Emerging Deal Constructs – Why, How and What?

© 2014 Information Services Group, Inc. All Rights Reserved. Proprietary and Confidential. No part of this document may be reproduced in any form or by any electronic or mechanical means,

including information storage and retrieval devices or systems, without prior written permission from Information Services Group, Inc.

Dinesh Goel & Kapil Puri

08 Oct 2014

SIC 2014

Emerging Deal Constructs – Why, How and What?

© 2014 Information Services Group, Inc. All Rights Reserved 2

Content

Emerging Deal Constructs – Why, How and What?

1. Deal characteristics witnessing emerging constructs

2. “Established” Deal Constructs

3. “Emerging” Deal Constructs

4. Rationale behind Emerging Constructs

5. Critical Success Factors

6. Evolution in Near Future

7. Implications for

► Clients

► Service Providers

► Sourcing Advisors

8. Case Studies


Emerging Constructs


Changing Customer Expectations

Rather than prescribing the service delivery parameters and benchmarks, Clients have started expecting the Service Providers to propose avenues and mechanisms for value creation.

Deliver to the specifications

… Plus, Bring Ideas … Plus, Innovate … Plus, Deliver Business Impact

First Generation Second Generation Third Generation Emerging Expectations

Cu

sto

mer

Exp

ecta

tio

ns

Time

Reduce Operating Costs

Improve Productivity

Transform Business Operations

Redefine the Enterprise

True Strategic Partnership

The Broader Domain of Innovation

2014 2005 1990


Emerging Deal Constructs – Evolving Key Elements

Key elements of sourcing deals are evolving to next maturity level in an increasingly dynamic sourcing industry.

Desired pricing and commercial models

Commitment to Service delivery

Risk management

Contract and Commercial Construct

Solution and Services sourced

Span of control for Service Provider

Desired end to end accountability

Scope of Work

Process methodology

Descriptiveness/Level of detail

Speed of execution

Key stakeholders

Transaction Process


Price Access to talent Driven by Service Provider economics Service levels – measures for direct “in scope” work

Contractual constructs Control Flexibility Governance

‘Established’ Deal Constructs

Established Constructs’ of these characteristics have been around for years.

Established


Typically non-core and frequently fragmented

Natural candidates - economies of scale/non customer facing

Relatively low-value (bottom of the value pyramid)

Scope of Work

Prescriptive and tactical (RFP driven)

Cost and compliance focused

Individual function driven (IT, Procurement, Finance, etc.)

Time consuming

Transaction Process


Evolving Pricing Models

Output and Outcome based

Me

asu

rab

le B

usi

ne

ss O

utc

om

es

Sourcing Maturity

Selective Outcome Based Largely input based with selective outcome

based pricing Pricing linked to input with some outcome

based incentives Higher risk/tighter governance Extended team models E.g.: R&D outsourcing

Outcome Based Bundled Scope (Infra, Apps, BPO) Transformation led Business Outcome Linked Fees Gain Sharing (Revenue / Cost Savings) E.g. Reduced customer churn rate (Telco)

Input Based Piece meal and flexible Resourcing / Staffing centric Headcount linked Fees Client Managed E.g. No. of FTEs by skills, Resource Rate Cards

Output Based Modular or Bundled scope Managed Services SLA linked fees Service Credits/Earn backs E.g. Server Downtime, Support TAT, FPs, Test

Cases

Low High

Low

H

igh


‘Emerging’ Deal Constructs

Emerging constructs to the key deal attributes are slowly but surely gaining ground

Emerging Price

Driven by potential for value creation Promote

Innovation Agility (capacity and tech shift) Leveraging capability (provider/market solutions/expertise)

Complex construct Investments expected (exit more complex)


Scope of Work

Transaction Process

• Pricing model linked with Business Projections • Truly scalable model with least minimum commitment – supplier carries the risk and rewards

of low and high volumes respectively

• Supplier measured/rewarded on supporting • Business growth or de-growth • Scope/function Transformation

• Resource Units not linked to underlying infrastructure or technology units (consumption of IT resources or efficiency not the driver)

• Ability to assume exposure • Rebadged staff

• Novated vendor contracts/solutions • Significant investments • Unpredictability of business volumes/revenue




Emerging Price





Not always non-core

Not always just high-volume (blend of work for better control)

Moving up the value pyramid

Scope of Work

Transaction Process

• Entire function or process • Complex R&D / Engineering • Analytics (DW/BI/new age tools) • Cloud based migrations/solutions • Industry specific solutions • Service Integration (SIAM)




Emerging Price





Not always non-core

Not always just high-volume (blend of work for better control)

Moving up the value pyramid

Scope of Work

Objectives and not specs driven Strategic as opposed to tactical (Significant CEOs involvement) Solution and capability focused, not just the lowest cost and max compliant Allows solution diversity showcase Partners cultural and ethos match of greater relevance (CEO to CEO handshake must)

Transaction Process

Request for Solutions approach to align the objective of finding the partner with the best solution and capability that fits the cultural ethos


‘Established’ vs ‘Emerging’

Slow but sure shift occurring with the next gen of sourcing.

Established Emerging • Price • Access to talent • Driven by Service Provider economics

• Service levels – measures for direct “in scope” work

• Contractual constructs • Control • Flexibility • Governance

• Price • Driven by potential for value creation • Promote

• Innovation • Agility (capacity and tech shift) • Leveraging capability (provider/market

solutions/expertise) • Complex construct

• Investments expected (exit more complex)


• Not always non-core • Not always just high-volume (blend of work for better

control) • Moving up the value pyramid

• Typically non-core and frequently fragmented • Natural candidates - economies of scale/non

customer facing • Relatively low-value (bottom of the value

pyramid))

Scope of Work

• Prescriptive and tactical (RFP driven) • Cost and compliance focused • Individual function driven (IT, Procurement,

Finance, etc.) • Time consuming

• Objectives and not specs driven • Strategic as opposed to tactical (Significant CEO

involvement) • Solution and capability focused, not just the lowest

cost and max compliant • Allows solution diversity showcase • Partners cultural and ethos match of greater

relevance (CEO to CEO handshake must)

Transaction Process


Drivers and Critical Success Factors


Rationale for ‘Emerging Constructs’

Dynamic business environment, rapid pace of change in technology and supplier capabilities apart from industry maturity amongst key drivers.

► Enhanced supplier capabilities – domain and tech

► Fueled by M&A/Alliances

►Much greater competitive intensity to win

Supplier Capabilities

► Helping re-define the new ways of sourcing: Cloud Mobility Analytics

Technology evolution

► New markets

► Faster time to market

► Uncertainty

New Business Imperatives

► Higher level of maturity to move the dial forward

► Greater willingness to try new constructs

Industry Maturity

► Potential for significant impact leveraging suppliers –more than ever

► Increasing dependence on suppliers as Partners for business success

Supplier Dependence


Critical Success Factors

Relatively easy to define but difficult to sustain these relationships without the attention to following critical success factors.

► High level of trust in relationship

► Transparency - Pro-active sharing of information

► Joint discussion/ownership of issues/change

Utmost Trust & Transparency

► Strong Governance structure that allows

Focus on innovation

Measurement of progress/value creation

Direction and decisions

Enable Strong Governance

► Ensure Service Providers have ownership and control over

Scope of work they are expected to manage to maximize value creation

Required to manage risks

Enable Control and Ownership

► All parties must keep their focus on potential for value creation in true spirit

► Focus not on just the costs, though cost has to be reasonable Focus on Value


Innovation In Outsourcing: Unmet Expectations

“Innovation”

► Has been a gray concept in most outsourced relationships

► Generally has not clearly defined or understood by the parties

► Has been something most Clients believe they should receive through the relationship

► Has been promised by most Service Providers as part of the sales process

The Innovation Gap – Missed Expectations

► Misalignment upfront

In general, outsourcing Clients have been disappointed at the level of Innovation delivered through their relationships.

Client

Although Service Provider proposals make claims of Innovation and best practices, we have not seen anything — or benefited from anything.

We always seem to have to force the discussion with our Service Provider.

It seems as if we have to give more scope to get Innovation.

It is not fair or smart to begin gainsharing from our starting point — it should be based on true exceptional performance.

Service Providers

Companies say they want Innovation, but their actions and behaviors indicate cost reduction, cost reduction and cost reduction.

Our solution brought a tremendous amount of transformation from their current state.

Companies do not want to pay for Innovation; they only want the benefits.

Companies reject all of our ideas for Innovation.

Common Perceptions


Approach to Achieving Innovation through Outsourcing

Business drivers, investment, organizational alignment and disciplined execution must all exist for Innovation to occur.

New ISG Recommended Approach

Expectations

Governance

Investments

► Educate Client on Innovation in Context of Outsourcing Service Delivery

► Innovation MVD; Executive Alignment

► Evaluation Criteria - Innovation

► Define Empirical Measures of Value; Structured Review Process

► Innovation Team as Part of Governance Operating Model; Jointly Funded

► Service Provider Quantifies Innovation As Part of Solution

► When Applicable – Innovation Fund With Spectrum of Investment Models, Transparency, Business Case Process

► The Value Added Schedule

► Disputes whether innovation initiatives were in the price

► Largely Oriented Towards Idea Sharing, Networking Forums, Access To Service Provider R&D Labs

► No Formalized Governance

► Episodic Topic Of Discussion; Highly Subjective

► Constrained To The Domain Of The Services “In Scope” Rather Than Focused On Core Business Operations

► Joint Venture / Go-To- Market Arrangements With Client Platform Or Industry Expertise


Implications for Outsourcing Community and

Look ahead


Implications for Buyers

Here are the key implications for Buyers/Clients in this new paradigm.

► Significant on the Client side for implementing such a strategy

►Well planned and thought out measures required

Change and Communication

► Implement structured governance and risk management processes

► CXOs representation in governance structure

► High level of trust and transparency required with the Service Provider as a partner

Governance and Risk

Management

► Right sponsor and team members to handle the sourcing process cross functional – Finance, IT, HR etc.

► Representation and alignment with senior business leadership

Sourcing Process

► Ensure solid sourcing strategy vis-à-vis business objectives/plans

► Clarity on strategy and market validation required

Sourcing Strategy


Implications for Service Providers

Here are the key implications for Service Providers in this new paradigm.

► Track record of delivering in similar deals

► Ability to “walk the talk” Track Record

►Matured discipline around governance structure/processes

► Ability to pro-actively develop business case/recommendations for decisions

►Manage risks actively as a true partner

Governance and Risk

Management

► Pick your battles – avoid “everything to everyone”

► Solution and capability focused

►Willingness to assume risk with reasonable reward

Selection of deals

► Nuances of Sourcing process are different

► Re-align teams and skills to succeed in winning deals

Sourcing Process

► True to end to end capabilities in select areas

Engineering Services Services


Implications for Sourcing Advisors

Here are the key implications from our vantage point…

Bring greater level of domain (industry and function) expertise to bear while advising Clients. 1

Ability to help establish link between business outcomes, metrics and capabilities/solutions – develop strong IP in this area that can be leveraged.

2

Ability to construct appropriate risk-reward pricing models considering multiple alternatives and “what if” scenarios.

3

Craft governance models sophisticated enough and suitable for such true partnerships than traditional sourcing deals.

4

Much more interactive, iterative and collaborative approach to the sourcing process. 5

Work towards the expectation of crashing timeframes in the contracting process, without postponing critical issues to post deal governance.

6


‘Emerging Constructs’ – Crystal Ball

We expect this trend to gather steam in the coming 24-36 months.

Increased Prevalence of RFS Approach

► Collaboration in developing mutually acceptable end state, will continue to rise. Expect an increase in trend for RFS

► More and more Clients will look to shorten their sourcing timelines

Service Integration, End-End Sourcing

► Need for Service Integration and Governance services will grow significantly

► Greater sourcing of end-to-end scope with the partners

► Technology led innovation will become increasingly important

► Contract constructs and metrics for new age deals will mature

Transformation led Sourcing Deals

► Transformation led sourcing deals will show growth (especially in new age industries/business models)

► Greater reliance on partner(s) for implementing contemporary IT solutions and providing agility

► Businesses with hyper growth potential or rapid technology shift more amenable

Next 24-36 months


Case Studies discussion


Thank you!

www.isg-one.com

Information Services Group is a leading technology insights, market intelligence and advisory services company, serving more than 500 Clients around the world to help them achieve operational excellence. ISG supports private and public sector organizations to transform and optimize their operational environments through research, benchmarking, consulting and managed services, with a focus on information technology, business process transformation, program management services and enterprise resource planning. Clients look to ISG for unique insights and innovative solutions for leveraging technology, the deepest data source in the industry, and more than five decades of experience of global leadership in information and advisory services. Based in Stamford, Conn., the company has more than 800 employees and operates in 21 countries.

knowledge powering results®

http://www.isg-one.com/

http://www.isg-one.com/connect/

Emerging Deal Constructs – Why, How and What?

Technology

Transcript of Emerging Deal Constructs – Why, How and What?