Global Information Technology Sourcing Night Watch or Company

Global Information Technology Sourcing “Night Watch” or “Company of Captain Frans Banning Cocq and Lieutenant Willem van Ruytenhurch”, by Rembrandt van Rijn (1606 -1669) – rijksmuseum 1

Global Information Technology Sourcing Mary C. Lacity Professor of IS University of Missouri-St. Louis Leslie Willcocks David Feeny Thomas Kern Joseph Rottman Rudy Hirschheim 2

Readings Cullen, S. , Seddon, P. , and Willcocks, “Managing Outsourcing: The Life Cycle Imperative, ” MIS Quarterly Executive, March 2005, pp. 229 -246 Rottman, J. , and Lacity, M. , "Proven Practices for IT Offshore Outsourcing, " Cutter Consortium, Vol. 5, 12, 2004, pp. 1 -27. Lacity, M. , "Twenty Customer and Supplier Lessons on IT Sourcing, " Cutter Consortium, Vol. 3, No. 3, pp. 1 -23, 2002. 3

“Sorry, the Board is outsourcing your job to guy in India who’ll be CEO for a 10 th of your salary. ” 4

Session Objectives Understand Different Sourcing Models: Staff Augmentation (Primarily Domestic) Fee-for-service (Domestic & Offshore) Joint ventures (Domestic & Offshore) Captive centers (Offshore) BOT (Offshore) Understand the Outsourcing Life Cycle (Company Perspective) Architect/Engage/Operate/Regenerate Understand 4 phases of an IT sourcing markets (Market Perspective) (Hype, Cost Focus, Quality Focus, Value-Added Focus) 5 The proven practices for domestic and offshore IT outsourcing

Session Objectives The proven practices for domestic and offshore IT outsourcing 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Treat IT as a Portfolio (Selective Sourcing) Identify Core Capabilities for Insourcing Best source non core capabilities Consider Time & Material contracts when business or technical requirements are certain Consider exchange-based contracts for stable, non-core activities requiring customization Consider netsourcing for highly standardized, non-core activities Consider customer-supplier joint ventures only if there is a proven market Ensure all layers of the service stack are adequately provided Compare RFP to internal bids Involve senior management and IT management in sourcing decisions Detail contracts Keep contracts short enough to retain relevancy but long enough for supplier to recoup Put core capabilities in place to protect the customer interests as well as foster supplier success Embrace the dynamics of the relationship Consider incremental outsourcing to develop expertise with outsourcing (learning curve) Hire help Covered in Presentation Covered in Reading 6 Lacity, M. , "Twenty Customer and Supplier Lessons on IT Sourcing, " Cutter Consortium, Vol. 3, No. 3, pp. 1 -23, 2002.

Session Objectives The proven practices for domestic and offshore IT outsourcing 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. Escalate the strategic importance of new sourcing options after conquering the learning curve Select an offshore sourcing destination based on business objectives Select an offshore sourcing model that balances costs and risks Create a centralized program management office to consolidate management Hire an intermediary consulting firm to serve as a broker and guide Select suppliers by considering 12 supplier capabilities Use pilot projects to mitigate business risks Give customers a choice of sourcing location to mitigate business risks Hire a legal expert to mitigate legal risks Openly communicate the sourcing strategy to all stakeholders to mitigate political risks Use secure information links or redundant lines to mitigate infrastructure risks Use fixed-priced contracts to mitigate workforce risks Design effective organizational interfaces Elevate your own organization’s CMM certification to close the process gap between you and your supplier Bring in a CMM expert with no domain expertise to flush out ambiguities in requirements Negotiate the CMM processes for which you will and will not pay Tactfully cross-examine, or replace, the supplier’s employees to overcome cultural communication barriers Require supplier to submit daily status reports Let the project team members meet face-to-face to foster camaraderie Consider innovative techniques, such as real-time dashboards, to improve workflow verification, synchronization, and management Manage bottlenecks to relieve the substantial time zone differences Consider both transaction and production costs to realistically calculate overall savings Size projects large enough to receive total cost savings Establish the ideal in-house/onsite/offshore ratio only after the relationship has stabilized Give offshore suppliers domain specific training to protect quality and lower development costs Overlap onshore presence to facilitate supplier-to-supplier training Develop meaningful career paths for subject matter experts, project managers, governance experts, and technical experts to help ensure quality Create balanced scorecard metrics 7 Rottman, J. , and Lacity, M. , "Proven Practices for IT Offshore Outsourcing, " Cutter Consortium, Vol. 5, 12, 2004, pp. 1 -27.

15 Years of Sourcing Research 1989 -2001: Outsourcing: n = 72 organizations: British Aerospace Du. Pont Inland Revenue Enron IRS South Australia 1989 -1996: Insourcing/Backsourcing: n = 18 organizations: Westchester County Occidental Petroleum Ralston Purina Vista Chemicals 1999 -2001: Application Service Provision: n =10 organizations: Corio EDS Host Analytics my. SAP Zland 2001 -2004: Business Process Outsourcing: n = 4 organizations: BAE Systems Lloyd’s of London 2004 -2005: Offshore Outsourcing: n = 39 organizations: Anonymous Case Studies: Primarily Fortune 500 companies & their offshore suppliers 2005: Global IT Workforce Development: Team of 20 researchers In - Progress: Corporate members of the Society for Information Management 8

Case Study Outcomes n = 116 sourcing decisions Outcome Percent of Decisions Yes, most expectations met 58% No, most expectations not met 22% Mixed Results; some major expectations met, other major expectations not met 9% Too early to determine 11% 9

Customer Rating of Supplier Performance Overall, suppliers are earning a “good” report card, but there are many opportunities for improvement. 10

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Major Domestic Sourcing Models “contract labor”, “consulting” “staff augmentation” A client buys in labor to supplement in- house capabilities, but the client manages the person, usually onsite at client site. “fee-for-service” or “exchange-based” or “traditional” outsourcing A client pays a fee to a supplier in exchange for the management and delivery of specified IT products or services. “joint ventures” “strategic partnerships” “A specific type of contract entered into by two or more parties in which each agrees to furnish a part of the capital and labor for a business enterprise, and by which each shares in some fixed proportion in profits and losses. ” -- American Heritage Dictionary 12

Domestic Sourcing Models Suited IT Activities Contract Type Location Of Supplier Staff Augmentation Core or non-core capabilities; Time & materials Customized products & services; Uncertain business or technical requirements Customer site Fee-for-Service Non-core capabilities Customized products or services Stable business & technical requirements Highly customized contract defining costs and services Mixed Joint Venture Customer & supplier have different but complementary capabilities; Significant market for venture's product & services Highly customized for operations, broadly defined for revenue sharing Mixed Netsourcing Non-core capabilities Standard products or services Stable business & technical requirements Generic contracts Not on customer site 13

Major Offshore Sourcing Models Captive Joint Venture Build Operate Transfer Fee-forservice Customer builds, owns, staff, and operates offshore facility Customer and offshore supplier share ownership in offshore operations Offshore supplier owns, builds, staffs, and operates the facility; ownership and staff transfer after completion Customer signs a contract for services in exchange for a fee Cost & Risk Highest High Medium Low Ability to Control Depends on ownership Medium Low Description Highest Examples 14

Size of Different IT Sourcing Markets in 2005 IT Market: Approximate Size: IT Outsourcing $250 billion Business Process Outsourcing $200 billion Offshore Outsourcing $30 -$50 billion Netsourcing/ Application Service Provision $1 to $4 billion Comprised by averaging various reports from Gartner, Yankee, and IDC 15

Figure 1: The Outsourcing Lifecycle Model: Phases and Building Blocks Source: Cullen, Seddon, Willcocks, “Managing Outsourcing: The Lifecycle Imperative, MIS Quarterly Executive, March 2005. 16

Source: Cullen, Seddon, Willcocks, “Managing Outsourcing: The Lifecycle Imperative, MIS Quarterly Executive, March 2005. Phase 1: Architect Building Block 1 Investigate Goal Veracity, not ideology Key Outputs Gather insight Test expectations Collect market intelligence Peer assessment Building Block 2 Target Goal Appropriate services identified Key Outputs Outsourcing model/mode Target services identification Profiles Building Block 3 Strategize Goal Informed, not speculative strategies Key Outputs Rollout Strategic “rules” Program Skills Communications strategy Business case rules & base case Feasibility & impact analysis Phase 2: Engage Building Block 4 Design Goal Well designed future state Key Outputs Blueprint Scorecard Building Block 5 Select Goal Best value for money Key Outputs Draft SLA Competitive stages Draft price model Evaluation team Draft contract Selection strategy & criteria Relationship Retained organization Contract mgmt function Bid package Bid facilitation Evaluation Due diligence Phase 3: Operate Building Block 6 Negotiate Goal Complete, efficient contract Building Block 7 Transition Goal Efficient mobilisation Key Outputs Building Block 8 Manage Goal Phase 4: Regenerate Building Block 9 Refresh Results Negotiation strategy Key Outputs Negotiation team Transition team Relationship Effective negotiations Managed staff Meetings Key Outputs Admin & records Next gen options Risk mgmt Outcomes & lessons Final plans Knowledge retention & transfer Transfers Governance structures setup Engineering Acceptance Goal Key Outputs Reporting Issues, variations & disputes Continuous improvement Evaluations Refreshed strategy Knowledge refresh Requirements refresh Options business case & strategy 17

Example of large fee-for-service outsourcing deal • In 1997, Du. Pont signed a series of 10 year contracts in 22 countries worth $4 billion with CSC and Andersen Consulting, making it the second largest IT outsourcing deal at the time. • 58% of the annual $690 million IT budget was outsourced. 18

Company Background Revenues Profits Number employees – – – 2004 2003 $27, 340 million $26, 996 million $1, 780 million $973 million 60, 000 81, 000 Founded in 1902 in Wilmington, Delaware Percentage of sales outside US: 53% 20 strategic business units: 70 countries Joint ventures >120 www. dupont. com 19

Du. Pont’s IS Department Prior to Outsourcing 1989 $1. 2 billion spent on IT per year: “He didn’t ask what value, only that the number was too big”. -- IS Global Planning Manager Scope of Information Systems • • Mainframe and Midrange Computers 800 Personal Computers 65, 000 Local Area Networks >500 Telephones 120, 000 Data Exchange Customer Links >2, 500 Business Information Systems >3, 000 E-mail messages per month 17, 000 20

IS Organizational Structure Prior to Outsourcing Centralized: Regional Centers: Decentralized: CIO Business Information Board, senior VPs 3, 000 people provided to the 20 SBUs: data and applications planning and security data center operations telecommunications Asia, Canada, Europe, Mexico, South America, and US. 1, 000 IS staff worked on SBU specific systems Reported to VP of IS within SBU 21

Major IS Cost Reduction Effort: 1991 -1996 • 1996 Reduced IS costs by 45% • $690 million spent per year on IT • The users were forced to accept cost reduction measures. 22

Consequences of IS Cost Cuts • No disruption in service • SBU managers applauded the IS group on their continuous cost reduction performance: • “While the people who use systems day to day don’t feel the same, no body ever complained at the senior VP level, they loved it. ” -- IS Global Planning Manager • IT assets and skills were not being renewed • IS infrastructure needed several hundred million dollars worth of investments. • The IS group was operating on borrowed time, and any data center disasters would potentially cripple Du. Pont. “The data centers were bandaided together. ” -- IS Global Planning Manager 23

Outsourcing Objectives • • • Avoid cost of renewal Move from 90% fixed costs to variable Further reduce costs (7% savings estimated) Faster flexible service Improved IS careers Initiated by CIO, supported by senior management. 14 Month Decision Process Phase 1: Architect 24

Evaluation: RFP Process • In February of 1996, Du. Pont created a “three foot” RFP. • The RFP contained no cost data, but provided details on every IS job and the services provided. • April of 1996, twelve companies were invited to respond, but no internal bid was invited. • Four companies responded: IBM, Phillips, CSC and AC. • In June of 1996, CSC and AC were selected as partners. Phase 2: Engage 25

Negotiations Due Diligence: • From August until December of 1996 • 100% of the infrastructure would be given to CSC • Applications would be divided based on competency. Contract Negotiations: • December of 1996 until the 2 nd quarter of 1997 • Negotiated 22 global contracts • All the RFPs requirements had to be translated into legal requirements. “The transformation was frustrating” -- Global Alliance Manager • Legal experts • Technical experts for service level agreements Phase 2: Engage 26

Negotiations: Contract Overview • 1997 $4 billion worth of contracts: * $3. 45 billion to CSC * $. 55 billion to AC • CSC • AC • Du. Pont -- 2600 people (64%) provide global infrastructure & applications -- 400 people (10%) provide chemical applications -- 60 people ( 1%) manage contract -- 1000 people (25%) provide business IT leadership 4060 Phase 2: Engage 27

Negotiations: Price Work Units Overall master service agreement, no billing occurs at this level • 22 country contracts • Pricing schedule that reflects cost of living • Local currency • 20 different billing units, including: M stand-alone desktops M desktops connected to a LAN M mainframe MIPS M gigabytes of storage M tape mounts M UNIX boxes M IS staff charges by job category. Phase 2: Engage 28

Negotiations: Contract Service Levels • Document current service levels as the baseline • Set goals of long-term service improvement, especially in the area of desktop computing. • 600 services defined at different locations world-wide. • For each location, determine standard, differentiated, or no service. • Ranked services by criticality • Escalation procedures, cash penalties for non-performance • Procedures defined for root cause analysis • In the spirit of a “partnership”, no cash penalties in the first year Phase 2: Engage 29

Transitions: Distribute Contract • Transforming a 30, 000 line legal contract into daily work practices “The lawyers delivered 10 boxes to the office and said, ‘that’s the contract’. The contract is 30, 000 lines long. It’s impossible to execute the relationships from this contract. ” --Global Alliance Manager • A 2 inch summary document was made of the contract • Still about 18 months worth of work to translate the contract into daily work practices. Global Alliance Manager called experts and asked, “why didn’t you tell us we weren’t even close to done? ” Phase 3: Operate 30

Transition Phase: Manage volume additions Demand Management (volume): • Demand used to be constrained by central IS “What we found is that everyone is using more IT than baseline. ” -- Global Alliance Manager • “In old times, each SBU bought from global leverage (i. e. , centralized IS group). There was lots of negotiating pressure to keep costs down. ” -Global Planning Manager Difficult to forecast demand, which means lost discounts Phase 3: Operate 31

Transition Phase: Monitor service/price Service Management (Quality): • Monitoring Service Levels • In actuality, 90% of the service lapses within the first 8 months were inherited from Du. Pont. Financial Management (Price): • Work on 150 major projects was halted due to lack of project pricing. • Bills have been incorrect by millions of dollars • Primarily cause: services have not been fully defined. – What should be included in mainframe billable units? – What should be included in a standard PBX upgrade cost? Analyst time? Installation? Wiring? Shipping and handling? Phase 3: Operate 32

Supplier Relationships Collaborating and Competing: • CSC and AC have separate contracts • Competitive bidding for additional services: CSC, AC or other parties • Structure of the deal requires the suppliers to cooperate: MUsers call one help desk run by CSC, but their calls are seamlessly forwarded to either a CSC or an AA person, depending on the question. MAC is developing some SAP applications that will have to run on the CSC infrastructure. Phase 3: Operate 33

Partnering in Practice • Act on the intent of the contract, rather than the exact content of the contract • Rely on continuity of experience • Additional negotiations not officially amended to contract • Implemented Problem Resolution Process • Joint Du. Pont-supplier teams are assigned responsibility for major areas. • Each management team told lower level IS employees to do the work, we’ll worry about price. • The operating principle of each team is to be fair, not to exploit any contract inefficiencies. Phase 3: Operate 34

New Work • Y 2 K Project M $400 million M Du. Pont decided to refresh technology rather than just merely Y 2 K comply M CSC and Andersen brought in 400 additional people world-wide M Du. Pont is extremely pleased with quantity and quality of skill access • SAP Project M Replaced legacy systems such as process control and supply change management M AC had SAP software expertise M CSC needed some investment in SAP skills M Du. Pont transferred additional 300 people from decentralized IS staff Phase 3: Operate 35

Assessment What is going well? • • • Access to Skills and Talent M CSC and AC provide 400 Y 2 k people M Du. Pont transferred an additional 300 decentralized IS staff to become SAP experts M Du. Pont bought back certain skills Skill upgrades M AC and CSC have reskilled talent M better and more rigorous development methodologies M function point productivity has improved Infrastructure Investment M CSC made major improvements worth millions of dollars to the infrastructure such as the 3 mainframe mega-data centers and tcom. M Now use mega center in Newark for 20 other non-Du. Pont clients. Phase 4: Regenerate 36

Assessment What is not going so well? • Desktop M Du. Pont retained a number of suppliers for different desktop functions M Users satisfaction was very low M User had multiple suppliers to call for procurement, add, changes, and deletions, maintenance, help desk M 3 month improvement process, Du. Pont handles systems integration M Users now have one-stop shopping External sales and joint revenues is “small potatoes” Phase 4: Regenerate 37

Final Thoughts • This is a commercial business transaction, not a partnership • Requires massive effort of hands on management everyday • Needed to retain about 60 more people for technical direction and strategy, such as, “should we do X, Y, or Z? ” • Constant negotiations and interpretations of the contract due to business and technology changes • Suppliers have to keep earning the business everyday!!! 38

Size of Market Customer Learning Outsourcing Learning Curve Phase 1: Hype & Fear Phase 4: Institutionalized Focus on Value-added Phase 3: Market Matures Richer Practices Emerge Focus on Quality Phase 2: Early Adopters Best & Worst Practices Emerge Focus on Costs Time 39

Proof of Customer Learning: Success Rates Over Time Year Contract Was Signed YES, NO, most MIXED results Total most expectation met expectation not met 1984 -1991 14 (48. 3%) 12 (41. 4%) 3 (10. 3%) 29 1992 to 1998 41 (73. 2%) 8 (14. 3%) 7 (12. 5%) 56 TOTAL # OF DECISIONS 55 (64. 7%) 20 (23. 5%) 10 (11. 8%) 85 CONTRACT DATE (n=85 outsourcing decisions with discernible outcomes) 40

Phase 1: Fear & Hype “Slaying the IS Dragon with Outsourcery” 1989 “Selling One’s Birthright, ” 1989 “Outsourcing: A Game for Losers, ” 1995 All artwork and web design © 2002 by Rebecca Kemp 41

Phase 2: Hard Learning From Early Adopters Selective Outsourcing not Total Outsourcing Detailed Contracts not Loose Contracts Joint Decisions not CEO or IT decision Internal & External Bids not Informal Bid Processes Escalating commitments not Instant long-term commitments Aligned Incentives & Win/Win not Us/Them Transaction & Production Costs not Production Costs 42

Phase 2: Selective Sourcing N = 102 decisions with discernible outcomes Decision Outcome: Success Failure Mixed Total # Results Decisions Total Outsourcing 11 (38%) 10 (35%) 8 (27%) 29 Total Insourcing 13 (76%) 4 (24%) 0 (0%) 17 Selective Outsourcing 43 (77%) 11 (20%) 2 (4%) 56 Total # Decisions 67 25 10 102 43

(n=85 outsourcing decisions with discernible outcomes) SUCCESS RATES OVER TIME Year Decision Was Made YES, NO, most MIXED results Total most expectations met expectations not met Selective Outsourcing 12 (63%) 7 (37%) 0 19 Total Outsourcing 2 (20%) 5 (50%) 3 (30%) 10 14 12 3 29 Selective Outsourcing 33 (87%) 3 (8%) 2 (5%) 38 Total Outsourcing 8 (44%) 5 (28%) 18 41 8 7 56 55 20 1984 -1991 Totals 1992 to Totals 1998 TOTAL NUMBER OF DECISIONS 44 85

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Phase 2: Hard Learning From Early Adopters IT Outsourcing 10 -15 Years Ago Selective Outsourcing not Total Outsourcing Detailed Contracts not Loose Contracts Joint Decisions not CEO or IT decision Internal & External Bids not Informal Bid Processes Escalating commitments not Instant long-term commitments Aligned Incentives & Win/Win not Us/Them Transaction & Production Costs not Production Costs 46

Phase 2: Detailed Contracts N = 87 outsourcing contracts with discernible outcomes Decision Outcome: Mixed Total # Results Decisions Success Failure Detailed Contract 45 (75%) 9 (15%) 6 (10%) 60 Mixed Contract 6 (55%) 1 (9%) 4 (36%) 11 Joint Venture 2 (40%) 3 (60%) 0 5 Loose/Vendor Contract 2 (18%) 9 (81%) 0 11 55 22 10 87 Total # Decisions 47

Phase 2: Hard Learning From Early Adopters IT Outsourcing 10 -15 Years Ago Selective Outsourcing not Total Outsourcing Detailed Contracts not Loose Contracts Joint Decisions not CEO or IT decision Internal & External Bids not Informal Bid Processes Escalating commitments not Instant long-term commitments Aligned Incentives & Win/Win not Us/Them Transaction & Production Costs not Production Costs 48

BEST PRACTICES ON DECISION PROCESS (n=102 sourcing decisions from case studies with discernible outcomes) Joint senior management & IT management decision Decision Sponsor • Joint Decision • Senior Level IT Managers Only • Senior Executives Only Percent “Successful” 76% 71% 43% Rationale: • Sourcing decisions typically required senior management’s larger business perspective and power to enforce decisions and IT managers’ understanding of technical requirements for their organizations. 49

Phase 2: Hard Learning From Early Adopters IT Outsourcing 10 -15 Years Ago Selective Outsourcing not Total Outsourcing Detailed Contracts not Loose Contracts Joint Decisions not CEO or IT decision Internal & External Bids not Informal Bid Processes Escalating commitments not Instant long-term commitments Aligned Incentives & Win/Win not Us/Them Transaction & Production Costs not Production Costs 50

BEST PRACTICES ON DECISION PROCESS (n=102 sourcing decisions from case studies with discernible outcomes) Invite both internal and external bids Sourcing Decision Process Percent Successful • Compared bids to a newly-prepared internal bid 83% • Compare 3 or more supplier bids (no internal bid) 75% • No formal bid process 55% • Compare 1 -2 supplier bids (no internal bid) 42% Rationale: • In the past, IT managers were not empowered to institute change. When senior executives empowered internal IT managers through the threat of outsourcing, internal IT managers often competed with external vendors by proposing to replicate their managerial practices. 51

Phase 2: Hard Learning From Early Adopters IT Outsourcing 10 -15 Years Ago Selective Outsourcing not Total Outsourcing Detailed Contracts not Loose Contracts Joint Decisions not CEO or IT decision Internal & External Bids not Informal Bid Processes Escalating commitments not Instant long-term commitments Aligned Incentives & Win/Win not Us/Them Transaction & Production Costs not Production Costs 52

SHORT CONTRACTS (n=85 outsourcing decisions with discernible outcomes) Shorter contracts were more successful than longer contracts. Contract Duration • Less than 4 years • Between 4 and 7 years • Greater than 7 years Percent Successful 88% 59% 38% Rationale: • • • As contracts matured, they became obsolete as technology/business conditions changed. Fixed price, long-term contracts did not adapt prices to technology’s high price/performance improvements. Short term contracts motivated vendor performance to ensure contract renewal. 53

Phase 2: Hard Learning From Early Adopters IT Outsourcing 10 -15 Years Ago Selective Outsourcing not Total Outsourcing Detailed Contracts not Loose Contracts Joint Decisions not CEO or IT decision Internal & External Bids not Informal Bid Processes Escalating commitments not Instant long-term commitments Aligned Incentives & Win/Win not Us/Them Transaction & Production Costs not Production Costs 54

Problems with early fixed-price, long-term, exchange Based relationships: Excess fees Fixed prices soon exceeded market prices Failure to define & thus improve service levels Inability to adapt to changes in business or technology Loss of power due to monopoly supplier condition Inability of customer to manage the relationship 55

Strategic Partnerships Example: Swiss Bank/Perot • • Announcement in 1996: Swiss Bank signed a 25 -year outsourcing deal with Perot Systems worth $6. 25 billion. The partners will sell client/server solutions to the banking industry (Schmerken and Goldman, 1996). Outcome in 1997: Swiss Bank reduced scope and value of contract to 10 years, $2. 5 billion. Example: Delta Airlines/AT&T • • Announcement in 1996: Delta Airlines and AT&T form Transquest to provide IT solutions to airline/travel industry. Deal is worth $2. 8 billion. 10 year contract. Outcome in 1997: Venture terminated; Delta brought IT back in-house 56

Strategic Partnerships Example: Xerox/EDS • Announced in 1996: The Xerox-EDS contract provides for future shared revenues for the development and sale of a global electronic document distribution service. Contract worth $3. 8 billion, 10 years. At the time of the contract signing, the President of EDS and CEO of Xerox announced: “We realized that each of our companies brought to the table specific best-inclass capabilities that enabled a level of performance that neither could achieve independently. This is a case of two technology companies enabling one another to achieve a shared vision for adding value for their customers. ” (reported on October 10, 1996 on WWW at http: //www. xerox. com /PR/NR 950321 -EDS. html) • Outcome in 1998: Contract completely renegotiated; reject strategic partnership model and enacted exchange-based relationship. Lesson: It requires 10 times initial investment to transform an in-house system to a commercially viable product. 57

Strategic Partnerships Example: South Australian Government and EDS • 9 year, $600 million (AUD) contract for economic development of South Australia • Strategic goal: pump $200 million into South Australian economy increase employment in IT sector provide international marketing channels housing starts and other multiplier effects • Outcome: EDS has exceeded yearly targets; moved 600 EDS employees to Adelaide established an IPC, IMC, SEC Lesson: advantage is effective for first adopter but difficult to duplicate 58

Phase 3: Market Matures Richer Practices Emerge CUSTOMER 9 Core Customer Capabilities Feeny & Willcocks, SMR, 1998 SUPPLIER 12 Core Supplier Capabilities: Feeny, Willcocks, Lacity, 2004 59

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9 IT capabilities customers need in-house to make outsourcing successful Business and IT Vision Business Systems Thinking Design of IT Architecture Relationship Contract Builder Facilitation IS Leadership; Informed Buying Contract Technical Monitoring Technical Architecture Doer Vendor Development Delivery of IS Service 61 Feeny & Willcocks, Sloan Management Review, Vol. 39, 3, 1998, pp. 9 -21.

12 capabilities suppliers need to make outsourcing successful Relationship Capabilities Planning & Contracting Organization Design Governance Business Management Delivery Capabilities Domain Expertise Customer Development Leadership; Program Management Process Re-engineering Behavior Management Technology Sourcing Exploitation Transformation Capabilities 62

Phase 4: Sources of Customer Learning: Institutional Isomorphism Consultants Conferences Benchmarks Kodak Effect Lawyers Powerful Parties Normative Influences Mimetic Influences ISOMORPHISM: Reasoned Adoption Of Best Practices Coercive Influences 63 Adapted from Di. Maggio & Powell, The New Institutionalism in Organizational Analysis, Chicago, 1991

Phase 4: Focus on Value-Added: Example of Enterprise Partnerships Xchanging Human Resource Services (XHRS) Xchanging Procurement Services (XPS) Xchanging Insurance Services (XIS) Xchanging Claims Services (XCS) Lacity, M. , Feeny, D. , and Willcocks, L. , European Management Journal, Vol. 22, 2, April, 2004, pp. 127 -140. Lacity, M. , Feeny, D. , and Willcocks, L MIS Quarterly Executive, Vol, 2, 2, 2003, pp. 86 -103. Lacity, M. , Willcocks, L. , and Feeny, D, Cutter Consortium, Vol. 5, 2, 2004, pp. 1 -25. 64 Feeny, David, Willcocks, Leslie, and Lacity, Mary, Business Process Outsourcing: The Promise of the Enterprise Partnership Model, Templeton Executive Briefing, Templeton College, Oxford University, ISBN 1 873955162, 2003, 44 pages.

Offshore Sourcing Phase I: Fear & Hype Phase II: 28 Lessons Learned 65

Phase 1: Fear & Hype “The Outsourcing Bogeyman, ” 2004 “Offshore Outsourcing Dragging Down Bonus Pay, ” 2003 “Software: Will Outsourcing Hurt America’s Supremacy? ” 2004 66

Offshore Challenges: How can we develop and implement a global sourcing portfolio? (6 practices) How can we mitigate risks? (6 practices) How can we effectively work with offshore suppliers? (9 practices) How can we ensure cost savings while protecting quality? 67 (7 practices)

Practices to develop and implement a global sourcing portfolio? Practice 1. Escalate the strategic importance of new sourcing options after conquering the learning curve Equally Important for Domestic & Offshore More Important for Offshore X 2. Select an offshore sourcing destination based on business objectives X 3. Select an offshore sourcing model that balances costs and risks 4. Create a centralized PMO X X 5. Hire intermediary consulting firm 6. Select suppliers by considering 12 supplier capabilities Previously covered in presentation Unique to Offshore X X To be covered in presentation Covered in reading 68

2. Select an offshore sourcing destination based on business objectives Sample Offshore Venue Comparison Source: Neo. IT 69 Better Location Criteria: Market expansion, leverage existing facilities, customer service

Practices to Mitigate Risks Practice Equally Important for Domestic & Offshore 7. Use pilot projects to mitigate business risks More Important for Offshore X 8. Give customers a choice to mitigate business risks X 9. Hire a legal expert to mitigate political risks X 10. Openly communicate sourcing strategy to mitigate political risks X 12. Use fixed price contracts to mitigate workforce risks X Previously covered in presentation Unique to Offshore To be covered in presentation Covered in reading 70

How can we mitigate risks? Legal Risks Political Risks Business Risks Workforce Risks Logistical Risks Social Risks Infrastructure Risks 71

Risk Category Sample Risks Equally Risky for Domestic & Offshore Backlash from external customers damages reputation Business More Risky for Offshore X No overall cost savings X Poor supplier capability, service, financial stability, cultural fit X Wrong types of activities outsourced X Inability to manage supplier relationship X Inefficient/Ineffective judicial system in offshore locale X Infringement of IP Rights Legal Risk Unique to Offshore X Export Restrictions X Inflexible labor laws X Difficulty obtaining visas X Changes in tax law erode savings Inflexible contracts Security/Privacy Breech X X X 72

Risk Category Sample Risks Equally Risky for Domestic & Offshore Backlash from internal IT staff Political Workforce Social Logistical Risk Unique to Offshore X Perceived as unpatriotic X Democrats threaten punishment X Political instability in offshore country X Unstable U. S. /offshore country relations X Supplier employee turnover/burnout X Inexperience supplier employees X Poor communication skills X Loss of in-house capability Infrastructure More Risky for Offshore Poor telecommunications X X Poor utilities Cultural Differences X X Holiday & Religious Calendar X Time Zone Challenges X Managing Remote Teams X 73

How can we mitigate risks? 7. Use pilot projects to mitigate business risks. Biotech launched 17 pilot projects: 4 Indian suppliers (2 large, 2 small) Staff augmentation (time & materials) and end-to-end (fixed price) Old (ERP) and new (wireless) technologies Re-platforming and systems development 20 person day to 800 (4 FTEs for 8 months) 74

How can we mitigate risks? 7. Use pilot projects to mitigate business risks. Ideal pilot size: according to Gartner Group is 10 -15 FTEs for 6 months according to Biotech 4 FTEs for 5 months according to Source. Quest – 2 man years; $50, 000 - $100, 000 "I am not sure our selection of projects told us as much as it could have. Bad project selection skews your results in both ways. If the pilot was too small, it led the teams to conclude the overhead is too large and we can't be successful, we won't have savings. We had other projects that were not complex that lead us to believe, offshore is wonderful, it's wildly successful. But we didn't really test the supplier's capabilities. Neither view is correct. "--Laura, Global Leadership Team member 75

How can we mitigate risks? 8. Give customers a choice to mitigate political risks Financial Services Company & Retailer: The Business Sponsor Chooses: Offshore: Low Costs Domestic: Lower risks 76

How can we mitigate risks? 10. Openly communicate the sourcing strategy to all stakeholders to avoid political risk. Biotech: Open communications Using offshore to replace domestic contract labor, not internal IT Sold as “Doing more with a flat IT budget” Financial Services: Closed communication to avoid panic when “simply testing the waters” IT staff panicked when 11 Indians showed up in cubicles CTO held town meeting, sold concept as meeting refinance boon No firings but no hires when natural attrition occurs From prior cases: Need bonus pay if asking internal IT to build their own guillotines 77

Practices to Effectively Work with Suppliers Equally Important for Domestic & Offshore Practice 13. Design the customer/supplier interfaces More Important for Offshore Unique to Offshore X 14. Elevate your own organization’s CMM certification X 15. Bring in CMM expert with no domain knowledge to flush out ambiguities X 16. Negotiate CMM documents X 17. Cross-examine, or replace, the supplier’s employees to overcome cultural communication barriers X 18. Require daily status reports X 19. Let project team members meet face to face X 20. Consider deal time dashboards X 21. Manage bottlenecks exacerbated by time zone differences X Previously covered in presentation To be covered in presentation Covered in reading 78

How can we effectively work with offshore suppliers? 13. Design the customer/supplier interfaces Retail & Industrial Equipment Manufacturing: Architects/ DBAs/etc. Offshore Supplier Delivery Team PMO Offshore Supplier Delivery Team Local Business Units Project Managers Onsite Supplier Engagement Manager Offshore Supplier Delivery 79 Team

How can we effectively work with offshore suppliers? 13. Design the customer/supplier interfaces Architects/ DBAs/etc. PMO Local Business Units Biotech: Onsite Supplier Project Managers Offshore Supplier Delivery Team Project Managers Offshore Supplier Delivery Team Onsite Supplier Project Managers Offshore Supplier Delivery Team Offshore Supplier Delivery 80 Team

How can we effectively work with offshore suppliers? 13. Design the customer/supplier interfaces Kaiser & Hawk, 2004 VP IS Relationship Manager Director Anchor Project Manager Anchor Team Lead Development Staff 81

Issues Dealing with CMM U. S. Participants’ Reservations with CMM Questionable Value/Cost: ”The overhead costs of documenting some of the projects exceeded the value of the deliverables. " – Pam, Global Team Leader member "You ask for one button to be moved and the supplier has to first do a twenty page impact analysis--we are paying for all this documentation we don't need. " – Project Manager “Mistakes upstream replicate downstream” “CMM Certification is no substitute for experience” 82

Lesson 14: Elevate your own organization’s CMM certification to close the process gap between you and your supplier Lesson 15: Bring in a CMM expert with no domain expertise to flush out ambiguities in requirements Lesson 16: Negotiate the CMM processes for which you will and will not pay 83

Practices to Ensure Cost Savings While Protecting Quality Equally Important for Domestic & Offshore Practice More Important for Offshore 22. Consider both transaction and production costs when calculating overall savings. X 23. Size projects large enough to receive total cost savings X Unique to Offshore 24. Do not establish the ideal inhouse/onsite/offshore ratio until supplier X 25. Give offshore suppliers domain specific training to protect quality X 26. Overlap onshore presence to facilitate supplier to supplier training. 27. Develop meaningful career paths for SMEs, project X X managers, governance experts to ensure quality 28. Create balanced scorecard metrics Previously covered in presentation X To be covered in presentation Covered in reading 84

How can we ensure cost savings while protecting quality? 22. Consider both transaction and production costs Transaction costs of offshore outsourcing: 15. 2 to 57% of contract value Transaction costs of domestic outsourcing: 4 to 10% of contract value Transaction costs include: Vendor selection & negotiation Transitioning work Layoff and retention Lost productivity due to cultural issues Managing the contract Studies done by Meta, Gartner, Renedis; Amrosio, J. , “Experts Reveal Hidden Costs of Offshore IT Outsourcing, ” CIO Magazine, April, 2003. 85

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How can we ensure cost savings while protecting quality? 23. Size projects large enough to receive total cost savings Only anecdotal evidence of size needed to ensure 15 to 20% overall cost savings: 80 to 100 FTES – Personal Experience of Research Practice Director, Gartner 87

How can we ensure cost savings while protecting quality? 24. Do not establish ideal in-house/onsite/offshore ratio until supplier relationship has matured 15% customer staff on site to serve as project managers 15% supplier staff on site to serve as liaisons and project managers 70% supplier staff offshore Nationwide had 50/50 ratio with Wipro until Relationship matured Biotech had supplier staff work in Biotech’s R&D Facilities for data access and updates 88

28: Create balanced metrics SUPPLIER MANAGEMENT OVERALL SUPPLIER PERFORMANCE % of supplier business % supplier of choice Utilization Rates COMPARATIVE COSTS Onsite/offshore Cost per function point VISION & STRATEGY % Unfavorable Turnover % Delivered On-time Cooperation Satisfaction Score COMPARATIVE EFFICIENCY QUALITY OF WORK Error rates Quality of code scores Employee-to-supplier work ratio 89

Session Objectives Understand Different Sourcing Models: Staff Augmentation (Primarily Domestic) Fee-for-service (Domestic & Offshore) Joint ventures (Domestic & Offshore) Captive centers (Offshore) BOT (Offshore) Understand the Outsourcing Life Cycle (Company Perspective) Architect/Engage/Operate/Regenerate Understand 4 phases of an IT sourcing markets (Market Perspective) (Hype, Cost Focus, Quality Focus, Value-Added Focus) 90 The proven practices for domestic and offshore IT outsourcing

Session Objectives The proven practices for domestic and offshore IT outsourcing 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Treat IT as a Portfolio (Selective Sourcing) Identify Core Capabilities for Insourcing Best source non core capabilities Consider Time & Material contracts when business or technical requirements are certain Consider exchange-based contracts for stable, non-core activities requiring customization Consider netsourcing for highly standardized, non-core activities Consider customer-supplier joint ventures only if there is a proven market Ensure all layers of the service stack are adequately provided Compare RFP to internal bids Involve senior management and IT management in sourcing decisions Detail contracts Keep contracts short enough to retain relevancy but long enough for supplier to recoup Put core capabilities in place to protect the customer interests as well as foster supplier success Embrace the dynamics of the relationship Consider incremental outsourcing to develop expertise with outsourcing (learning curve) Hire help Covered in Presentation Covered in Reading 91 Lacity, M. , "Twenty Customer and Supplier Lessons on IT Sourcing, " Cutter Consortium, Vol. 3, No. 3, pp. 1 -23, 2002.

Session Objectives The proven practices for domestic and offshore IT outsourcing 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. Escalate the strategic importance of new sourcing options after conquering the learning curve Select an offshore sourcing destination based on business objectives Select an offshore sourcing model that balances costs and risks Create a centralized program management office to consolidate management Hire an intermediary consulting firm to serve as a broker and guide Select suppliers by considering 12 supplier capabilities Use pilot projects to mitigate business risks Give customers a choice of sourcing location to mitigate business risks Hire a legal expert to mitigate legal risks Openly communicate the sourcing strategy to all stakeholders to mitigate political risks Use secure information links or redundant lines to mitigate infrastructure risks Use fixed-priced contracts to mitigate workforce risks Design effective organizational interfaces Elevate your own organization’s CMM certification to close the process gap between you and your supplier Bring in a CMM expert with no domain expertise to flush out ambiguities in requirements Negotiate the CMM processes for which you will and will not pay Tactfully cross-examine, or replace, the supplier’s employees to overcome cultural communication barriers Require supplier to submit daily status reports Let the project team members meet face-to-face to foster camaraderie Consider innovative techniques, such as real-time dashboards, to improve workflow verification, synchronization, and management Manage bottlenecks to relieve the substantial time zone differences Consider both transaction and production costs to realistically calculate overall savings Size projects large enough to receive total cost savings Establish the ideal in-house/onsite/offshore ratio only after the relationship has stabilized Give offshore suppliers domain specific training to protect quality and lower development costs Overlap onshore presence to facilitate supplier-to-supplier training Develop meaningful career paths for subject matter experts, project managers, governance experts, and technical experts to help ensure quality Create balanced scorecard metrics 92 Rottman, J. , and Lacity, M. , "Proven Practices for IT Offshore Outsourcing, " Cutter Consortium, Vol. 5, 12, 2004, pp. 1 -27.