The Capabilities Your Suppliers Need to Make Outsourcing Work Mary C. Lacity Professor of IS Leslie...

The Capabilities Your Suppliers Need to Make Outsourcing Work

Mary C. LacityProfessor of IS

Leslie Willcocks David Feeny

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95+ case studies, 140 decisions in US, Europe, and Australia, over 500 interviews IT Outsourcing: n= 98 decisions

British Aerospace DuPont Inland Revenue Enron IRS Rigg’s Bank South Australia Swiss Bank

Insourcing/Backsourcing: n= 18 decisionsContinental Baking Brown Group Westchester County Occidental Petroleum Ralston Purina Vista Chemicals MEMC

Application Service Provision: n=10 decisions Corio EDS Host Analytics mySAP Zland

Business Process Outsourcing: n = 4 decisions BAE Systems Lloyd’s of London

Offshore Outsourcing: n = 10 customer-supplier pairs in progress Anonymous Case Studies by Participant Request: Fortune 500 companies

15 Years of Sourcing Research:

copyright Feeny, Lacity, Willcocks, 2004

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Where are you on the learning curve?

Phase 1:Hype & Fear

Phase 2:Early AdoptersBest & Worst Practices EmergeFocus on Costs

Phase 3: Market MaturesRicher Practices EmergeFocus on Quality

Phase 4:InstitutionalizedFocus on Value-added

Siz

e of

Mar

ket

Cus

tom

er L

earn

ing

Time

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Phase 1: Fear & Hype

All artwork and web design © 2002 by Rebecca Kemp

“Slaying the IS Dragon with Outsourcery” 1989“Selling One’s Birthright,” 1989“Outsourcing: A Game for Losers,” 1995

“The Outsourcing Bogeyman,” 2004

“Offshore Outsourcing Dragging Down Bonus Pay,” 2003

“Software:Will Outsourcing Hurt America’s Supremacy?” 2004

http://www.wildlife-fantasy.com/

http://www.time.com/time/magazine/archive/covers/0,16641,1101040301,00.html


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Immature Customers

Assess supplier resources rather than capabilities

Have unrealistic expectations

Focus too much on baseline costs & services


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Mature Customers

Understand their objectives and how outsourcing fits into overall strategy

Assess the supplier’s delivery, transformation, and relationship competencies vis-à-vis objectives

Assess own capability to manage the supplier

Commit necessary customer resources and management to make outsourcing work.

Focus on overall value-added: fair market price, good service, adaptability, good relationship, possible revenue generation


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CUSTOMER SUPPLIER

9 Core Customer CapabilitiesFeeny & Willcocks, SMR,1998

12 Core Supplier Capabilities:Feeny, Lacity, Willcocks 2004

Phase 3 & 4: Markets MatureRicher Practices Emerge

Focus on Quality, Transformation & Value-Added

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Business and IT Vision

Delivery of IS ServiceDesign of IT

Architecture

Business SystemsThinking

ContractFacilitation

TechnicalArchitecture

ContractMonitoring

VendorDevelopment

TechnicalDoer

RelationshipBuilder IS

Leadership;InformedBuying

9 IT Capabilities Customers NeedIn-House to make IT Outsourcing Successful

Feeny & Willcocks, Sloan Management Review, Vol. 39, 3, 1998, pp. 9-21.


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RESOURCES

CAPABILITIES

COMPETENCIES

12 Capabilities to evaluate in your supplier


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Relationship Competency

TransformationCompetency

DeliveryCompetency

Planning &Contracting

Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program

Management

12 Capabilities to evaluate in your supplier

ProcessRe-engineering

TechnologyExploitationSourcing

BusinessManagement

DomainExpertise


11

Delivery

Delivery Competency is based on capabilities which determine the extent

to which a supplier can respond to a customer’s day-to-day operational services

minimum requirement that customers seek in all suppliers

includes supplier’s domain expertise, business management capabilities, etc.

a supplier’s delivery competency--although crucial for success--may not serve to meaningfully distinguish suppliers.


12

Transformation Competency is based on capabilities which determine the extent to which

a supplier is equipped to delivery radically improved services in terms of cost and quality

vitally important if the customer is seeking radical transformation of its back office from the outsourcing relationship.

includes the supplier's capabilities to exploit technology, redesign business processes, and empower staff to a customer-focused culture.

transformation capabilities must be exploited for the customer's benefit, not just to increase the supplier's margin.

Transformation


13

Relationship Competency is based on capabilities which determine the extent to which a supplier is willing and able to align with the

customer's needs and goals

The relationship competency uses innovative plans, aligned contracts, and governance structures and processes to ensure the promise of win/win relationships.

This is the most difficult competency to find in a partner.

Size of deal important factor

Relationship


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Domain Expertise:the capability to apply and retain

sufficient professional knowledge of the process domain to meet user

requirements

Customer wants the supplier to manage transitioned staff to eliminate poor performers, adjust capacity, leverage untapped potential of best people

For body-shop outsourcing in which the customer hires suppliers for specific tasks, the customer should retain most of the domain expertise.

For outsourcing relationships where the supplier has more responsibility, it may be more economical and effective for the supplier to employ most of the domain experts.


Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program

Management ProcessRe-engineering


BusinessManagement

DomainExpertise

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Business Management:the capability to consistently deliver against both customer service level

agreements and suppliers’ own required business plans

Savvy customers know that it is in their best interest to protect and ensure the supplier's financial health

Savvy suppliers are upfront about their margin requirements

Supplier

Winner's Curse

12 Cases

3 Cases

No Curse 19 Cases

51 Cases

Negative Outcome

Positive Outcome

Customer


Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program



BusinessManagement

DomainExpertise


16

Behavior Management:the capability to motivate and

manage people to deliver service with a “front office” mindset

How do suppliers orient new employees to their culture?

How do suppliers reward and incent desired behaviors?

S2Tech, an Indian offshore supplier, hires only Indians with a minimum six years experience living in the U.S. & sets their hours as 1:00 to 10:00 to minimize time zone effects


Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program



BusinessManagement

DomainExpertise


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Sourcing:the capability to access whatever resources are required to deliver

service targets

Customer wants to benefit from supplier’s access to:

economies of scale lower unit labor costs from supplier’s offshore operations scarce professional skills superior infrastructure


Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program



BusinessManagement

DomainExpertise

18

Process Improvement:the capability to design and implement changes to services processes to meet

improvement targets

Six Sigma, CMM, ISO certifications are only indicants of process improvement capability

Customers complain certifications benefit suppliers more than customers

Indian suppliers were all at level4 or 5

U.S. customers were all at level2 or below


Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program



BusinessManagement

DomainExpertise


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Questionable Value/Cost:

"the overhead costs of documenting some of the projects exceeded the value of the deliverables." – Pam, Global Team Leader member, Biotech

"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, Financial Services

“Mistakes upstream replicate downstream” -- Retail

“Certification is no substitute for experience” -- Everybody

Process Improvement:the capability to design and implement changes to services processes to meet

improvement targets


Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program



BusinessManagement

DomainExpertise


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Process CompetencyGoal is to redesign business processes to reduce costs and to improve quality through Six Sigma quality improvementdiscipline.

DPMO

6 3.4 99.99966%

5 233 99.9770%

3 66,807 93.3%

ProcessCapability

Defects Per Million YieldOpportunities

%

4 6,210 99.37%

2 308,000 69.2%


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Process Competency

Redesigning Processes such as Senior Leader Peer Review

Old process: 640 senior leaders did paper-based peer reviews, assisted face-to-face by HR personnel

New process: e-hr online peer review

"What would have happened before, thirty people would have happily expanded a task to fill three months and as it is now, eight people have been busy for a month--bang! Done." -- Mike Margetts, Head of Implementation, Xchanging HR Services


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Technology Exploitationthe capability to swiftly and effectively deploy technology in support of critical

service improvement targets

Technology is expensive and must be the master, not the servant

e-HR to implement standardization, shared services, and self-service CGI co-develops annual technology plan with customer and supplier Customer verses supplier investment


Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program



BusinessManagement

DomainExpertise

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Program management:the capability to prioritize,

coordinate, ready the organization, and deliver across a series of inter-

related change projects

Multi-phased approaches

Short cycles Balance paradox

of rigorous project management with flexible pragmatism

OperationalCritical activity

Preparation

Service

Set-Up

Process

People

Technology

Sourcing

Environment

Preparation

RealignmentStreamliningContinuous Improvement

2-3mths 3-6mths 6-9mths

Source: Xchanging


Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program



BusinessManagement

DomainExpertise


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Customer Development:the capability to transition users of an

internally provided service to customers who make informed decisions

about service levels, functionality, and costs

Requires aggressive communication and dissemination of the meaning of the partnership to all budget holders in the customer organization.

To avoid excess costs caused by runaway user demand, customer development requires customer stakeholders to understand the financial consequences of their demands.

Customer satisfaction monitoring and reporting

Allows customers to define services, service levels


Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program



BusinessManagement

DomainExpertise


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Planning and Contracting:the capability to develop and

contract for business plans which deliver ‘win/win’ results for

customer and supplier over time.

One supplier quipped, "If the customer says win/win, they really mean, the customer wins twice.“


Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program



BusinessManagement

DomainExpertise

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Planning and Contracting

Fee-for-service contracts are suitable when customers' requirements are definable and when customers are primarily seeking modest cost reductions, variable spend, and the ability to focus on more value-added activities

Previous strategic partnerships falsely assumed the customer had exploitable world-class back offices.

Newer partnerships focus upon the customer's back office transformation first, commercial exploitation second.


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Organizational Design:the capability to design and implement organizational

arrangements to realize plans and contracts

?


Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program



BusinessManagement

DomainExpertise


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Organizational Design: Offshore

Onsite SupplierEngagement Manager

OffshoreSupplierDelivery

Team

LocalBusiness

Units

Architects/DBAs/etc.

ProjectManagers


Team


Team

PMO


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Onsite SupplierProject Managers


Team


Team


Team

Onsite SupplierProject Managers


Team


Team


Team

Architects/DBAs/etc.

ProjectManagers

PMO

LocalBusiness

Units



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VP IS

Team Lead

Project Manager

Director

DevelopmentStaff

Team Lead

DevelopmentStaff

RelationshipManager

Team Lead

Anchor

Anchor

DevelopmentStaff

Team Lead

DevelopmentStaff

Kaiser & Hawk, 2004



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Example of a large deal, creating an organizational structure that operates like a strategic business unit within the supplier organization is an effective design

Customer and supplier executives serve on the Board of Directors, which transforms the role of "customer" to active "partner."

The supplier account manager assumes the more empowered leadership role of CEO, including a staff dedicated to business development beyond the focal customer.

The CEO's direct reports include the supplier's Practice Directors who hold dual positions within the supplier parent organization to cooperatively share resources, best practices, and intellectual property across customer accounts.

Organizational Design Example:Xchanging & BAE Systems’ XHRS


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Organizational Design Xchanging & BAE Systems’ XHRS

D a v id O ld fie ldH R B u sin e ss P a rtn er

J im M ee ch anH e a d o f R e so urc ing

Jo a n ne C a rrH e a d o f G ra du a te R e cru itm e n t

& D e ve lo p m e nt

S a rah K e n nyH e ad o f R em un e ra tion

& B en e fits

H o w a rd M cC a llumH e a d o f T ra in ing

C h ris C a b leH e ad o f In te rn a tio na l A ss ign m e n ts

N e il W atk in sonH e ad o f E m p lo ye e D e ve lo p m e nt

& H ea d o f P roce ss

M a rk H o g g a rtR e m & B en S tra te gy

S te ve H o d gsonH e a d o f R e sou rces

T in a Ja m esH e a d o f P e ns io ns

S te ve D ru ryIT D e ve lo p m e n t M a na g er

A n n T a ylo rC u s to m er S u pp o rt

T e a m M a na g er

R ich ard B ecke ttF a c ilit ie s M a n a g er

to ge th r

T im H o lla ndH R IT O pe ra tio ns

M a na g er

A n d re w P e trieP ro je ct M an a g er

to g e th r S e rv ice C e n tre& H ea d o f In fo S e rvices

M ike M a rg e ttsH e ad o f Im p lem en ta tion

P h il B u tle rF in a n c ia l C o n tro lle r

D a v id B au e rn fe indC F O

S a m S p arkesC u s tom e r R e la tio n sh ip M an a g er

A v io n ics

S im o n M iln erC u s tom e r R e la tio n sh ip M an a g er

O p e ra tio n s & A ircra ft S erv ices

R u th C ra venC u s tom e r R e la tio n sh ip M an a g er

H O

R a ch e l T o n u cciC u s tom e r R e la tio n sh ip M an a g er

C S & S

L u c in da H ew itsonC u s tom e r R e la tio n sh ip M an a g er

P ro g ram m es

B ryo n y M o o reH e a d o f S e rv ice

A la n B a ileyN e w B u s in ess D eve lo pm e nt

R icha rd H o u gh tonC E O


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Governance:capability to define, track, assess

and fix performance

Fee-for service governance in offshore:

• Customers complain they cannot rely on supplier’s internal governance mechanisms

• Customers designing dashboards

• Customers designing and demanding daily status reports


Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program



BusinessManagement

DomainExpertise


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Governance:capability to define, track, assess

and fix performance

Joint Boards of Directors can create a managerial schizophrenia

Multiple Joint Boards help provide checks and balances among competing objectives

Joint Board of DirectorsJoint Service Review BoardJoint Technology Review Board


Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program



BusinessManagement

DomainExpertise

Example of Strategic/Enterprise Partnerships


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Leadership:the capability to identify, communicate,

and deliver the balance of delivery, transformation, and relationship

activities to achieve present and future success for both client and provider.

Requires individuals who have the vision, experience, ability, and clout to serve as "CEO" of the relationship.

76 case studies of EDS, IBM, CSC, Accenture with similar contracts found customer/supplier leadership as main explanator of customer satisfaction

Every customer expects the supplier’s A team

Often customer demands a change in leadership with first few months—on both sides!


Organization Design

CustomerDevelopment

BehaviorManagement

Governance

Leadership;Program



BusinessManagement

DomainExpertise


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Prioritize supplier’s competencies based on your outsourcing objective

Main Customer Objective:

Supplier’s

Delivery

Competency

Supplier’s Transformation Competency

Supplier’s

Relationship Competency

Lower costs on baseline services

1st 3rd 2nd

Transformation of back office processes

2nd 1st 3rd

New business development

3rd 2nd 1st

ETC…


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Supplier Perspectives on Client

PotentialGrowthValue

of Client

Present Revenue Valueof Client

HIGH

LOW

HIGHLOW

Develop Re-commit

De-commitReap

and Retain


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Challenges Remain

Customer/Supplier ‘fit’ across scope and time

Reality vs. rhetoric of ‘partnership’

Difficulty of achieving sustainable success

The Capabilities Your Suppliers Need to Make Outsourcing Work Mary C. Lacity Professor of IS Leslie...

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