Consider the Source

ADM as a Business Changer, Plus Free ADM Webinar Details

by Steve Hall, Partner, ISG

Editor’s note: On Thursday, February 16 at 11:00 a.m. Eastern, Steve Hall will be the featured guest speaker on a webinar hosted by CAST Software on the topic of aligning service provider SLAs with long-term value. The discussion will focus on risk mitigation and value enhancement from provider relationships. View the key discussion points and pre-register here (no cost).

While cost savings remains a top priority for global Application Development & Maintenance (ADM) organizations, businesses are also increasingly looking to shift from a “run the business” model to a “change the business” (CtB) perspective, whereby ADM resources are focused on enabling transformational enterprise-wide initiatives rather than merely supporting the status quo and reacting to small enhancements. The demands associated with a CtB approach, however, can increase the risk of higher defect rates and maintenance costs, as well as poor documentation and weak standards around performance and process measures. 

Here are the Top 5 key strategies to ensuring that a CtB ADM model is implemented with optimal efficiency:

1. Separate and manage service categories. Delineation of the major categories of ADM is essential to efficient management. As the old adage goes, “You can’t manage what you can’t measure;” therefore, it is imperative for organizations to understand their application support costs. Specifically, you need to define three main categories — maintenance, minor enhancement, and project-based work — and manage costs of each of those categories separately. The reason is that cost drivers and performance indicators vary by category, so different actions and priorities may be required for each.
2. Align the retained organization with the strategy. Many ADM organizations fall into the trap of focusing on what they can do, rather than what the business needs. For a CtB strategy, that’s a recipe for disaster. Key roles and attributes to help ensure that ADM activity stays on track include liaisons whose specific role is to coordinate between business and IT leaders; program/project managers to oversee large programs; client-driven architecture; ongoing business analysis to understand and communicate business needs; service delivery managers; and business subject matter experts to work with developers and testers.
3. Define end-to-end service level agreements. Multiprovider environments are the norm in today’s outsourcing environment. The multisourcing environment provides significant advantages to clients, but also introduces complexities when trying to govern a large outsourcing arrangement or manage a large software development program. Service level agreements are an effective way to incent the right behaviors in a multiprovider environment, but they must be built to address the entire project lifecycle and clearly aligned with the responsibilities of the service providers.
4. Embrace process excellence. Service levels and quality goals are often aligned with process maturity — and more mature organizations can be contractually obligated to deliver higher quality code.  Since process adherence drives repeatability and productivity improvements, service providers should be incented to operate at CMMi level 3 or higher, and to commit to productivity improvements.  Conduct ongoing operational assessments to ensure process adherence.
5. Use key performance indicators (KPIs) and dashboards. Gauge performance on an ongoing basis with tools such as an earned value analysis (EVA) that includes a schedule and cost performance index. To stay on top of defects, employ other quality metrics such as:

• Defect injection and probability statistics for software quality
• Structural quality tools and techniques to validate the longer term supportability of the code
• Regression testing, defect detection, and effective test coverage ratios to validate the functional quality of the deliverables

For more information about ISG solutions for ADM, contact the author at steven.hall@isg-one.com or +1 720 851 0481.

New TPI Research: Baby Steps for BPO, Giant Leaps in ITO Spending

By Paul Reynolds, Chief Research Officer, TPI Momentum

Some service delivery trends and emerging client preferences were consistent across the eight specific outsourcing services lines examined in depth in the just-released TPI Momentum 2011 Market Trends & Insights Service Line Report. Buyers of ITO and BPO services alike want access to emerging technologies and service delivery options, including mobile device support, Cloud Computing and X-as-a-Service. Clients are also challenging service providers to create functionality, features and services that are tailored to their specific industry.

Changing preferences for new technologies and services didn’t stop the market, as outsourcing interest and contract activity were strong in most segments. There were a record number of BPO contracts awarded in 2010, and ITO spending was at an all-time high thanks to heavy network spending.

Here are the TPI Top 5 highlights from the TPI Momentum 2011 Market Trends & Insights Service Line Report:

1. Business process outsourcing (BPO) is attracting new clients. A record 759 BPO contracts were awarded in 2010, 20 percent more than the previous year. Many of these contracts (encompassing Contact Center Services, Finance & Accounting [F&A], Human Resources Outsourcing [HRO] and Procurement) were for limited engagements for small companies who are cautiously investigating outsourcing. New interest was especially strong in Procurement, F&A and HRO. Despite the heavy contract volume, total spending in 2010 was down 12 percent from 2009.
   
   
2. Strategic considerations slow ITO. The ITO market seemed to pause in 2010 while clients reassessed their information technology strategies. Contract award volumes declined from 2009 in part because clients were heavily engaged in evaluating options and setting plans and policies regarding mobile devices, applications and security, virtualization, Cloud Computing and other issues. ITO contract awards rose 1.6 percent in the Americas while experiencing sharp declines in the EMEA and Asia Pacific regions. The Managed Network Services service line was the unquestioned strength of the ITO market in 2010 and was buoyed by heavy telco-to-telco spending.
   
   
3. Clients are bundling up. 2010 saw a decided shift in the ratio between standalone and bundled contracts  as clients opted for more bundling of services. In ADM, Cloud Computing and F&A service lines, in particular, companies are adopting portfolio bundling, in which separate bundles of contracts for outsourcing are created in both business and technology domains. The preference for portfolio bundling and vertical niche expertise is fueling the momentum for multi-provider sourcing. Clients also bundled when they renegotiated contracts or added scope.
   
   
4. Mobility is moving the market. The general business trend toward more mobility is affecting the outsourcing industry in several ways. Demand for mobility has the most clear and direct impact on the End-User Computing service line because service providers need comprehensive solutions for supporting an ever-growing range of mobile devices. ADM service providers are increasingly called on to develop mobile apps, and network operators need to manage more traffic. Client executives want mobile access to various business applications and performance dashboards, resulting in needs for BPO service providers to address.
   
   
5. (Expert) help wanted. Clients strongly valued expertise in their vertical industry when selecting service providers in 2010. They want solutions that are tailored to their industry or business process rather than general, “off-the-shelf” offerings. Clients also prefer strong value innovation, including Cloud Computing or other emerging platforms for service delivery. Cloud Computing is now sought after both as a transformational and as a cost-reduction mechanism. Additionally there is preference for “business-process-as-a-service” solutions, in which entire functions such as payroll, recruitment and others are procured over a platform on a pay-as-you-go basis.

The complete TPI Momentum report includes individual chapters for each service line that cover these and other developments in detail. For more information contact Paul Reynolds, Chief Research Officer, at paul.reynolds@tpi.net or +1 508 625 2194.

Focus on Demand When Managing ADM Services

by Doug Bunch, Director, ADM Services, TPI

Cost cutting alone is not enough to optimize your application portfolio investment. Top-performing organizations are focusing on the “demand” side of the supply and demand equation.   

Check out these TPI Top 5 essentials to an effective Application Development and Maintenance (ADM) demand management strategy:

1.  Create an investment mindset. View your ADM spend as a financial investment in an asset rather than an expense. A chargeback system can show stakeholders that the services are not “free,” introduce accountability and drive better decision making. Form stakeholder teams to plan and approve overall investments, define business rationales and priorities, and develop “roadmaps” outlining your support requirements.
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2.  Define a strategy. Application spending should reflect business priorities. The investment strategy should outline ADM spending parameters for major activities so that, for example, 70% of the ADM budget will be spent on major projects, and 30% will go to minor enhancements and sustenance activities. The other key to a solid investment strategy is to categorize applications as value-adding, strategic, redundant or obsolete so that resources can be allocated accordingly.

3.  Know where your dollars are going. Knowledge of actual spend on sustenance, enhancements and development is essential in order to manage demand and track costs on an ongoing basis. A detailed labor recording identifying time allotted for break/fix, small enhancements, large enhancements, major development and other tasks keeps ADM spending aligned with investment strategy and planned expenditures. 

4.  Be clear, consistent, and flexible. Create well-defined roles and responsibilities for all IT and business stakeholders to sustain participation and drive accountability. Consistently utilize the demand management process across the enterprise to ensure compliance and comparability. Centralize decisions for larger investments, and decentralize decisions for the smaller investments to accommodate “emergencies” requiring rapid response.   

5.  Review and monitor on an ongoing basis. Deploy a common estimation model or a consistent set of estimation models across the organization. This will enable more reliable prioritization and more effective “go / no-go” decisions when evaluating requests for ADM work. Use periodic reviews to gauge process effectiveness and ensure that ADM spend is delivering business value. Involve the executive team to alert them of any deviations from the targeted investments and priorities. 

While demand management requires effort and potentially painful changes, the benefits to the business are significant. For more information, contact Doug Bunch.

Being a Hero vs. Doing Things Right

By Chris Pfauser, Compass Principal Consultant

Let’s say you’re a talented and ambitious young IT professional. Late one Friday afternoon, the VP of sales corners you in the hallway and says his laptop has crashed, just as he was finishing a presentation for a Monday morning meeting with a new customer.

Do you:

A: drop everything and restore the document, even if it means calling in colleagues and working over the weekend.

B: tell the VP to call the Help Desk and get a problem ticket.

Obviously, in this instance the right thing to do is to jump in and resolve the crisis.  However, the scenario illustrates a key challenge of managing an effective IT organization: how to reconcile individual ambition and initiative with the need for process discipline and consistency.

Many large IT organizations make a virtue of fixing crises and putting out fires. As a result, what they become really good at is fixing crises and putting out fires.  Meanwhile, the truly top-performing organizations find ways to prevent crises and fires from happening in the first place.

The “hero” culture in IT can undermine efficiency and improvement initiatives in a variety of ways.  Consider, for example, an ITIL initiative – it’s all about process standardization, consistency, and repeatability. In a sense, all those things are a threat to the IT hero, because they don’t give him or her a chance to shine, to be different and better, to be heroic.  For executives managing ITIL initiatives, it’s therefore essential to gain the support of the IT heroes and give them a stake in its success.  Otherwise, because they’re talented and ambitious and smart, they’ll find a way to derail the process. Read more.

Sourcing relationships can also fall prey to the hero syndrome. In many instances, a client organization characterized by a hero-driven, ad hoc, and reactionary approach to problem management confronts a process- and standardization-oriented service provider. When these respective approaches clash, the client’s way usually prevails, for a variety of reasons. First off, the idea that the “customer’s always right” is a powerful one. Moreover, retained staff are often more experienced and senior than their service provider counterparts, particularly in offshore environments.  Hence, the vendor team often lacks the wherewithal to push back and insist on standards and consistency. An added danger of the hero syndrome in outsourced environments is that strong personal bonds often develop between the respective teams – everyone’s in it together, striving to be heroic. So both sides feel that the partnership is strong, even if service delivery is woefully inefficient.

The way out of the impasse is for senior executives from both sides to step back and reassess the initial objectives of the initiative, and to re-commit to the steps necessary to drive improvement. Again, it’s imperative to gain the trust and support of the best and brightest on both teams, and to give them a stake in ensuring that standardization and consistency prevail over individual heroics. Read more. 

Key Pricing Constructs for Application Development and Maintenance Agreements

by Randy Tucker, Director ― CIO Services, TPI

In all sourcing agreements, pricing provisions are a critical component of the understanding between the client and service provider and are the basis for the business arrangement between the parties.

Be sure you address these TPI Top 5 items when crafting the financial terms and conditions for your Application Development and Maintenance agreement:

1. Clearly define the types of work in scope. Definitions for work activities associated with Application Development and Maintenance can vary depending on the industry and geography. This variance is acceptable as long as the work definitions are clearly defined in the agreement and are aligned to the pricing elements. This is extremely critical in agreements that utilize fixed price for a given scope of service.

2. Define the algorithms and methodologies for three key potential cost adjustments.

• Inflation risk: Be sure you clearly allocate the financial responsibility for this risk between the parties and define the timing and calculation for potential adjustments based on increases or decreases of "cost of living" adjustments. The indices that are utilized in the calculation should be published by the governmental entity based on the geographies involved.
  
• Foreign exchange risk: You must clearly allocate the financial responsibility for this risk between the parties and define the timing and calculation for potential adjustment based on currency conversion fluctuations. The calculation needs to document the organization that publishes the foreign exchange indices.
  
• Taxes: It is critical to clearly allocate the financial responsibility between the parties for this cost in the agreement. The client (service recipient) should ensure that it has the right to approve or reject changes to the service provider’s delivery locations that may create negative tax implications.

3. Document committed onsite/offshore ratios for service provider delivery resources. You should note the risk associated with onsite/offshore ratios, including language specifying annual offshore ratios and language prohibiting shift by more than +/- 5 percent. This can be documented at the portfolio or subportfolio level for the term of the agreement as a personnel projection by month.

4. Maintain a process to add or delete applications to the portfolio. Be sure you provide language that will accommodate changes to the base pricing for additions and deletions to the portfolio based on level of effort, function points supported or other measures of throughput or support.

5. Document the commitment regarding the skills mix on blended labor rates. Clearly define the types and levels of skills that will be utilized in a "blended skills rate" calculation to ensure that it is not comprised of primarily junior-level resources. Document these "mix" commitments by skill type and level with language prohibiting shift by more than +/- 5 percent.

A business case that provides value for both the client and service provider is based on certainty of the cost and delivery model. Implementation of these five key constructs is a start toward ensuring that both parties can realize maximum value.

TPI’s CIO Services experts can help your company optimize its Application Development and Maintenance agreements using our experience, objective advice, industry knowledge and depth in all aspects of information technology and business process services. To learn more, e-mail Randy Tucker, Director ― CIO Services, TPI, or phone him at +1 972 322 9402 to learn more.

Expand Your Organization’s Sourcing Knowledge With Focused Workshops

By Steven Hall, Partner, CIO Services, TPI

How do I work with the Service Provider? Should I interview the offshore resources? What are SLAs? What can I do to improve quality? These are questions we hear repeatedly from our customers. In response, we’ve developed a series of workshops to address these pressing needs. The content is structured to be delivered in ½ day to 2-day highly-interactive sessions, which allows organizations to truly understand and implement the concepts.  We’ve conducted these with a number of large IT organizations on a variety of topics, including:

• Managing in an Outsourced Environment (ADM Operational Management) - Organizations struggle with the transition from a staff augmentation model to a managed service model. Internal employees often have new roles and must work with Service Providers using contractual constructs such as defined pricing units and Service Level Agreements. This 1- to 2 -day course provides practical guidance on day-to-day management in an outsourced environment. It breaks down many of the contractual elements into easy-to-understand tools that front-line managers can use to measure and incent Service Provider behavior and to foster a healthy Service Provider relationship that achieves the original sourcing goals. Many of the concepts are based on the book I wrote with Jim Hussey, Managing Global Development Risk,  which was no. 1 in the outsourcing category on Amazon.com last year.
• Creating an Investment Mindset – IT Governance and Demand Management are two of the hottest topics in the industry but are also two of the hardest strategies to implement within an organization. This 1-day workshop focuses on IT decision rights and a practical approach to IT Demand Management focused on prioritizing projects and aligning them with business needs. The workshop also highlights the advantages of agile development in an offshore delivery model to develop a flexible team that can rapidly respond to changing business needs.
• Establishing a Testing Center of Excellence or Managed Test Factory – Focused testing via a COE is quickly becoming one of the best ways to improve software quality. Service Providers are creating a potpourri of offerings to capture a slice of this rapidly growing market. This ½-day course provides an overview of the market with an operational focus on the key concepts and the necessary steps to establishing and managing your own Testing COE or Managed Test Factory.

Dedicated time with industry experts in a ½ day to 2-day workshop is a great way to accelerate your organization’s understanding of emerging sourcing trends and strategies. As the world’s leading sourcing advisory firm, TPI has led the way in helping to educate the industry with practical advice on implementing these changes. “Knowledge Powering Results” is a motto we live by. If your organization could benefit from a TPI workshop on one of these topics or any other, or if you just want to know more, drop me a line at steven.hall@tpi.net. It’s a great way to sharpen your sourcing skills.

Large Contract Restructurings Lifted Outsourcing Market in First Quarter

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

In last quarter’s TPI Index, I was happy to report that the market which had bottomed in the first half of 2009 had made a turn in the second half, signaling the beginning of a gradual recovery in the outsourcing industry. In today’s 1Q10 Global TPI Index, we reported that total contract value (TCV) rose 25 percent from the first quarter of 2009, but the underlying market is recovering slowly and unevenly.

Contract restructurings, in which clients renewed, renegotiated or expanded existing contracts, were the real reason for the growth in the first quarter of 2010. Restructurings accounted for 42 percent of TCV, far surpassing the previous record of 29 percent set in 2006, and greatly impacted Americas and Europe, Middle East & Africa regional performance.

Restructurings also fueled the growth in IT outsourcing (ITO), which expanded 46 percent, with particular strength in Application Development & Maintenance (ADM) and ADM-plus-Infrastructure contracts. In addition, three of the four mega-deals awarded in the quarter were ITO restructurings.

Looking ahead, TPI anticipates that contract restructurings will continue to have an impact on the outsourcing market. Between $10 billion and $12 billion in annual contract value due to expire in 2010 will be renegotiated, up 20% to 25% from where the industry stood last year.

We don’t expect a huge rush of new-scope contracting. Instead, we foresee a steady flow of new opportunities as the recovery continues at a slow pace.

Check out the full 1Q10 Global TPI Index presentation or listen to the replay at 800-332-6854 (Replay Conference ID: 231877).

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

 

Top 5: Tips for Successfully Transitioning ADM Operations Offshore

By: Jim Hussey, Director, TPI

A well-planned, effective transition of Applications Development & Management (ADM) operations to an offshore managed service delivery model establishes a positive working relationship between outsourcing clients and their service provider(s). A bumpy transition only casts doubt and concern, introduces unnecessary risk and increases the likelihood of challenges that could have been avoided.

To help clients and service providers achieve more predictable success during the formative period of transition, TPI recommends establishing a transition framework  that utilizes clear quality gates (or “tolls”) with defined entry and exit criteria strategically aligned with the major transition activities of knowledge acquisition, knowledge transfer, stabilization and steady state.

These are the TPI Top 5 actions you can take to ensure a successful transition offshore:

1. Develop a detailed transition plan during the agreement phase of the engagement.
2. For continuity, ensure that transition team members form the nucleus of the service delivery organization.
3. Assess true behavioral risk within the ADM organization, anticipating reaction at every level of the IT and business organization, and closely monitor throughout the transition.
4. Focus on application and process knowledge development versus the service provider’s individual resources.
5. Have a realistic understanding of your current ADM execution model and anticipate internal challenges to instituting the new service delivery model.

Transitioning a current environment to a new service delivery model that leverages one or more service providers is a technical challenge combined with an organizational change agenda that touches an organization at a very deep and personal level.

Effective planning before transition initiation is critical. Formation of a detailed plan, honest assessment of plan achievement and the ability to take corrective action are keys to transition success.

TPI’s seasoned advisors can help guide your organization through the intricacies of successfully transitioning your ADM operations offshore. Contact Jim Hussey, Director, TPI, to learn more.