcing land-scape (infrastructure, applications, businessprocess, operations) all environments will be‘multi-partner’. These multi-partner modelsraise significant questions.

How do you deploy end-to-end deliveryprocesses across multiple providers? How doyou transfer accountability and liability as wellas responsibility and to whom under what cir-cumstances? How do you optimise the role ofeach partner, determine the scope of theiractivities and, more problematic still, changeroles and scope over time?

Increasingly for those clients that wish toaddress the wider business agenda, the sourc-ing strategy must look beyond cost reductionand performance improvement to understandhow different combinations of partners mightbe woven together into a collaborativearrangement that maximises business value.Understanding how to design a sourcing strat-egy to be a collaboration of compatible part-ners working together to innovate, transformand create measurable improvements to theoverall business, rather than a collection ofcontracts offering price/performance gainswithin each specific domain, is thereforebecoming a hot topic.

In this new business and sourcing context,it is increasingly acknowledged that tradition-al outsourcing arrangements and the contractsthat define them often struggle to provide the

97www.cxoeurope.com

required levels of value creation, multi-partnercollaboration and relationship flexibility. Withregard to the issue of “innovation”, for exam-ple, it is fair to say that traditional outsourcingarrangements have not generally been suc-cessful in addressing client expectations for“value-creating” innovation.

Fundamentally these difficulties arisebecause traditional outsourcing agreements aredesigned to be “transactional” and assume thatmuch of what may happen in the next five to 10years can be envisaged and captured in con-tract. Secondly, because they deal mainly withimprovements to the existing environmentrather than with the transformation and main-tenance of a desired “competitive position” overtime, they do not directly address the “strategiceffectiveness” agenda.

Also problematic is the intrinsic focus oftraditional outsourcing models on legal reme-dies against non-performance and attainablepenalties, rather than on the required“behaviours” that each party will exhibit whenfaced with changing circumstances and theneed to address new opportunities, threats orregulatory requirements. This often results insituations where, despite the service providerdischarging its obligations under the contract,the overall relationship fails because themechanisms to maintain alignment in priori-ties and objectives are flawed or lacking.

The real issue here is that the contract nolonger reflects the needs, priorities andrequired competitive position of the client andmoreover that the contract actually disincent-ed the supplier from meeting the real, ratherthan the contractual, needs of the client.

CSC’s Dynamic Sourcing approach isexpressly designed to address these challengesand seeks to create a new type of sourcingmodel that is adaptable to changing business

"Sourcing strategy mustaddress how combinations

of partners can be woven together into a

collaborative arrangementthat maximises business value."

Traditional Context forOutsourcing

BusinessStrategy Big Bang

BusinessFocus Operational

EfficiencyOperationalEfficiency

GrowthCompliance

/RiskAgility

SourcingAgenda Transition + Operate

Organisations today are pursuing a wider business agenda

Transform + Realise Value

Portfolio of Initiatives

Today’s Business Context


GovernanceSECTION 2


priorities and which provides a mutually bene-ficial basis for long term partnership for clientand service provider(s) alike.

Principles of DynamicSourcing

Increasingly, CSC and its clients are taking anew approach to sourcing relationships:accommodating and exploiting change; weav-ing innovation and continuous transformationinto the fabric of a long-term relationship; anddesigning and facilitating multi-partner, collab-orative business models. This new approachcan create extraordinary value, well beyondthat associated with traditional outsourcingand conventional transformational offerings.

Whilst Dynamic Sourcing is a new approach,it is highly pragmatic - based upon CSC learn-ings and best practice from many successfulclient relationships in which the ability tochange the structure and content of the rela-tionship over time to maintain alignment, rele-vance and contribution has been critical.

1. Focus on Business OutcomesIncreasingly, the technical goals and mea-

sures within outsourcing contracts are becom-ing secondary to the business outcomes that theoverall sourcing strategy aims to accomplish orsupport. These higher-order objectives are bet-ter understood by the business and have theadvantage of greater longevity.

The overall business objectives define theintent of the contract, specific business capa-

bilities and outcomes associated with eachstage of the transformation plan, and chargesare associated with business improvement andcapability rather than with narrow technicalmeasures. Sophisticated processes are used tolink business strategy to IT and process strate-gy, so that changes in business needs, prioritiesor even configuration are captured and formthe basis of a revised forward plan.

As a consequence the relationship is dynam-ic, changing in line with the business andremaining vital over an extended period. Bymeans of an example, one of CSC’s clients SAS,the Scandinavian airline, has a key goal ofautomating non-flight activities wherever possi-ble. Many of these services are purchased on atransactional basis, so it is critical for both SASand CSC therefore that automation projects aresuccessful. In order to achieve this, all projectsare now subject to a technical transformationplan that deploys the required IT capabilities aswell as a jointly developed business transforma-tion plan that measures effectiveness andensures that the desired business results aredelivered. Differentiated charging strategies aredeployed to encourage behavioural change inboth supplier and client organisations.

2. Create a Collaborative Business ModelIn CSC’s most recent market survey, many

of the respondents said that they were pursu-ing multisourcing strategies and that supplierintegration and collaboration between suppli-ers was a key challenge.

Most organisations are ‘serial outsourcers’,optimising each transaction with little regardfor the target ‘sourcing model’ and with almostno regard to the eventual collaborationbetween the portfolio of partners that they arecreating. This approach raises strategic as wellas operational issues. From an operational per-spective, technology needs to be managed onan end-to-end basis. Traditionally, businessusers are concerned with availability, perfor-mance, cycle times and of course cost, althoughthey are entirely unconcerned about the state ofaffairs at the component level. When there is aproblem they do not care why they can’t tradeor in which partners’ domain the blame lies,they only care that they cannot trade.

Transferring risk is more complex in amulti-partner environment. Suppliers are gen-erally willing to accept both responsibility andliability for matters within their direct control.In a multi-partner environment, it is highlyunlikely that any one partner would acceptresponsibility, let alone liability, for ‘availabili-ty’ in the broadest sense.

From a strategic standpoint a traditionalsourcing approach leads to a collection of competitively advantaged contracts.However, when later business improvementsare contemplated, they require the co-operationof many partners to achieve the planned out-come and once that outcome is achieved thereare likely to be winners and losers amongst thepartners. As the attention turns from technicalefficiency to business effectiveness, improve-ment programmes range across and beyondtechnological boundaries. For example, one ofCSC’s current clients is facing a regulatoryrequirement that calls for a step-change incapability. Applications will need to be re-engi-neered or replaced so that infrastructure can besimplified and better integrated, followingwhich the business process can be re-engi-neered to deliver the new capability. From asupplier perspective, the partners deliveringapplication development, network and datacentre services will see volumes and revenuesrise, those delivering application maintenance,end-user and midrange services will see falls.

Unsurprisingly, the client concerned is see-ing varying levels of enthusiasm from its chosepartners, collaboration being difficult to retrofit to the existing outsourcing arrange-ment. Suppliers’ assumptions about risk, vol-ume, future business and required investmentdrove the commercial offer that they made,underpinned the future commitments that theyoffered and shaped the contract itself.

Improving efficiency Achieving growth

Innovation

Transformation

Agility

Better

Faster

Cheaper

Characteristics of Dynamic Sourcing

Key Characteristics:Results-DrivenCollaborative

FlexibleSustainable

Process-Centric


SECTION 2Governance


99www.cxoeurope.com

Dynamic Sourcing acknowledges the needfor each sourcing transaction to be designedto fit into a collaborative sourcing model aswell as to be optimal in its own domain. Theseconsiderations are made explicit in the solu-tion, transition, transformation and gover-nance, as well as in the commercial and con-tractual approach.

3. Align Client and Supplier BehavioursDynamic Sourcing aims to accommodate

and exploit change as opposed to simply miti-gate it. There is an explicit recognition thatmany of the assumptions that underpin the ini-tial transaction will change, as will therequired performance levels and economicexpectations. The key is to focus on the realrequirements from a business perspective andto be realistic about the supplier’s need torecover investments and make profit. Forexample, setting a target service level of x% fora service delivered for $y and consumed at agiven volume may represent the best view ofthe requirements in year three of a relationshipbut is unlikely to be realistic across the full-term of the contract.

It may be more appropriate to suggest that: • Service performance and costs will be

maintained in the top x% relative to theclients competitive peer group;

• Service performance and costs will remaincompetitive with other suppliers of similarservices etc.

Such definitions are more likely to endurethan traditional metrics. Dynamic Sourcingtakes a similar approach to other areas ofchange, envisaging business scenarios(merger and acquisitions, disposals, regulato-ry requirements, new product launches etc.)and making explicit the behaviours andactions required of both partners and theclient. It makes specific provision for innova-tion – identifying how ideas will be generated,tested and funded. It also makes it clear howboth investment and benefits will be realizedand shared.

Designing this level of alignment is highlyrewarding but challenging - requiring high lev-els of trust, collaboration, transparency anddisclosure, between all parties.

4. Build Mechanisms for SustainableTransformation

Traditional outsourcing envisages a singleperiod of aggressive transformation to improveservices and deploy supplier processes, followed

by a sustained period of continuous improve-ment. This however is no longer sufficient tomaintain market-leading performance.

CSC’s Dynamic Sourcing approach envis-ages sustained, or iterative, transformationthroughout the life of the outsourcing rela-tionship and makes extensive use ofBusiness Process Management (BPM) tech-niques and tools.

BPM enables the capture, representation,optimisation and deployment of businessprocesses without reference to the underlyingor supporting technology. As a consequence,the business process itself can be trans-formed, improving business performance andcapability, and thereafter optimising the tech-nology environment.

The fusion of BPM with more conventionaloutsourcing approaches enables CSC to makethe interaction between technology and businesstransformation explicit, and to make the vision ofan arrangement based upon business outcomesrather than technical aspirations, a reality.

The potential now exists to move fromcontinuous improvement to continuous opti-misation – maintaining the optimal businessmodel and technology environment in realtime, as the business needs, priorities and con-figuration change.

5. Ensure Shared Governance/ProcessesDynamic Sourcing assumes that from the

outset there will be a multi-partner environ-ment providing end-to-end service delivery,management and improvement processes.Dynamic Sourcing embodies these ideas inan innovative operating model and a radi-cally different approach to governance.

In short, Dynamic Sourcing is a newapproach to designing, shaping and managingoutsourcing relationships that focuses on busi-ness objectives and outcomes rather than ontechnological goals. It is designed for a flexiblemulti-partner environment that accommodatesand exploits change so that the relationshipremains vibrant and contributive over time.

As such the model advocates a new way ofworking, but one which sets a real foundationfor collaborative value creation and addressesthe simultaneous challenges of near termoperational efficiency and longer term strate-gic effectiveness.

To date, many of the issues that CSC hasencountered with this approach are culturaland behavioural. Some suppliers find theseapproaches come naturally, others don’t.Different combinations of suppliers, all per-

haps equally capable have in the past pro-duced very differing results.

Ultimately, the success of this approach ismore to do with the combined capability of allsuppliers and the client itself rather than thesum of its parts. When we move from a collec-tion of contracts to a cohesive, collaborativemodel combining the skills, resources andcapabilities of some of the world’s best suppli-ers in pursuit of the client’s goals the resultscan be extraordinary.

CSC’s Five Principles of Dynamic Sourcing

1. Focus on business outcomes

2. Create a collaborative business model

3. Align client and supplier behaviours

4. Build mechanisms for sustainable transformation

5. Ensure shared governance/processes

For dynamic, results-driven sourcing solutions,talk to CSC

Email: [email protected]

Contact: Simon KnowlesMarketing DirectorEuropean Business Development

Tel: +44 (0)1252 536871


Dynamic Outsourcing

Enabling the ResultsDriven Enterprise

Business needs and priorities are changingmore quickly than ever before. Productschange more quickly; customers seem lessloyal; the competition is more difficult to pindown; margins are under constant pressure;and information technology itself is makingthe boundaries between industries much lessclear. Business configuration is beingtransformed through mergers andacquisitions, divestments, joint ventures andgeographic expansion. Technology is alsoshifting rapidly and it is now common for'breakthrough' changes that offer newcapabilities and possibilities, to occur withinthe life of any contract.

CSC provides innovative solutions forcustomers around the world by applyingleading technologies and CSC's ownadvanced capabilities. These include systemsdesign and integration, IT and businessprocess outsourcing (BPO), applicationssoftware development, Web and applicationhosting, and management and technologyconsulting.

The company's spectrum of end to endservices includes:• Outsourcing - Improving business

performance, service levels and reducingcosts. Our outsourcing capabilities includebusiness process outsourcing, applicationoutsourcing, infrastructure outsourcingand hosting services.

SOLUTION PROVIDER

• Systems Integration - Our 45-year heritageof technology leadership includes buildingsome of the world's most complexmission-critical information systems. Fromfront-end consulting and planning tointegrating and managing technologysolutions, CSC has the expertise andexperience to respond to uniquechallenges and opportunities.

• Consulting - Our portfolio of industry-focused solutions spans the full life cycle -from strategy and business process designto technology services, systems integration,application outsourcing and hosting.

New Business Context forSourcing

Business needs and priorities are changingmore quickly than ever before. Businessconfiguration is being transformed throughmergers and acquisitions, divestments, jointventures and geographic expansion.Technology is also shifting rapidly and it isnow common for 'breakthrough' changes thatoffer new capabilities and possibilities, tooccur within the life of any contract.

Fewer clients are now prepared to awardall infrastructure and applications-relatedservices to a single vendor. Indeed, whenthe wider view of business processoutsourcing is included in the sourcingstrategy there are no single supplieroutcomes. These multi-partner models raisesignificant questions.

For dynamic, innovative, results-drivensourcing solutions, talk to CSC

As the third largest outsourcing company in the world, CSC's mission is to providecustomers in industry and government with solutions crafted to meet their specificchallenges and which enable them to profit from the advanced use of technology.

www.CSC.com

www.cxoeurope.com100

www.CSC.com Computer Sciences Corporation Founded in1959, Computer Sciences Corporation is a leadingglobal information technology (IT) services company.

CSC Corporate Headquarters:2100 East Grand AvenueEl Segundo, CA 90245 USAPhone: +1.310.615.0311

CSC European Headquarters:Royal PavilionWellesley RoadAldershot, Hampshire GU11 1PZUnited KingdomTel: +44(0)1252.534000Fax: +44(0)1252.534100

Business ContactSimon KnowlesMarketing Director, European Business Development

Tel: +44 (0)1252 536871E-mail: [email protected]

TOP_06_CSC_P.qxd 12/7/06 5:12 pm Page 1

How do you deploy end to end deliveryprocesses across multiple providers? How doyou transfer accountability and liability as wellas responsibility and to whom under whatcircumstances? How do you optimise the roleof each partner, determine the scope of theiractivities and, more problematic still, changeroles and scope over time?

Finally, clients are pursuing a wider agendathan cost reduction and performanceimprovement, and hence demanding andincreased contribution from their sourcingpartnerships towards the broader businessagenda of growth, agility and riskmanagement, as well as in improvingoperational efficiency. Accordingly, whilediscrete outsourcing transactions may still befocused on operational efficiency, at thesourcing strategy level, the goal is focusedupon business effectiveness. Understandinghow to design a sourcing strategy to be acollaboration of best-of-breed partnersworking together to innovate, transform andcreate measurable improvements to theoverall business, rather than a collection ofcontracts offering price/performance gainswithin each specific domain, is thereforebecoming a hot topic.

The Principles of DynamicSourcingSM

Increasingly CSC and its clients are taking anew approach to sourcing: accommodatingand exploiting change; weaving innovationand continuous transformation into the fabricof a long-term relationship; and designing andfacilitating multi-partner, collaborativebusiness models.

CSC calls this collaborative and flexibleapproach to enterprise IT and processsourcing “Dynamic Sourcing”. In essence theconcept is built around five principles thataddress the aforementioned issues.

1. Focus on Business Outcomes:Increasingly, the technical goals and

measures within outsourcing contracts arebecoming secondary to the businessoutcomes that the overall sourcing strategyaims to accomplish or support. These higher-

order objectives are better understood by thebusiness and have the advantage of greaterlongevity.

2. Create a Collaborative Business Model:Most organisations are 'serial

outsourcers', optimising each transactionwith little regard for the target 'sourcingmodel' and with almost no regard to theeventual collaboration between the portfolioof partners that they are creating.

Dynamic Sourcing acknowledges theneed for each sourcing transaction to bedesigned to fit into a Collaborative BusinessModel as well as to be optimal in its owndomain. These considerations are madeexplicit in the solution, transition,transformation and governance as well as inthe commercial and contractual approach.

3. Align Client and Supplier Behaviours:Dynamic Sourcing aims to accommodate

and exploit change as opposed to simplymitigate it. There is an explicit recognitionthat many of the assumptions that underpinthe initial transaction will change, as will therequired performance levels and economicexpectations. The key is to focus on the realrequirements from a business perspectiveand to be realistic about the supplier's needto recover investments and make profit.

4. Build Mechanisms for SustainableTransformation:

Traditional outsourcing envisages a singleperiod of aggressive transformation toimprove services and deploy supplierprocesses, followed by a sustained period ofcontinuous improvement. This however is nolonger sufficient to maintain market-leadingperformance. CSC's Dynamic Sourcingapproach envisages sustained, or iterative,transformation throughout the life of therelationship.

5. Ensure Shared Governance/Processes:Dynamic Sourcing assumes that from the

outset there will be a multi-partnerenvironment providing end to end servicedelivery, management and improvement

processes. It assumes that the objective is toharness the combined capabilities of thevarious partners into a cohesive wholeworking to meet client goals whether thosegoals are driven by opportunities, threats,market requirements or innovation. DynamicSourcing embodies these ideas in aninnovative operating model and a radicallydifferent approach to governance.

Above all, Dynamic Sourcing is dependenton a trust based relationship and awillingness to adapt as we learn. As such it isnot for everyone but it will richly rewardthose who do embrace it. CSC has a variety ofcollaborative methods and approaches,ranging from value discovery techniques tocollaborative solution environments, whichenable us to engage with each client todetermine the true potential of DynamicSourcing in their own unique businessenvironment.

For dynamic, results-driven sourcingsolutions, talk to CSC.

Email: [email protected]

For further details please refer to theaccompanying CSC whitepaper "ShapingRelationships that Last - Principles ofDymamic Sourcing" on page 96.

101www.cxoeurope.com

www.CSC.com

SOLUTION PROVIDER

CSC at a GlanceYear founded: 1959 No. of employees: 79,000 FY05 revenue: $14.6 billion

TOP_06_CSC_P.qxd 12/7/06 5:12 pm Page 2

RETENDERING & RENEGOTIATIONCOMPANIES OFTEN MISS SUBSTANTIAL COST SAVINGS BY RUBBER STAMPING THE RENEWAL OF EXISTING DEALS

Executive SummaryThe outsourcing market is changing con-

stantly. As a result, there are often significantopportunities to improve service or reducecost by applying those market changes toexisting contracts. In our experience, contractsare typically renewed at a nominal discount of~10% on no other basis than leverage / suppli-ers desire for renewal. Unfortunately for sup-pliers this often equates to a 50% or more mar-gin reduction. What often ensues is a powerstruggle without any grounding in real marketchange or mutual interest. Primary analysis ofEverest Group constructed deals suggests thatthat a ‘good deal’ can look more like a reduc-tion in excess of 20%, with both parties (buyerand supplier) benefiting.

We believe that the reason for the differ-ence is that the vast majority of contract rene-gotiations are either purely a rubber stamp ORthe buyer focuses on price reduction in a con-frontational way, without properly collaborat-ing with the supplier on cost reduction ideas.The supplier sees this as a bald attempt atmargin reduction and renegotiations becomesa difficult and painful process.

Whilst this paper will draw upon examplesfrom a number of process areas includingHuman Resource Outsourcing (HRO),Information Technology Outsourcing (ITO) and

GovernanceSECTION 2


IT Infrastructure Outsourcing, the concept isthe same across the board.

In this paper I will first look at how toassess the existing relationship with the sup-plier. Are you looking to improve the relation-ship, improve pricing or do both? Then, inorder to successfully renegotiate or retender, Iwill describe how to understand and modelcost and the process of supplier engagement.

‘Health Checking’ yourCurrent Outsourcing Deal

At Everest Group we use The EverestHealth Checksm to conduct a comprehensivedeal diagnostic. This is as opposed to bench-marking, which focuses purely on the cost ofservice. The Health Check is designed toachieve positive outcomes for both the buyerand supplier. It results in recommendationsthat the buyer and supplier can individuallyimplement in order to improve the relation-ship. By placing significant emphasis on iden-tifying and harnessing the value drivers, inter-ests can be realigned.

A Health Check can be carried out at anypoint in the outsourcing deal lifecycle. Indeedmany outsourcing contracts allow for eitherparty to end the contract at several pre-definedpoints in time. Ensuring that your deal contin-ues to perform at an optimum level is worth

exploring whatever the likely outcome.I have outlined a few key questions that

you may want to ask to get an early ‘feel’ of thedeal strength:-• How much has the outsourcing deal

reduced the costs of retained and relatedbusiness processes compared to the annu-al outsourcing deal charges?

• How aligned are the buyer’s and supplier’smanagement teams?

• How consistent are the aims of the buyer’smanagement team?

• How extensively do you use risk-rewardpricing metrics for the achievement of yourbusiness objectives, as distinct from penal-ties and bonuses for service performance?

• How flexible is your contract with respect tomodifying contract pricing and servicescope with changes in business conditions?

• How active is the vendor in your planningprocesses?

Collaborating to ImproveDeals and Relationships

There are many reasons why a deal maynot be operating as effectively as it could be. Itincludes inappropriate deal construction, illdefined process boundaries, irrelevant servicemetrics, inappropriate pricing metrics and lackof contractual flexibility.

Stephen Dunn Managing PrincipalEurope - Everest Consulting Group

TOP_06_Everest_wp 12/7/06 5:13 pm Page 2

In our experience, rubber stamp rollover orpure price negotiation renewal without suppli-er collaboration typically saves just 10%.However, we have found that buyers whoemploy a specialist advisory firm, can oftenrealise savings in excess of 20%, see Chart 1.

Key Levers Driving theSavings

There are 6 key levers that account formost of the achievable savings that can beproduced from a renegotiation / retenderingof contracts.• Increased use of offshore resources• Improved technology• Increased scale• Capture of productivity gains• Demand management• Increased competition

However, the relative importance, size andsubstance of each of these levers will vary byprocess and client.

Increased use of OffshoreResources

Contracts with an offshore element drivethe biggest savings. In our experience, 87% ofoffshore programmes achieve 30%+ savings.Clearly this is an extremely important lever.

SECTION 2Governance



Relationship problems can exist for rea-sons including:-• Adversarial procurement process• Poorly executed or non-existent governance• No alignment of interests• Micro management by buyer• Inadequate planning / incorrectly scoped

deal resulting in unbudgeted expenditure• Inadequate business participation in the

relationship• Political agendas dominate the actions of

the parties• Inability to communicate effectively

All of the above are aggravated by the pas-sage of time. Collaboration and mutual align-ment are necessary to address them.

Also, perhaps surprisingly, renewing withthe existing supplier can be just as cost effec-tive as changing suppliers altogether (if thedeal is restructured well).

Why Assess theRelationship?

There are typically 2 main reasons forassessing the existing relationship:• To improve the relationship• To improve pricing• To improve the relationship AND improve

pricing

Buyers Achieving Given Savings After Using Specialist Advisory ServicesNearly 80% of buyers reported savings of over 20%

Relationship fix was focus (not cost savings)

Older deals taking advantage of

offshore for the first time

Note: Based on Everest Group experience in advising clients in the restructuring of over 40 contracts

Range of savings (Percentage)

0 - 19 20 - 29 30 - 39 40 - 49 50+

31%

6%

19%19%

25%

Chart 1

• There is increasing buyer acceptance ofmoving some or all work abroad

• Savings not only vary by country, but alsoby city. In fact city selection is even moreimportant than country selection

• Just 5 years ago, very few HRO contractshad an offshore element built into the deal.Now all of the key players have made sig-nificant investments in offshore locations

• The labour arbitrage should last 20+ yearsin the most significant source-destinationpairs (eg US / UK to India / Philippines)

Improved TechnologyWhilst offshoring is a powerful lever,

automation can be even more powerful (i.e. it isbetter to reduce cost to £0 than by 50%!).However, it can be extraordinarily hard to do. Butsuppliers are getting more sophisticated every-day. Take HR as an example; employee and man-ager self-service combined have the potential todramatically reduce cost of the HR service.

Increased ScaleOutsourcing has long been predicated on

the idea that suppliers can bring scale and pro-cess experience to bear in a fashion impossi-ble for internal departments to replicate. Inmany areas of BPO this promise, with regardsto scale, is finally bearing fruit. Whilst in thepast suppliers might not share any resourcesacross clients (except security guards!), suppli-ers have been able to leverage technology andprocess investments in BPO across smallerclients leading to a cost reduction.• In HRO, increasing supplier scale, particu-

larly over the past 2 to 3 years, is creatingsubstantial economies of scale (as suppli-ers gain critical mass in industries andgeographies)

• Equally, increased scale and better stan-dardisation offerings are allowing largesuppliers to support smaller deals

Capture of ProductivityGains

Suppliers typically set 5%+ annual produc-tivity gain targets. After 5 years, redistributionof these gains is often a sizeable opportunity.Everest Group has observed that productivitychanges range from 0 to over 30% improve-ments depending on the execution success.

Demand ManagementBuyers governance is often focused on

management of the contract and delivery, butdoes not pay sufficient attention to demand


GovernanceSECTION 2


We have found that that the adoption of thefollowing actions is useful in ensuring the suc-cessful renegotiation of contracts:• Engage with the supplier to understand the

contract from their perspective- Identifying constraints that are hindering

their performance - Understand other opportunities that they

have identified to improve performance• Review the applicability of the contract

renegotiation / renewal levers for eachparticular contract

• Evaluate service levels and other qualita-tive data

• Review the financial performance of thecontract against any original businesscase

• Update business case • Understand the flexibility and constraints

of the existing contract

However, the actual renegotiation/retendering process adopted and detail ofmethodology will be dependent upon:• Overall satisfaction and success of the out-

sourcing strategy• Whether or not the client is limited to re-

negotiation with incumbent supplier• The flexibility to pursue a competitive

approach with a number of suppliers • Existing contract terms and supplier rela-

tionship

ConclusionIn this article I suggested that buyers

should seek to get a good understanding ofhow the market has changed and the appro-priate application of ALL the key value levers.This will invariably lead to greater value beingdelivered in either existing or renewing theoutsourcing deal.

In other words, simply rubber-stamping adeal renewal is likely to be a costly decision!

About the Author

Stephen Dunn is a Principal with Everest and leaderof our European practice based in London. He has astrong blend of IT, process and business experiencebuilt on nearly two decades of experience with sup-pliers and as a consultant and strategic advisor forcompanies in the U.S., U.K, China and Spain. Whilsthe has worked in many industries, his primary focushas been in financial institutions, energy and trans-portation industries. In addition to his client responsi-bilities, Mr. Dunn is Research Director for EverestResearch Institute’s offshore sourcing practice.

management (eg for an IT InfrastructureOutsourcing deal - project work, number ofservers and numbers of MIPS installed). A lackof demand management often results in insuf-ficiently constrained expenditure of resources.

Example: Chart 2 - IT InfrastructureOutsourcing Server Consolidation.

Increased Competition• Many of the offshore suppliers (eg Infosys,

Wipro and TCS) have opened offices in theUK and US and have aggressive marketingplans. With a large percentage of their staffoffshore they are often able to offer signifi-cant savings

• There is still substantial room for growth inall of the outsourcing processes. For exam-ple, the HRO market comprises only 5% ofthe overall HR outsourcing market.

For example, the factors above have con-tributed to a substantial drop in unit prices inHRO. Anyone renegotiating a deal now shouldseek 30%+ price reductions – see Chart 3.

SuccessfullyRenegotiating Contracts

Around 75% of contracts under going rene-gotiation end up being renewed with theincumbent supplier. Moving to a new supplierdoes not necessarily achieve greater savingsthan renegotiating with the existing supplier

Average price comparison: <25K segment€per employee per year

Average price comparison: >25K segment€per employee per year

€ 902

€ 450 € 448

€ 298

1998-2003(n=28)

2004 onwards(n=29)

1998-2003(n=23)

2004 onwards(n=18)

Sample size : n = number of transactions; 98 transactions Note : Similar trend is observed with adjustment of data for scope differences Source : Everest Research Institute

50%decline

34%decline

Chart 3

Server Consolidation Opportunity# of servers

Resulting Cost Structure£million

1000

330

30

20

Pre-consolidation

Postconsolidation

Pre-consolidation

Postconsolidation

Source: Everest Group client experience

Chart 2


DISPUTE RESOLUTION


solution. Business solutions are not constrained by law or con-tracts as you can tear up a contract and re-draft it. You can findother ways of satisfying interests as opposed to filing briefs andspending time in courts. In a transnational context it is alwaysbetter to provide an arbitration clause with the contract.

It’s about recognising that commercial relationship changeand that they are dynamic and that it’s worth the effort to pre-serve them, acknowledging that problems will probably happenand the time to address that is the beginning of the relationship.

It’s worth taking the time to establish protocols, policies, sys-tems and contracts - a real contract language that establishes asystematic way of problem resolution. Bring problems to the sur-face and resolve them at the lowest possible level, with the leastamount of fuss. Then move them up the chain of command onlyif necessary, but move them instead of letting them sit unac-tioned. Business problems don’t age well, unlike some fine wines,problems tend to get worse.

So a critical issue for business is identification and resolutionand then recognising that on a occasion, because of humandynamics being what they are, and because communicationbetween parties who have previously been in an adversarialposition tend not to be successful, people in conflict talk pasteach other, they don’t talk to each other. Sometimes it’s appro-priate to involve third parties, and most appropriately, a thirdparty mediator, who can listen and hear effectively, who can

CxO: Can you give us some background information on The International Centre for Dispute Resolution?

MA: The International Centre for Dispute Resolution wasfounded in 1986 and is the international arm of the Americanarbitration association. It is essentially a private courthouse. Itsnot for profit organisation and we think of it as a place to go tofor assistance and education. We are the largest provider of dis-pute resolution in the world. Arbitration and, increasingly, medi-ation are the best ways that commercial and transnational com-mercial interests can use to resolve their disputes quickly, effi-ciently and fairly.

CxO: At what stage of the dispute do companies most commonly ask you to intervene?

MA: Right at the beginning. The issues for business, for exam-ple the outsourcing industry or business in general in a transna-tional setting, are that we are dealing with business changingrapidly, today’s competitor is tomorrow’s partner. One of our col-leagues, who was a councillor to a major multi-national corpora-tion, came to a conference and summed it up: “We don’t havecommercial contracts , we have strategic commercial relation-ships, non of which we are willing to leave to the courts of anynation state”. So acknowledging first what you have got in hand,which is the maintenance of a strategic commercial relationship,and then acknowledging that disputes happen, problems happen,is a very modern, mature and professional way to approach theprocess. Right at the beginning of the relationship is when youshould start anticipating issues.

Problems will arise and that’s when we need to establish sys-tems and contracts which allow us to bring problems to the sur-face quickly, resolve them quickly and move them up the chain ofcommand as necessary. When it’s necessary, the use of a third-party mediator to facilitate communications and facilitate settle-ments is the best form of problem-solving and the resulting bestsolution is all your own - and it’s a business solution not a legal

An interview with Mark Appel Senior Vice PresidentInternational Centre for Dispute Resolution

EXEC

UTI

VEVI

SION

S

EXECUTIVE VISIONS

When it’s necessary, the use of athird-party mediator to facilitate communications and facilitate settlements is the best form of

problem-solving

TOP_06_Appel_EV.qxd 12/7/06 5:14 pm Page 1

An interview with Mark Appel , Senior Vice President, International Centre for Dispute Resolution


translate in a much more global way about what one party’sneeds are to the other party, someone who can assist in theproblem-solving process who can move parties from a veryadversarial stance to one which is more focused on needs andinterests and problem-solving.

You can literally feel the temperature change when this pro-cess works, and when people stop arguing and start solving, andit’s a remarkable process. It is common now in substantial com-mercial contracts to include a dispute resolution procedure calleda ‘step clause’, which allows the partners to try to resolve theproblem themselves. It might be a series of steps, negotiated

internally, followed by the use of a third party whose only role isto help or assist in settlements. And, if that doesn’t work, by adecision-making process of arbitration. Specifically, that shouldbe a process which is enforced by convention and treaty asopposed to any nation state laws. Frequently, business peopledon’t understand that when they get a judgement from a particu-lar court, it’s like many of our football teams, it doesn’t travel well.And most of the time it can’t be enforced, or it can only beenforced with considerable difficulty.

There’s a great bit of legislation - the United Nation’s treaty onthe ‘recognition and enforcement of foreign arbitral awards’. Ithink it has the second biggest number of signatures on anyUnited Nations treaty. There are about 135 nation states whohave signed this convention. What that means is that you canhave an arbitration award in England, and you can take thataward to Brazil and you can enforce it in the courts of that nationstate, which has signed that treaty and agreed to be bound by it.

It is arguably the most successful commercial legislation everdrafted.

I’ve been merely setting the stage about why this is importantin the outsourcing industry. It might be useful to have a look atthe American Arbitration Association’s substantial ‘Dispute-wiseManagement’ survey (visit www.adr.org) which was based on asample of 254 companies. It interviewed the corporate generalcouncil, or associates and persons charged with managing thelegal affairs. The sample included three different sizes and typesof companies: 101 from Fortune 1000 companies, 103 from mid-sized public companies and 50 from private companies. Andwhat they found was that it is possible to identify companies thatdescribe themselves as having dispute-wise business manage-ment practices. Essentially they talk about involving their legal

planning in their business planning. Legal staff also contribute tosolving highly complex and technical issues. It’s no surprise tofind that these companies don’t go ballistic at every opportunitywhen they have a dispute - they are less focused on aggressive-ly litigating on every matter that comes to them. The secondmajor survey finding was that these companies have strongerrelationships with their customers, employees and partners.They have the smaller legal budgets and but better utilisation oflegal resources and higher profit-to-earning ratios. And that sug-gests that they are better run companies. Most of this stuff is justgood business.

Due to the demands of modern business, the law departmentis increasingly looked to for the provision of a councillor role asopposed to a ‘warrior’. It’s really a change of mindset, but anappropriate one, considering that everyone is now expected toadd value to the company. Where we [The International Centrefor Dispute Resolution] provide value, is through providing bestpractices now, in other words what other companies are doingand, beyond that, providing neutral services. Where appropriatewe provide highly trained, competent individuals who serve ashelpers, mediators or arbitrators. We would be at home with sub-stantial transnational disputes.

CxO: Have you been asked to arbitrate between two compa-nies involved in an outsourcing arrangement?

MA: I am sure we have but I am not sure if we have out-sourcing as a distinguished category. But I know that these rela-tionships are quite common and they sometimes create somefriction. It is the nature of business that that’s going to happen.One of the things that we have to get past is despite all the lovewhen the contract is formed, invariably conflict arises and asophisticated business realises it should address that right at thebeginning of the process.

CxO: Using all of your experience, what advice would you giveto minimise the risk of disputes occurring?

MA: I think you should be very careful in your choice of part-ner, obviously. By the way, time does become an issue as all of usare driven to add value and add value now and make decisionsquickly, which is very reasonable. But I think it’s more importantto make the right decisions too, and that means picking the rightpartner and taking the time to get to know them, and to align yourgoals and to make sure you are aligned properly. Beyond that Ithink it takes time to integrate and one of the things that we see,especially in the international context, is that the companies havetheir own cultures and within those, especially in a transnationalcontext, you are talking about different cultural expectationsbased on where you are. Taking the time to understand those andwork with them is important.

I think that even we, as an organisation, frequently want totake the approach that we have the answer, but the best busi-nesspeople recognise that there are many answers. Find a waythat works and then be realistic and recognise that problems aregoing to happen. Take the time to think through what we are

EXECUTIVE VISIONS

It is common now in substantialcommercial contracts to include adispute resolution procedure called

a ‘step clause’, which allows the partners to try to resolve the

problem themselves.



going to do if and when it happens. That is time is well spentbecause you have something in place and you are not surprisedwhen something does happens. You can say that this is some-thing we anticipated and you have a process not only to solve the

problem but to learn from it. The best business processes willhave a mechanism for giving feedback and best companies learnfrom their mistakes. And then recognise, beyond that, that whatwe know is you can’t always get it all done yourself and once ina while you will need an expert. Certainly the outsourcing indus-try is an example of that - it’s recognising that your best resourcemay not be your own. And in this particular case there are triedand tested ways of getting things done.

CxO: Do you provide guidelines or best practices for drawingup contracts?

MA: We provide standard clauses and run an industry educa-tion programme. I frequently appear at events, talk about the pro-cess, problem-solving, mediation and arbitration. I talk aboutwhat other companies are doing and appear alongside in-houseexperts who have come up with their own systems of resolvingthings. I will give you a simple instance of a critical error, whichhappens invariably in the contract process. The absolute finalissue parties turn to at the time of contract draft is their disputeresolution mechanism. It usually happens at about three minutesto midnight. After three days of negotiation, when people are just

dog-tired, nobody wants to give it a lot of thought. As a result,somebody trots out some old, bad clause and put it into a contract.

Recognising this faux-pas, several large well-known compa-nies have changed the way they do business. When they entercontract negotiation they discuss this issue first. It’s an importantrelationship, we know that during the course of the contract prob-lems are going to arise, and we care enough about this relation-ship to discuss the means of solving those problems. We want toput it at the beginning of the negotiations.

It’s like a breath of fresh air through the proceedings, becauseit is an extension of an olive branch. Parties want to find a way ofsolving problems and start talking about that first. The rest of thenegotiation actually becomes more of a problem-solving exerciseas opposed to an adversarial sparring session. And that’s whatoften happens in contract negotiations. You literally start out withthe whole basis of the relationship on an adversarial stancebefore it’s begun. If approached properly, taking the lead and talk-ing about the problems first can have a positive outcome in termsof the rest of the negotiations.

At least in this particular area, it does become a leadershipissue. If we look at it in the context of the construction industry,when partnering often fails, one of two things can occur. Mostcommonly, there is no buy-in from the leadership. If you are goingmake it work it has to be a top-down thing. People need to knowit’s important, otherwise it doesn’t count. And I think you have gotto measure it. Big companies, for example General Electric, haveintegrated mechanisms, as part of their policy, to measure howdisputes are resolved and their outcomes. It’s possible to quanti-fy things such as how much money was saved, what the alterna-tives were, and what it would have cost to litigate on this. Notonly should you address it, you should pay attention to it. Youshould measure it and hold somebody accountable for it.


EXEC

UTI

VEVI

SION

S

The best business processes will have a mechanism for giving

feedback and best companies learnfrom their mistakes.


BUSINESS CHALLENGESTo continue to meet its business targets

and maintain its leading position in anincreasingly competitive global market,Philips Semiconductors was looking forimprovements in two key areas – operationalefficiency and costs.

SOLUTIONTo tackle the issue of operational

efficiency, Atos Origin and Philips developedan improvement program to support themanagement and exchange of product

definition data in all stages of the productlifecycle. This is critical for PhilipsSemiconductors as it is the fundamentalbackbone of all product data.

Atos Origin has combined its Application Management expertise with a Global Sourcing approach to deliver cost savings, a more effective way ofworking and improved quality to Philips Semiconductors. The agreement covers the development, implementation and maintenance contracts forthe Philips Semiconductors chosen solution for PDM (Product Data Management) and BcaM (Business Creation and Management).

Governance

Case Study

SECTION 2


In order to control costs and maintainquality, a Global Sourcing approach wascentral to delivering the required benefitsand savings as it ensures formalizedprocedures and processes, as well ascontinuous improvement and maturitygrowth. Global Sourcing was implementedfor the application management elementand covered areas such as programming,testing, documenting changes, de-bugging,improving and correcting as well as thehelp-desk. Representatives from PhilipsSemiconductors visited Atos Origin’s

facilities in India to verify the offshoringcapabilities and these were found to bemature and fully in-line with theirrequirements.

Finally, most of Atos Origin’s recurringservices have been defined into a ServiceCatalogue for Philips and a utility-basedapproach to pricing introduced to determinethe monthly invoice. This allows Philips toknow precisely what they are buying fromAtos Origin, broken down to logical servicecomponents, and to actively manage andcontrol their IT costs.

BENEFITSThis innovative approach has allowed

Philips Semiconductors to realize significantcost savings without having to sacrifice qualityor service. The experience of Global Sourcinghas also made Philips realize that the benefitsare greater than simply costs alone.

Processes are more mature and this has ledto a more structured and precise approach.There is more focus on deadlines and they aremore often met. Services are delivered exactlyas described in terms of time, content andquality and this has meant that Philipsthemselves have also had to become morespecific in formulating their questions andrequests. Furthermore, a new ‘FrontOffice/Back Office’ model has brought

INNOVATIVE APPLICATION MANAGEMENTAND GLOBAL SOURCING APPROACH GIVESPHILIPS SEMICONDUCTORS AN ADDED‘IMPULSE’ BRINGING SIGNIFICANTBUSINESS BENEFITS AND COST SAVINGS!

In order to control costs and maintainquality, a Global Sourcing approach wascentral to delivering the required benefitsand savings…

TOP_06_Philips_cs 12/7/06 5:15 pm Page 2

SECTION 2Governance



improved communication and greatertransparency. This, coupled with better andmore detailed reporting, has led to greaterconfidence within Philips itself as to the abilityof IT to really support its business needs. Infact, this project has become a benchmarkacross Philips for assessing quality and cost.

A greater level of trust between Atos Originand Philips has also grown from this and bothparties are now exploring new businessopportunities and the possibility of movingmore application management offshore.

“Although it was initially about reducingcosts, Atos Origin has demonstrated to us thatthere are also other significant benefits, such ascontinuous process improvements and greaterpro-activeness, to be gained from a GlobalSourcing approach to application management.”

Henk Grootegoed, Service Delivery Manager

PDM & Manufacturing solutions, Philips Semiconductors

Royal Philips Electronics of the Netherlands is

one of the world's biggest electronics companies,

as well as the largest in Europe, with 159,709

employees in over 60 countries and sales in 2004

of Eur 30.3 billion. Philips Semiconductors is a

leading supplier of silicon system solutions for

mobile communications, consumer electronics,

digital displays, contactless payment and

connectivity, and in-car entertainment and

networking. It is one of the top ten global

semiconductor manufacturers, employing more

than 35,000 people, 6,000 of whom are engineers

or software engineers. A global organization, it

operates twenty manufacturing sites and

maintains sales organizations in sixty countries

around the world.

TOP_06_Philips_cs 12/7/06 5:15 pm Page 3

OUTSOURCING CONTRACTS – ARETHEY WORTH THE PAPER THEY’REWRITTEN ON?

One complaint we sometimes hear aboutoutsourcings, is – Outsourcing contracts are out-of-date the moment they’re signed. And theybecome more and more out-of-date as time goeson. Rather than spending time on some increas-ingly irrelevant contract, business people shouldfocus on the underlying customer/supplier rela-tionship. Can this be true?

Anyone who works on outsourcing con-tracts will know the heavy costs involved - interms of time, manpower, professional fees,etc. Perhaps unsurprisingly, I am firmly of theview that this is money well spent. But I alsothink businesses deserve a clear explanationof why a good outsourcing contract is essen-tial, and how businesses can ensure that theiroutsourcing contracts remain relevant anduseful throughout the contract term.

Why have a contract at all?

I think it’s useful to consider this funda-mental question at the outset.

Imagine making a presentation to yourBoard – you’ve found the perfect supplier tomeet your business’ needs; they’ve got a greattrack record and the price is right. When theBoard asks you about the contract arrange-ments, you say – Don’t worry about that; I’vedecided not to use a contract on this one.Chances are you’d be looking for a new jobbefore the end of the day. But why?

Of course, there are some legal and regu-latory reasons for an outsourcing contract:for example, some regulators require this;

GovernanceSECTION 2


and some assets cannot be transferred with-out a written document. But what about busi-ness reasons?

Three key business rea-sons for an outsourcingcontract -1. Remedies: To provide an appropriate level

of remedy, if things go wrong. If your sup-plier, or customer, does not perform aspromised, your business might suffer.Without a good contract, it can be difficultto claim compensation, or to terminate, forfailures by the other party. Equally, busi-nesses generally wish to limit their liabilityfor losses incurred in connection with theoutsourcing relationship. This cannot bedone without a contract.

2. Clearly establishing each party’sresponsibilities: Many outsourcing dis-putes are over which party has responsibil-ity to do, and (usually more importantly)pay for, particular aspects of the service.The disputes usually relate to occurrencesthat were not anticipated when the con-tract was first put in place. For example – - Who procures replacement services if a

subcontractor becomes insolvent?- What information must be given to other

bidders, if the customer wishes to put theservice out to tender towards the end ofthe contract term?

- Which party has the right to use valuableinformation generated in connection withthe outsourcing relationship?

Gill Andrews Bird & Bird

TOP_06_Bird&Bird_wp 12/7/06 5:15 pm Page 2

the people who will actually be running therelationship. If those people buy into theagreed mechanisms, they are much likelyto be used in practice.

Don’t accidentally modifythe contract

The negotiating team that agreed the orig-inal outsourcing contract will have workedcarefully to allocate responsibilities to the par-ties, and to create the right risk/reward bal-ance and allocation of responsibilities.Without good contract management, and goodlevels of awareness amongst the outsourcingteams, it is easy to unintentionally modify thatbalance, and to throw away hard-won rights.4. Be careful about ‘scope creep’ – ‘Scope

creep’ occurs when the scope of workentrusted to the supplier gradually increas-es without anyone really realising this ishappening. This is a particular risk where agreat deal of service definition workremains to be done when the contract issigned. Without strong relationship man-agement, it can be tempting for the cus-tomer’s personnel to request additionalfunctionality; often resulting in escalatingcosts, and delays as development time isside-lined on ‘nice-to-have’s.’ It can alsoresult in the supplier doing work that is notproperly reflected in agreed contract word-ing, leaving the parties in an uncertain sit-uation if things go wrong.

5. Don’t inadvertently take on extraresponsibilities – This situation typicallyarises where the new services are beingdiscussed. It can be tempting for a cus-tomer to specify not only what services thesupplier must deliver and the related ser-vice levels, but also to dictate the methodthe supplier must use. If that method turnsout to be flawed, the customer may finditself without a remedy (as the supplier canargue that it was simply following the cus-tomer’s instructions, and the customer hadeffectively taken on responsibility forselecting the working methodology).Collaborative working can be highly bene-ficial to outsourcing projects, but it isimportant to be clear as to which partytakes ultimate responsibility for the outputof the collaboration.

6. Don’t inadvertently waive your rights –Most outsourcing contracts allow the cus-tomer to claim service credits, liquidateddamages and other remedies for poor per-formance, missed deadlines etc. In practice

SECTION 2Governance


The discipline of drafting a contract forcespeople really to focus on these types of mat-ters. These matters can of course be agreedby way of non-contractual documents.However, in our experience, this generallyproduces a less rigorous analysis thanwhere a contract must actually be signed offby key decision makers.

3. Regulating the legal consequences ofthe parties’ actions: For example -should email agreements between contractmanagers be capable of varying the par-ties’ rights and responsibilities? What is thelegal consequence if the customer’s con-tract manager repeatedly allows the suppli-er to perform at below contract standard?

The real point I wish to make is that thesekey reasons (and more) are all just as impor-tant, a couple of years into the outsourcingrelationship, as they were on the day the con-tract was signed. The challenge therefore is tomake sure the outsourcing contract remains fitfor purpose, and does what it is meant to do,throughout the entire contract term.

Ten Steps to Success –Keeping the outsourcingcontract fit for purpose,throughout the contractterm

All outsourcing relationships evolvethroughout their term – the services change,the market changes, the customer’s organisa-tion changes. Unless the outsourcing contractevolves with the relationship, the contract willbecome less and less useful as time goes on. Itwill also become less and less legally effective,the more its provisions differ from the ‘live’outsourcing relationship.

Actively use the outsourc-ing contract

The signed outsourcing contract will reflectcompromises and agreements made at some-times the highest levels of the supplier’s andcustomer’s businesses. But we find that thoseactually operating the service often do not usethe contract. Why is that? Often because theydo not know what the contract says on the keyissues that affect their work. 1. Make it easy: Most lawyers now use plain

English drafting. But an outsourcing con-tract is still an unwieldy and difficult docu-ment to read. Also, an outsourcing contractis not a service manual; its primary pur-pose is as a legal document, designed to be


capable of being used – if need be – in acourt of law. Serious thought should begiven to the best way of ensuring that thepeople running the outsourcing relation-ship really understand how the contractshould affect their roles. This is likely, atleast, to include - • Contract summaries: Someone with a

detailed knowledge of the outsourcingcontract should produce simple, and rel-atively short, summaries of the contract.These are not designed for the lawyers;they are for those operating the serviceon the ground.

• Contract management workshops:Explaining how the outsourcing contractworks; introducing the ContractSummaries; and addressing peoples’questions about how particular issues areaddressed in the contract, and should beaddressed in practice.

2. Keep the contract team in place: Toooften, the key individuals who develop andnegotiate the outsourcing contract have noongoing involvement after the contract issigned. Where this happens, there can be amismatch between the negotiating team’sview of the world, and that of the employ-ees on the ground. The most obvious wayto address this is to make sure that at leastsome of the people who will operate theoutsourcing relationship are involved indeveloping and negotiating the servicedescriptions, service level schedules,implementation plans etc.

3. Don’t make your outsourcing contractmore complex than it needs to be:People actually operating outsourcing rela-tionships often complain that their con-tracts are too complex. In many cases, thisis simply the nature of the legal document,and their concerns can be met by welldrafted Contract Summaries. In othercases, these people are right. This is a par-ticular problem with service credit regimes- the contract negotiating team often devis-es a finely calibrated service credit mecha-nism, with appropriate weightings given toall relevant criteria. But when the mecha-nism is handed over to those actuallyworking on the ground, they find it toocomplex, it takes too much time to admin-ister and sometimes they are unable actu-ally to measure the inputs that need mea-suring. The operational parts of the con-tract should always be sanity-checked with


GovernanceSECTION 2


10. Allocate adequate resources –Recognise that keeping an outsourcingcontract up-to-date, and following theseTen Steps, requires work, and the alloca-tion of adequate resources.

The question of relationship

The quotation at the start of this paperdraws a contrast between the effort spent onthe outsourcing contract, and the effort spenton the outsourcing relationship.

We see that as a false distinction. Goodoutsourcing contract management certainlyinvolves investing time and effort into the rela-tionship itself, as well as following our TenSteps. But the face-to-face relationship and thecontract relationship are both essential to asolid outsourcing. Both are needed, if the rela-tionship is to succeed in a way that properlyreflects both parties’ reasonable expectations.

About the Autor

Gill Andrews is a Senior Consultant in Bird & Bird’sInternational Outsourcing Group. She advised onher first outsourcing in 1992, and has continued tofocus on the area as it has evolved. She hasworked on a wide variety of outsourcing transac-tions, from ‘straight’ domestic IT and communica-tions outsourcings, to innovative business processoutsourcings, insourcings and offshorings. She hassubstantial experience of advising on multinationaloutsourcings.

(and for good operational reasons), cus-tomers often decide not to enforce theserights. However, unless this situation ishandled properly, non-enforcement of theagreed contractual rights can result inthem being waived, and therefore unen-forceable in future.We certainly do not advocate that servicecredits, or other remedies, should invari-ably be claimed. But it is important todevelop a legally-effective strategy forresponding to failures by the other party, tomake sure you do not inadvertently giveaway your rights.

7. Be aware of the impact of informalcommunications – The supplier’s and cus-tomer’s staff will inevitably be in regularcontact, by email, on the phone, in personand in workshops, etc. Depending on thecircumstances, statements and agreementsmade in those meetings may be legallybinding. These statements and agreementsmight, for example, have the effect of vary-ing the outsourcing agreement, or of creat-ing a new, collateral contract between theparties. Good contract drafting, and effec-tive training of those involved in the out-sourcing relationship, are both key to min-imising the risk of this happening.

Good contract management8. Properly document all contract

changes: Often, changes are agreed inemails and in meetings, without any clearrecord being kept of what was agreed. Wesee contract disputes where there isabsolutely no consensus as to what

changes have and have not been agreed.If the outsourcing contract is to remain auseful legal document throughout thecontract term, it is vital that contractchanges are properly documented.Consideration should also be given toupdating Contract Summaries andManuals, etc.Where we are asked to advise on a dis-pute, we are also often handed a pile ofContract Amendment documents, whichwould seem to have been prepared with-out any real understanding of what theoutsourcing contract itself says. So weare faced with a series of documents thatsay very different things as to, for exam-ple, which party should own particularintellectual property rights developed inconnection with the services.Be sure that contract changes are approvedby someone with a good knowledge of theunderlying outsourcing contract (ideallysomeone in your legal or contractingteam). In that way, the changes can bemade to ‘fit’ with the agreed contract.

9. Periodic contract management work-shops: The team operating an outsourcingrelationship will change with time. Periodicworkshops are useful in keeping everyoneup to speed, and are also an ideal forum fordiscussing possible changes. An outsourc-ing relationship is complex and multi-facetted. What would work well from acost profile perspective may be disastrousfrom an HR perspective – it is importantthat all members of the team have theopportunity to provide input on possiblechanges to the relationship.


A CxO Research Initiative – Achieving Competitive Advantage through Collaborative PartnershipsSolutions Index

ACS is the leading provider of diversified, end-to-end business process outsourcing (BPO) and information technology (IT) outsourcing solutions to commercial and

ACS p61 www.acs-inc.com/emea government clients worldwide.

Atos Origin is a leading international IT services company.Its business is turning client vision into results through the application of consulting, systems integration and managed

Atos Origin p90 www.atosorigin.com operations.

Founded in 1959, Computer Sciences Corporation is a leading global IT services company with approximately

CSC p100 www.CSC.com 90,000 employees located around the world.

IBM Global Services provides comprehensive IT services integrated with business insight to reduce costs, improve

IBM p20 www.ibm.com/services productivity and assert competitive advantage.

Siemens Business Services is one of the world's top 10 outsourcing providers serving over 200 major clients in

SBS p44 www.siemens.com/sbs 44 countries.

To subscribe to: Achieving Competitive Advantage through Collaborative Partnerships apply online at www.cxoeurope.com


The Outsourcing ProjectA CxO Research Initiative

Published by CxO Research LtdCover Price £199

Achieving

Co

mp

etitive Ad

vantage thro

ugh C

ollab

orative P

artnerships

A CxO Research Initiative

Business

in ActionTransformation

www.cxoeurope.com

Achieving



Achieving




Documents

The Outsourcing Project