Consider the Source

Put in the Hard Yards to Get the Best Out of Your Sourcing Balanced Scorecard

by Ed Tann, Director, ISG

“Come what may, all bad fortune is to be conquered by endurance,” Joey Barton, English footballer turned Twitter prophet, quotes the ancient poet Virgil.

As Barton, and Virgil before him, reminds us: it takes hard work to win results. The balanced scorecard for sourcing promises a lot – to determine, measure and manage a set of predictable outcomes. But, like most treasure, it is the thing of whispers. There’s actually not much of a map to it, and only few have enjoyed its largesse. Indeed, the lack of a structured scorecard may have led a number of organizations into the poorly scrutinized, headline-making sourcing contracts with which the industry is, sadly, all too familiar.

Though constructing a balanced sourcing scorecard involves a degree of soul searching and rigor, the rewards at the end of the process are considerable. The following Top 5 guidelines will help you to construct a scorecard for your next sourcing transaction.

1. Create a map to flesh out the sourcing strategy. Use an established model that is based on the proven multi-dimensional Kaplan and Norton scorecard construct as the skeleton upon which to attach the meat of your sourcing scorecard. Resist attempts to change this established structure; it works. Allow it to prompt the right thinking.
   
   
2. Measure activities not outcomes. Objectives are about outcomes, and strategies are plans for achieving those outcomes. Measure the activities that underpin your strategic plans. Acknowledge major challenges, address tricky fundamentals and question entrenched patterns of behavior. The result should be a set of activities and associated measures that manage obstacles and create competitive advantage for client and service provider.
   
   
3. Guide the pre-contract process. A good deal of form and rigorous strategic thinking in the pre-contract phase is imperative to establishing fundamentals. Pre-contract deliberations will inform a great deal of the transaction including the definition of services, the assessment of the service providers’ attributes, the characterization of the type and term of the contract, the evaluation of the bidders and the definition of the service-level agreements (SLAs).
   
   
4. Manage the relationship during and after the contract. Your scorecard should underpin the delivery of services during contracting and beyond, guiding the business case requirements for both parties, value adds and investments in governance and innovation. Base SLAs on operational strategies rather than off-the-shelf norms. Use your balanced scorecard as a tool for continual relationship improvement, using inputs from senior managers from both the client and the provider that yield actionable improvement items.
   
   
5. Manage the provider’s operations. Providers need to confront the high stakes challenges of today’s competitive environment. They face margin-squeezing shifts in supply and demand, advanced cost and delivery models, new and powerful market entrants, general supply “switchability” and an increasingly savvy buyer. The scorecard produces a coherent analysis and measurement framework to help provider align its business to these fundamentals, devising go-to-market strategies, rebalancing costs, prioritizing investments and building capabilities.

As on the sports field, discipline and hard work will pay off in the competitive sourcing marketplace, especially with an expertly structured balanced scorecard. For more information, contact Ed Tann, Director, ISG, at edmund.tann@isg-one.com or +44 7769 977530.

TPI Index: Mega-Deal Drives Outsourcing Market to Record Third Quarter

By John Keppel, Partner & President, Information Services

Earlier today, we held our 3Q11 Global TPI Index conference call, during which we discussed noteworthy trends in the sourcing market during the second quarter and the first half of the year.

In 3Q11, a single $7.2 billion contract lifted the market TCV considerably. The mega-deal, awarded by Siemens to Atos as a part of its acquisition of Siemens Information Services,  spurred total contract value (TCV) to $25 billion, a gain of 41 percent year-over-year and 31 percent sequentially. This TCV marks an all-time high for a third quarter.

All three regions saw TCV increases for the quarter. IT Outsourcing TCV rose by some 50 percent year-over-year and Business Process Outsourcing TCV has already exceeded its full-year 2010 performance.

Furthermore, remove the single mega-deal, and the third quarter still saw a healthy $18 billion in contract awards, in line with the previous periods. In short, the third quarter looks very similar to other third quarters and offers more of a business-as-usual tale than a stunning growth story.

A replay of today’s call is available for one week on the TPI Index page of TPI.net, where you can also view the presentation slides. I hope you’ll have a chance to listen and sound off with your own perspectives in the comments section below!

Will the Current Macro-Economic Environment be a Drag to the Sourcing Industry?

By Dinesh Goel, Partner, TPI India

The stability of the IT services sector and the growth of the service providers has come under debate again due to several developments in the macro economic environment. The unemployment rate in the U.S. is more than nine percent, Standard & Poors lowered the sovereign credit rating of the U.S. on August 5 and in Europe, several European economies are in need of bailouts by stronger economies or measures to cut budgets and curb spending for improving their fiscal health.

These events may potentially lead to a slowdown in decision making and postponement of IT projects by companies. The argument is that slower GDP growth in the U.S. and several other economies will cause negative business sentiment, lower consumer confidence and cause a decline in state investments and consumer spending, which impacts businesses’ growth outlook and IT budgets. The largest impact for India heritage providers is feared from the U.S. since it contributes about 60 percent of annual revenues.

In my view, the global ITO and BPO services industry may not be impacted as severely as the recent recession (2008-2009) as companies will react in different ways to the situation. The reaction to the uncertainty in the global economy will probably result in:

1. Companies seeking to further tighten their belts with assistance from service providers to achieve these goals. Low cost global service delivery locations enable service providers to deliver a higher level of services to meet immediate, essential BPO and ITO needs potentially at a higher efficiency and productivity level.
2. Higher level of focus on cost and savings by public sectors across the U.S. and Europe – potential for outsourcing growth for service providers to partner with governments.
3. Accelerated adoption of cloud computing delivery models – among mid-sized businesses with a broader scope of services and large businesses with point requirements.
4. The transformational projects and allocated spending to complete these projects that can be deferred will be deferred, but hopefully will not disappear entirely.

The impact of companies choosing to defer budgets will likely mean slowing growth for the providers in the next few quarters, and it will be increasingly important for Indian-heritage providers. According to the TPI Index – which measures commercial outsourcing contracts valued at US$25 million or more – Indian-heritage providers have won a larger share of the sourcing contracts, increasing their market share in the last decade from one percent of contracts to 26 percent this past quarter. This effect could be partially offset by the growing demand for sourcing services from emerging markets such as India, Southeast Asia, Latin America etc… History also offers evidence that management teams that invest in its company’s future during periods of slower growth or recessionary spells are in a better position to catch the next bull phase.

Overall, I am not as pessimistic about the opportunities for the services sector as some economists and industry analysts might be. I’m also very interested in your view. How do you think this situation will play out for the ITO/BPO industry in the near future?

 

Notable Trends in the TPI Momentum Market Trends & Insights 2011 Verticals Report

by Paul Reynolds, Chief Research Officer, TPI Momentum

Look for interesting news in the TPI Momentum 2011 review of outsourcing spending. We looked at outsourcing trends in 27 vertical and 68 sub-vertical industries throughout 2010 and found that, while overall outsourcing spending increased by five percent, conditions were highly variable across industries – with spending up or down by more than five percent in over half of the verticals.

Here are the TPI Top 5 highlights from this year’s report:

1. G2000 companies increase outsourcing spend. In 2010, G2000 companies spent over $72.1 billion on outsourcing services, a five percent increase when compared to the previous year. While Manufacturing and Financial Services spent the most, the Retail sector grew the fastest (with 37 percent growth) among the industries studied. New business models in Retail are driving IT investments, which is a boon to outsourcing.
   
   
2. First-timers join the outsourcing surge. A steady flow of G2000 companies signed their first outsourcing contracts in 2010 while, like the previous two years, overall outsourcing penetration increased by three percent. Twelve of the 27 vertical industries experienced at least 20 percent penetration growth.
   
   
3. Sub-verticals spearhead outsourcing momentum. While some industries showed declining or flat outsourcing activity, specific sub-verticals saw growth. For example, overall outsourcing spending plateaued in the Chemicals industry, but its Life Sciences sub-vertical grew by more than 30 percent. Similarly, the Finance Services sub-vertical grew almost 15 percent while the larger Business Service & Supplies industry remained flat.
   
   
4. Hunting-Farming dynamics shift as specific verticals boost outsourcing. The TPI Hunting-Farming Index measures opportunity across the 27 industries we track. In 2010, the Farming Index showed that both the Utilities and Retailing sectors bumped their ratings from medium to high due to recent increases in outsourcing spending among companies that already outsource.
   
   
5. Fastest growing portion of the market impacts vertical trends. In most industries, outsourcing penetration is significantly higher among larger companies than smaller ones. Much of the new outsourcing growth stems from companies ranked 501-1000 in the Forbes Global 2000.

By and large, 2010 was a year of recovery. The strength and shape of the recovery and its impact on outsourcing spending was far from consistent across industries. More importantly, the measurable activity tells us a great deal about which vertical markets offer the strongest new opportunities and which strategies will be most effective for winning in these markets.

To learn more about the TPI Momentum Market Trends & Insights 2011 Verticals Report, click here or contact Paul Reynolds, Chief Research Officer, TPI Momentum, at +1 508 625 2194.

Checklist for Multi-Provider, Multi-Country Sourcing Initiatives

By James Lofton, Director, TPI

Implementing a multi-provider sourcing strategy across multiple countries requires tight coordination between business units, finance, legal and internal contract management. Success depends on an appropriate commercial structure, well-managed multiple-provider service delivery, smooth invoicing and allocation processes, and optimal service levels.

Note these TPI Top 5 questions and their answers, which will be unique to your organization, when considering a multi-provider, multi-country sourcing strategy:

1. How do we create a suitable commercial structure? Cross-border taxes and cross-subsidization are key factors in determining a commercial structure that best serves your multi-provider initiative. Whether you use a central agreement that covers all countries or a Master Services Agreement (MSA) with local agreements for each country, your commercial structure should allow for service delivery and legal and finance implications that work in your favor.
   
   
2. Is the provider capable of delivering services in multiple countries? Service providers need to deliver services under a flexible commercial structure that can handle local, in-country invoicing and billing in local currencies. Be sure your providers have managerial and legal entities to assure appropriate and legally sound agreements with multiple countries.
   
   
3. What is the optimal multi-provider management approach? The provider management approach for any multi-provider initiative should be based on the culture of your organization, your internal capabilities and your availability of skilled staff. There is no “one size fits all” solution nor a formula that will provide this answer. Whether you manage providers internally, through an outsourced service integrator (SI), or using Governance-as-a-Service from a third party, be sure your management strategy contributes to your sourcing goals.
   
   
4. How do we invoice in multiple countries? The most favorable invoicing approach will depend on your commercial structure. Invoicing may be centralized, invoiced by country to a single legal entity, invoiced by country to multiple legal entities, or a combination. The main consideration in deciding the best approach is the cost of local invoicing and allocations versus the financial impact of cross- border taxes and cross subsidization. Depending on the amount of the invoice and the scope of services delivered within a country it may be more beneficial to invoice centrally and not by country.
   
   
5. What is the best way to ensure service levels? Whether service levels are equivalent across varying countries or each country has independent service levels, the best strategy will define service levels as end-to-end across multiple providers. In-country service levels can be managed locally, while service levels that are comparable across multiple countries may be managed globally, keeping in mind the particulars of in-country service defaults and service credits. A combination of global and local service levels may provide the most flexibility.

For more information on multi-provider in multi-country sourcing initiatives, e-mail James Lofton or call +1 775 250 2933.

Walking the Talk of Telecom Negotiations

By John Lytle, Consulting Director, Compass

Because telecom costs represent a significant investment for a global organization, effective negotiation of telco/service/product contracts is imperative.

But it’s not enough to “play hardball” and threaten to terminate a contract and find new partners if your terms aren’t met.  You need to use knowledge of mature and emerging technologies, market-based price and service standards, and contract terms and conditions to define goals and manage vendor performance.

Some do’s and don’ts:

• Do include contractual provision for annual benchmarks to ensure that rates stay aligned with rapidly evolving market conditions, as well as your changing business requirements.
• Do enhance flexibility by demanding a low, or no annual commitment.
• Do be aware of market standards regarding pricing structures for basic product and service elements, as well as for those less obvious “administrative” charges that seem to appear on invoices.
• Don’t allow published tariffs to be used as the basis of negotiations. They are misleading, since they don’t include the credits, bonuses, and forbearance that typically characterize any large telecom agreement.
• Don’t allow the contract to include prices for services that you don’t use.  Since you have no incentive to negotiate prices for such services, you’ll be at a disadvantage if you need them in the future.

If you follow these and other guidelines and still don’t get what you need, then you have to be prepared to pull the trigger and issue an RFP for new services.

But how do you know when you've crossed the line from a salvageable relationship to a lost cause? "Make the Call," a Compass white paper on telecom negotiation strategies, outlines the basics of renegotiating an agreement with an incumbent service provider, and, if that renegotiation fails, how to go about finding new providers and implementing a smooth transition.

Set the Stage Early to Get the Best Out of Your RFP Process

by Ian Watt, Director, TPI

Issuing a request for proposal (RFP) and selecting a service provider partner is a big deal, especially for services that can materially affect the way — or even whether — you do business. You want the investment in time and focus to be worthwhile, resulting in the right services with the right partner at the right price.

When you issue an RFP, you’re signaling that you are willing to pay for certain services. Lots of service providers will be interested, especially in the payment part. You’re interested in the services part. A good RFP lets both parties align their interests.

Here are the TPI Top 5 guidelines for getting your RFP process started on the right foot:

1.  Have a sober discussion about what you really want to buy — and be sure to include the business. Generalities in an RFP increase the price a service provider will bid, especially if you are asking for a fixed price. The rigor of writing down exactly what you want to buy will improve the RFP result and sharpen your own thinking. Deciding on scope is not something you can delegate down the organization. If the services are going to affect business operations, your discussions should include business operations.

2.  Make a schedule and stick to it. From the moment you signal your intention to issue an RFP you are negotiating with your service providers. The single best way to remain in charge of the discussion is to set a schedule for the whole process and stick to it. Your providers will know that you are serious and organized. You will also drive a better response because they will be able to plan their internal staffing around dates they know will be honored.

3.  Provide the richest set of data possible. In this area, like no other, you get what you pay for. If you develop solid data to go with your RFP, you have a right to expect high quality responses in return. Reliable data also provides insurance against unpleasant discussions with your service provider after contract signature (when your leverage is roughly zero). You don’t want to hear: “When we bid that price, we assumed A, B, and C; but now we see D, E, and F, so our price will double …”

4.  Be willing and able to walk away from bidders who don’t play by the rules. When the prize has been big enough, bidders have been known to walk around the RFP process, spread fear, uncertainty, and doubt among executives, and perhaps ask for “another bite” at the process if the first attempt was rejected. If they can’t work as a partner during the courtship phase, what chance do you have for a long-term relationship? Brief your executives ahead of time, and make sure you’re able to walk away if you have to.

5.  Give yourself a structured decision process. If the RFP is a big deal, it should have players to match. Form an empowered team who will make decisions at pre-defined checkpoints (e.g., downselect, negotiations …). Involve the business, procurement, and legal counsel up front — not as a last minute check off. Above all, don’t allow “tourists” at the table. It should be clear from the beginning that nobody gets to swing into a meeting, offer criticism, and leave.

Remember the old story about the pig, the chicken, and bacon and eggs for breakfast? The hen is involved, but the pig is committed. Likewise, everyone on your team should be committed to the whole process.

TPI CIO Services experts can help you achieve your organizational goals through objective advice, knowledge of your industry and experience with arrangements from simple to complex.

Contact Ian Watt, Director, TPI, to learn more.

Value of Sourcing Advisors, Advised Deals Discussed at SSON “G6 Panel”

by Bill Huber, Partner & Director - CPO Services, TPI

Do sourcing advisors add value? This was a question posed to a panel of service provider executives at the IQPC Shared Services Outsourcing Week (SSOW) conference in Orlando this week.

The panelists from Accenture, Genpact, Infosys, CSC and TCS offered their candid and sometime pointed perspectives on whether advisors enhanced or stifled innovation and accelerated or delayed reaching a deal. Several of the providers expressed their preference for unadvised deals.

Granted that there are some advisors who fit all of these descriptions; but the fact is that service providers have always been motivated to prefer unadvised deals to advised deals. This is rational self-interest on the part of the providers, as unadvised deals often can tip the scales in favor of the providers. Service providers are in the market doing deals all the time and thus better understand the economics and risks of a transaction than a client who has much more limited knowledge of the market.  Additionally, the involvement of an advisor increases the probability that an outsourcing relationship will be sourced competitively. 

All service providers prefer a single source transaction. Sometimes this is okay, and an unadvised deal can turn out well. However, the majority of failed deals are either unadvised or have been negotiated with advisors who are willing to short-cut appropriate deal discipline to get a “strategic” deal signed in an unrealistically short timeframe. Regular industry watchers can all rattle off a list of deals that fit these characteristics.

The fact is that good advisors create value by ensuring that the deal economics are sound to both the client and the service provider and are priced competitively with the market; that service levels are aligned with client outcomes; and that financial structures and incentives are designed to achieve the client’s objectives for the relationship. The best deals also are structured to foster innovation and transformation, but such structures must ensure measurable outcomes — not merely reflect promises or good intentions.
Lastly, the best advisors also serve to educate and guide their clients on the art of the possible in terms of strategy and transformation; the real (vs. advertised) capabilities of the service providers; and the risks and pitfalls that are present even in good deals and how best to mitigate them through effective change management, transition and governance.

One panelist, a high-level executive of a multinational service provider, affirmed this, pointing out that good advisory services are not merely about tools and templates but about the softer elements that need to be considered when guiding a customer through the complex dynamics of outsourcing, all of which help clients to achieve more predictable outcomes. Another executive of a well-known provider pointed out that, similar to any industry, sourcing advisors need to continually innovate, and as the best advisors help their clients to build their internal sourcing capabilities, they are able to build on this internal expertise to help take their clients to the next level of strategy. A third panelist underscored this, pointing out that with a strong advisor, the probability of a deal coming to fruition was greatly increased.

The bottom line is that a smart client should select its sourcing advisor not only by the reputation of the advisory firm, but by the proven ability of the individual advisors who will be guiding them on the path to transformation.

Make the End of Your Current Contract the Beginning of a Better One

By Roger Sparks, Partner & Managing Director, TPI EMEA;
and Bob Mathers, Principal Consultant, Compass

Editors note: On Jan. 4, the parent company of TPI, Information Services Group Inc., acquired Compass, the premier independent global provider of business and information technology benchmarking, performance improvement, data and analytics services. This TPI Top 5 was co-authored by one of our new Compass colleagues. 

The end of an outsourcing contract term is considered an ideal time to drive improvements in rates and services. But many clients go into a renegotiation under-prepared and overly confident, believing they have more leverage than they actually do. The result is a missed opportunity to address problems and strengthen the relationship.

Here are the TPI Top Five keys to optimizing your end-of-contract review:

1.  Baseline existing operations. Conduct a quantifiable, fact-based analysis of the existing environment. Include all IT services – outsourced as well as internally delivered. Understand existing costs, prices, and service levels in the context of market standards. Identify where costs are competitive and where gaps exist, and use this knowledge to inform decisions on how services might be expanded, consolidated, repatriated, or re-sourced to multiple service providers. If prices are competitive, shift the focus to governance issues, facilitating innovation, or improving process efficiency.

2.  Be specific. Following the baseline, define your objectives and expectations for improvement. While kicking out the incumbent may be too expensive and risky and is often a last resort, identifying one service tower to rebid or repatriate could be feasible. Don’t be vague and expect the service provider to be “creative,” but don’t dictate how the service provider delivers. Rather, outline a framework within which the provider team can work. 

3.  Get boardroom support. You need the backing and support of senior management to be successful. This won’t happen on its own. Show that the sourcing strategy addresses constantly evolving business requirements and is delivering on strategic requirements. Define the potential risks and benefits of various operational scenarios, and outline options that best align with business needs.

4.  Walk the talk. Evaluate sourcing alternatives in the context of business strategy, and be willing to pursue those alternatives if necessary to support that strategy. Don’t go to RFP simply to drive down service provider prices. When evaluating the value propositions of prospective vendors, ensure a level playing field. This enables a more effective review and demonstrates your commitment to change, motivating the incumbent to improve the status quo.

5.  Look inward. Don’t put the onus of improvement solely on the service provider. Assess your internal operations and processes to identify how you can help leverage efficiencies and economies of scale.  Are custom requirements necessary across different business units? Do you really need 20 flavors? You will likely discover that vanilla will suffice in most cases. This helps enable the “commoditization” of standardized services, which, combined with appropriately tensioned pricing mechanisms, can drive significantly lower unit costs and more effective demand management.

To negotiate your most advantageous contract you have to come into the process knowing where you stand and where you ultimately need to go. The experts at TPI and Compass can help you meet your outsourcing objectives through industry experience, our extensive contract databases, and specialized knowledge of your industry and the associated service provider landscape.

Contact Roger Sparks, TPI, or Bob Mathers, Compass, for more information.

Sourcing Market Falls Short of 2009 Activity, Grows From Previous Quarter - TPI Index

by John Keppel, Partner and President-Information Services & Chief Marketing Officer, TPI

Today’s TPI Index, which examines fourth quarter and full year sourcing market performance, indicates that market activity did not meet the level of 2009 despite growth in the fourth quarter. Total contract value (TCV) for the market was about $22 billion, down 30 percent compared to 2009.

The Index also found clients steadily shifted toward smaller contract awards and multisourcing over the last decade – increasing from 30 to 53 percent during that period. We believe this took place as they grew disillusioned with the effectiveness of traditional single-source arrangements and realized that they could customize their sourcing solutions to leverage the skills of the best in each market.

While ITO continued to drive overall market activity, its TCV of $19 billion was down 19 percent year-over-year. Application Development & Management (ADM) contracts with Infrastructure included nearly doubled in value. Financial Services returned to its pre-recession TCV of $25 billion, with Banking, the largest subsector, turning in its best performance ever.

Restructuring activity – defined as contracts that were renewed, renegotiated or restructured –accounted for one-third of the overall market in 2010, while new-scope contracts declined 25 percent for the year.

We will share specific insights on market activity in Europe, the Middle East and Africa (EMEA) with the release of the 4Q10 EMEA TPI Index on January 24^th. The full TPI Index presentation can be found below.

4th Quarter 2010 TPI Index Presentation

View more presentations from TPI.