Consider the Source

Top 5 Ways to Ensure Successful IT Sourcing Management and Vendor Management Collaboration

By Cynthia Batty, Global Competency Lead, Service Management, TPI

Organizations with complex IT purchasing and delivery of hardware, software and services are examining their structures and wondering how they can work more effectively. While the purchasing department usually negotiates the contracts, we often observe vendor management organizations (VMOs) scattered through areas like operations, HR and IT. For example VMOs in the IT area commonly have responsibility for the overall relationships and performance of the hardware and software suppliers.

Most sourcing clients recognize the need for a separate organization to manage sourced services (SMO) in various organizations; this can include both service delivery and relationship and metrics. Here are the TPI Top 5 tips to ensure that your SMOs and VMOs collaborate productively to yield the best results for your organization.

1. Define the terms. Vendor management typically manages vendor relationships, delivery, metrics, efficiency and cost yield for contracts generally associated with physical (or virtual) delivery of supplies, assets or inventory. Sourcing management addresses similar aspects of service providers. These two types of relationship management ─ VMO and SMO ─ require different client skill sets to be effective.

2. Create a clear definition of roles. The client VMO and SM groups will relate to entirely different organizations inside the provider ─ with different motivations, objectives, and approaches. Clients should focus on both aspects and should not expect that these very different management style disciplines will be effective if applied in the wrong area.

3. Cooperate with data. Sharing information about common providers alerts both organizations to opportunity, leverage, and problem-solving, as well as providing insight into prospects for growing or developing a provider who is performing well.

4. Understand the difference between contracts for services and for products. IT services contracts are extremely detailed and often prescriptive. While contracting for IT hardware and software can be complex, especially regarding engineering and supply chain processes, it has less immediate effect on the client’s daily business operations.

5. Share business processes to achieve maximum control. During the delivery period (the longest and most complex part of the provider relationship), TPI recommends a specific group of management processes that produce data and knowledge about the relationship performance that is essential to best practice management. Our processes focus on the management of contract, relationship, finance and performance and support the client executive team with the best data for planning and decision making.

Read Cynthia's entire TPI Top 5 here . . .

TPI’s seasoned experts can help you achieve your global sourcing goals through objective advice, robust market data, knowledge of your industry and extensive experience with service management.

E-mail Cynthia Batty, Global Competency Lead, Service Management, TPI, or phone her at +1 201 978 0542 to learn more.

Need quick savings? Look at Software Optimization

By David Tienstra, Partner, TPI

While the cost to deliver a unit of computing resource continues to fall, there is a “traitor” to the cause of lower costs – Software. Software, eight years ago, was typically in the 40% range of the total cost to deliver a MIPS. Now, we see software taking over more than half the spend in mainframe computing; in many cases greater than 60% of the spend. While other major cost drivers have fallen through the years, software costs as a percent of the total spend continue to rise. Why? The other two largest cost drivers – labor and hardware – have continued to fall year over year:

• Labor – As support for systems has moved offshore to a more economical labor force, labor costs have fallen through the years. Increased productivity from more effective tools and established standard support processes have also increased the efficiency of the support organization.
• Hardware – Faster and cheaper has been the path for hardware; this is expected to continue as the mainframe becomes a worthy competitor to midrange servers as the platform for hosting Linux applications.

In the meantime, software costs are rising. How did software become such a large expense? Here are some things to consider as you begin optimizing your software expense.

• Shiny Object Syndrome – It’s in all of us. We like the latest, fastest, neatest tool on the market today. However, over time the functionality of tools begin to overlap and you end up with multiple applications providing similar functionality. Rationalize applications to those that provide greatest functionality and look to eliminate redundant applications.
• Value Meal – It was free and probably more than you should eat. Upon implementing new systems, software publishers will offer other, complimentary products. The hope is that the customer will begin utilizing and paying for them after some promotional period. After the promotional period of time has passed, the software is charged to the customer whether it is used or not. It’s worth the effort to take a look to make sure that every module and package being paid for is actually being utilized.
• Enterprise License – Software publishers make entering into an “enterprise-wide” agreement very attractive from a unit cost perspective. However, while unit costs are low, if a volume of license far exceeds an organization’s needs, the organization can be over spending for software.

Outsourced? Consider engaging in a dialog with your Service Provider to discuss the software expenses for your systems. Facilitate a discussion that seeks to understand how software is managed, who is looking after the spend, and rationalizing its expense. If software costs are embedded in resource unit rates, consider having your Service Provider separate them so that greater visibility into software costs is provided. Set these cost up with a mechanism that - to the extent you are able to lower costs - allows you to lower these costs dollar for dollar.

The Financial Implications of Cloud Computing

by Tim Langley-Hawthorne, Director, Financial Analysis, TPI

My colleague Kevin Smilie wrote last month about the need, when evaluating a Cloud Computing offering, to understand how the services are priced and how that price compares to your current costs.

The general perception of Cloud is that it follows a simple P-x-Q (price times quantity) model, that is, you pay for only what you use. What could be difficult about that, you ask? Well, just take a look at the pricing structure for Microsoft’s online collaboration offering (dedicated vs. multi-tenant implementation, volume discounts, existing Enterprise Agreement discounts and end of year discounts) or Amazon’s Elastic Compute (EC2) offering (On-Demand, Reserved or Spot instance pricing, anyone?).

Detailed financial models still need to be developed to give an accurate comparison of Cloud pricing vs. traditional approaches and what really happens when your expected volumes change. Total Cost of Ownership analysis is another important consideration: Technical support, incremental bandwidth and initial set-up, integration and data migration can all add costs in the Cloud.

IT outsourcing agreements typically contain forward pricing provisions where the price paid falls over time to reflect the declining costs of hardware, maturing of offerings and expected efficiencies and economies of scale for the service provider. But a close look at some of the standard subscription agreements for public Cloud services finds mention of only price increases, which can generally take effect automatically after 30 days notice. An IT service provider willing to offer firm unit-based pricing that declines over time may not seem as cutting-edge but could end up being the lower-cost option over time.

Finally, don’t overlook termination costs. Clients can typically cancel public Cloud agreements at any time with limited notice and no penalty. Given the provider has no client-specific investments to recover, that makes sense . For private Cloud agreements, however, termination provisions tend to look like traditional outsourcing arrangements, where the service provider needs to recoup stranded costs from assets purchased for dedicated client use.

If the assets are generic, an argument could be made that the Cloud provider could re-use them for other clients, but in my experience, very few are willing to step up to that risk. Therefore, it is unrealistic for clients to expect the same no-cost termination rights offered for public Clouds.

Cloud computing might seem intuitively quite simple, but have you thought through all of the financial implications of these new offerings?

Top 5 Staffing Considerations for Building a Procurement Team

By Bill Huber, Director ─ CPO Services, TPI

The most effective procurement organizations are able to attract, stimulate and retain top talent; and retain the energy and momentum to continuously drive change to their companies. Less effective organizations can succumb to bureaucracy, marginalization and the loss of talent.

How your procurement organization approaches staffing can make all the difference. Here is an overview of the
TPI Top 5 considerations for building and staffing your procurement team:

1. Focus on the 21st Century procurement leader. The traditional procurement focus on cost savings, negotiations and contract terms are all critical, but they have become non-differentiating table stakes for procurement leaders. 

2. Don’t overstaff. Every procurement organization is resource constrained and has more work than it can possibly complete. However the strategy of bulking up with bodies results in more overhead and the perception of an organization peppered with administrators, compliance cops and transactional buyers, all of whom will be accused of slowing down business. Find ways to make other organizations accountable for lower value activities, and reposition a smaller procurement staff as managers of spending strategy, governance and relationship performance. 

3. Build in flexibility. Create an environment that will ensure that the procurement staff is able to move across commodities and business areas. This means cross-training and balancing subject matter depth with adaptability and flexibility. 

4. Manage customer intimacy. To the extent possible, co-locate your key personnel with their most important internal clients. Your clients should see procurement leaders as members of their teams. Build formal partnership agreements with key clients, and involve them in the evaluation process of your leaders. 

5. Compensate well. A smaller team is easier to make a well-compensated team. If the core procurement organization is able to focus on the activities that will bring the largest bottom-line impact to the organization, and if budget is freed up through the strategies identified in consideration #2, it will be easier to attract top talent. 

Read Bill's entire TPI Top 5 here . . .

TPI’s seasoned sourcing experts can help you achieve your global sourcing goals through objective advice, robust market data, knowledge of your industry and extensive experience with sourcing negotiations.
 
E-mail Bill Huber, Director ─ CPO Services, TPI, or phone him at +1 704 806 3910 to learn more.

Lost in the Cloud

by Thomas Young, Partner & Managing Director, CIO Services - Infrastructure, TPI

 

The security of stored data is often cited as one of the key obstacles to organizations adopting Cloud Computing. To be sure, the risks are high if a company’s customer records are compromised as a result of being in an unsecure Cloud environment. That issue is enough to give even the most maverick CIOs pause as they consider their technology plans in the coming years.

However, if we look to other technologies that use public infrastructure, the solution for storing data in the Cloud may be right in front of us. The telecommunications industry has for years provided secure voice and data by encrypting communications and dividing them into multiple fragmented streams. The packets are sent on independent routes over unsecure public telephone networks and the Internet and then re-aggregated and decrypted in a secure environment. Something like secure à  unsecure à  secure.

All of this happens every time we log onto our brokerage accounts online and we never think twice about it. Why? Because if the packets were intercepted, they would have to be decrypted and re-aggregated for the voice or data stream to make sense. This is possible, but very difficult to do. 

The same protocols can be used to store sensitive data in the Cloud. Data can be encrypted and divided at the bit-fragment level and stored in multiple, independent and diverse storage arrays.  Each encrypted fragment reveals nothing if intercepted and meaningful information is only revealed if significant clusters of data are decrypted and re-aggregated. Theoretically possible, not likely.

In this architecture, aggregators sit between the application layer and the storage layer and act as an intermediary to the computing platforms that need the data, pushing and pulling these fragments. This is how Google search is architected. The data is read from storage, processed, and rewritten to storage, or something like this: secure à  unsecure à  secure.  Just like in the telecommunications example, the unsecure segment is effectively secure because the data is fragmented and encrypted. 

SNIA (www.snia.org) is working on standards to deploy this kind of technology so that data security will no longer be a barrier to cloud computing adoption. And in the future, when the auditors ask if your customer data is secure, you will be able to say, “Yes, it’s lost in the Cloud.”

Will new regulation curb outsourcing/offshoring by banks?

By: Brian Smith, Partner and Managing Director, Financial Services

The Administration has proposed a set of new rules to increase regulation of the banking industry. While we don't know what the final outcome will look like, we do know that changes will be focused on lending, bank structure, and the separation of investment banking from retail banking. None of these changes will minimize the need to reduce expenses.

In the spirit of proposed changes, banks are already taking a hard look at their businesses and looking to redefine what is core as a recent article from American Banker explains. The key for companies will be to find the right outsourcing partner to help them address whatever regulations do emerge. We believe that banks of all sizes will look to both domestic and offshore outsourcing solutions such as Knowledge Processing Outsourcing (KPO) to help them deal with new reporting requirements.

Essentially banks will further lean on sourcing solutions to manage these changes and keep their expenses in line.

Top 5 Ways to Maximize Leverage in Renewals

By Debora Card, Associate Partner

─ Research, Analytics & Intelligence, TPI

Effective contract negotiations leverage comes from developing viable alternatives that are financially, technically, and tactically feasible and desirable; and from being ready, willing and able to execute against them.

Here are the TPI Top 5 tips for maximizing leverage in your contract renewals:

1. Start early; don’t rush. The more time you have before expiration, the more options you have to introduce competition, move some or all of the services, and hold firm on your requirements.

 2. Do your homework. Collect market data to understand where your service provider relationship stands against current market standards for pricing, service level agreements (SLAs), services and terms and conditions. 

3. Realign with reality. Chances are that not everything you planned for in your original agreement is still valid. 

4. Remove the fog. Think about the top three to five areas where you and your service provider regularly disagree. Typically, these revolve around two primary areas: 1) scope of services (What is the service provider supposed to do, and should it be in the base price or a change order?); and 2) governance (How do we manage change, performance issues, innovation, etc.). 

5. Play out your hand. After you’ve gone through the preparation phases of collecting market data, understanding your current environment, weighing your options and clarifying expectations, you have almost all of the components necessary for a solid strategy for entering into renewal negotiations with your provider. There’s one last critical step … make sure you have executive alignment with all possible outcomes.

Read this entire TPI Top 5 here . . .

TPI’s seasoned sourcing experts can help you achieve your global sourcing goals through objective advice, robust market data, knowledge of your industry and extensive experience with sourcing negotiations.

E-mail Debora Card, Associate Partner ─ Research, Analytics & Intelligence, TPI, or phone her at +1 586 677 8351 to learn more.

Two Paths to the Cloud

By Thomas Young, Partner & Managing Director, CIO Services - Infrastructure, TPI

 

 

A recent study from Telecom Trends International estimated that Cloud Computing will generate more than $45.5 billion in revenue by 2015. But what should CIOs be doing about it today?

 

In his book The Big Switch, Nicholas Carr compares IT in the early 21st century to electricity in the early 20th  century, when large manufacturers had to generate and manage their own juice. Up until now, businesses have had to operate and maintain their own IT infrastructure.

 

In time, though, electricity became a utility that could support small and large operations alike. The key was standardizing on 110V-by-60Hz. Today, we see the emergence of a standard IT utility under the banner of Cloud Computing that may lay the framework for a revolution on the scale of electricity 100 years ago. 

 

So what is a CIO to do in 2010?

 

CIOs should assume Cloud Computing will evolve along two paths:

 

1. Proactive Path: They move functions such as e-mail to the Cloud to lower cost and improve functionality

2. Reactive Path: Their internal clients start to move functions such as CRM to the Cloud

 

In the Proactive Path, CIOs are driving the agenda to adopt solutions that leverage Cloud Computing technologies and service delivery platforms, and generally speaking, their business model does not change. In the Reactive Path, CIOs see major changes to their business model. For example, CRM is now being bought as a service from Salesforce.com.

 

Either way, the challenge will be to maintain their cost structure as more and more of the functions they support leave their data centers.  So in 2010, CIOs should plan to convert as much of their fixed costs into variable costs. They should also look to their supply chain to outlay capital and provide service at a cost that allows them to maintain their margins. 

 

As they try to separate the hype from reality, smart CIOs will be looking to create flexible third-party agreements with an eye on the Cloud.

 

To learn more, contact Thomas Young at thomas.young@tpi.net.

Considerations to Address Before Divesting Your Offshore Captive Service

by Sanjay Tripathy, Director, TPI

Although many of the same issues that apply to mergers, acquisitions and divestitures apply to the divestment of offshore captive service operations, certain considerations are amplified because of the integrated nature of captive operations with their parent companies.

Here are the TPI Top 5 considerations to take into account when considering divesting an offshore captive service operation:

1. Revisit the overall operations strategy and sourcing considerations, including financial. In most cases, offshore captive operations have been in place for many years and deliver a variety of services, including finance and accounting, human resources, customer relationship management, applications development and maintenance, IT infrastructure, plus more knowledge-based services like analytics, engineering services, research and development, facilities management and other judgment- and expertise-based functions.

Organizations should take a step back and revisit and redesign the overall global operations strategy and future state services delivery model in light of divestment of captive operations. This should include a detailed financial analysis of the various strategic options and related business cases to support the strategy, including strategic service providers who may buy the captive operations and provide ongoing services as a service provider. Furthermore, legal, investment banking, tax and human resource factors - in conjunction with local laws and operational considerations - must be taken into account while executing the strategy.

2. Create a portfolio approach to services delivery of the multiple in-scope functions. Business process, IT and knowledge-based service offerings by third-party global service providers has matured from cost, quality, location and language standpoints to a capability level that may enable most transactional and operational knowledge-based services to be provided by a few strategic providers. Organizations should take a “portfolio” approach to what services need to be delivered internally versus those that may be sourced externally and then create a roadmap for the next five to seven years.

3. Select your strategic services provider wisely. Selecting the right strategic service provider(s) is essential for delivery of future-state operations that meet your organization’s cost, quality and transformation objectives. Be sure to focus on creating the optimal requirements framework with robust statements of work, corresponding service levels and master services agreements for a managed service environment.

There are three parts to this process: 1) the valuation and contractual divestment of captive operations; 2) the buildup of a requirements framework that governs the delivery of services; and 3) the transition and service delivery considerations for the future.

4. How will you govern the operations in the future? Much like shared services in large organizations, most captives are governed internally through a wholly owned subsidiary with close operational links to internal customers. Future-state operations with strategic service providers will necessitate a robust global governance framework to manage the four key governance pillars of performance management, relationship management, financial management and contract management.

5. Actively manage transition and the end-user experience. Active management of transition to the strategic service provider(s) - including retention of key personnel from the captive operations - is key to ensuring continuity with the parent organization’s internal customers. You must also manage the operational risk introduced by sweeping changes wherein services are being bought in a managed services framework as compared to full-time equivalents (in most cases). Putting in place a robust “voice of the customer” feedback mechanism can minimize the difficulties associated with change and lead to a seamless transition.

TPI’s seasoned strategy and assessment experts can help you achieve your global sourcing goals through objective advice, knowledge of your industry and experience with arrangements from simple to complex.

E-mail Sanjay Tripathy, Director, TPI, or phone him at +1 919 809 4477 to learn more.

4th Quarter Global Index Signals Gradual Recovery for the Outsourcing Industry

By Mark Mayo, Partner & President,  TPI Global Operations, TPI

 

Today I am happy to report that fourth-quarter contract values have signaled the beginning of a gradual recovery in the outsourcing industry. Contract values are up 47 percent – its highest value in 18 months. After the market reached its bottom in the first half of 2009, the second half clearly showed positive momentum as businesses became more confident about making strategic decisions in this economic environment. The main factors driving the market’s upswing in the broader market were:

 

Strong IT outsourcing (ITO) demand. Activity in this area dominated the broader market for the entire year with total contract values (TCV) up 54 percent from the previous quarter.

The Europe, the Middle East and Africa (EMEA) region was significantly impacted by a number of large deals in the fourth quarter, delivering its best quarterly performance since the second quarter of 2008. The UK – like the U.S. – has seen its TCV steadily decline over the last five years due to the maturity of both markets, but other markets in the region are maintaining decent performance levels.

A resurgence in mega deals and mega-relationships was a positive sign that contributed to the market turn with fourth-quarter total contract values at their highest in six quarters.

It is also important to note that financial services, manufacturing and telecom & media  -

industry sectors that have traditionally driven the outsourcing market - all showed a strong second-half upturn in total contract value. These sectors have traditionally driven the outsourcing market so a continuing positive curve for all three will be crucial for new growth in the market.

With companies growing more confident and the market stabilizing, we expect to see growth in 2010.

Check out the full Q4 TPI Index presentation at:

http://www.slideshare.net/TPIIndex/4q09-tpi-index-presentation-final?from=share_email