Choosing Between Full-Service and Selective Outsourcing

Transcription

1 Case Studies, L. Scardino Research Note 17 September 2002 Choosing Between Full-Service and Selective Outsourcing Deciding whether to use the full-service or selective outsourcing approach is a challenge. As this case study shows, the key to making the right decision is to first define the sourcing strategy. Core Topics Sourcing: Sourcing and Procurement Strategies; Sourcing Vendor Evaluation and Competencies Key Issues What key business drivers and factors should be considered in developing optimal sourcing strategies? What are the best practices for evaluating ESP competencies and selecting the right ESP? What are the failure factors for ESPs, and why? What are the impacts and risks of external sourcing, and how will they be managed? Many enterprises struggle with deciding whether to outsource IT services using a full-service approach or to selectively outsource IT services to two or more external service providers (ESPs). Full-service outsourcing delivers a full complement of infrastructure services, including data center, network, PC, central processor/lan and applications. The full-service outsourcing approach tends to work well for enterprises with lengthy procurement processes that make it difficult to continually carry out market tests. It is also favored where the requirements suggest using a single provider with global reach, and where the enterprise does not have the internal resources to manage and integrate a variety of contracts and ESPs. The full-service outsourcing approach may also provide greater economies of scale, and hence cost savings. Selective outsourcing is where an enterprise contracts with more than one ESP to provide point services such as applications, network and PC services. This approach tends to be favored by enterprises that are new to outsourcing and don't want to put "all their eggs in one basket." Such enterprises fear that a single ESP may not be able to deliver all the required services and don't want to be stuck with a bad choice in their first outsourcing deal. Selective outsourcing is also favored when an enterprise's organization makes it unlikely that contract and relationship management can be consolidated under one unit. Once an enterprise chooses to outsource selectively, it usually stays with this approach. ESPs prefer the full-service approach. They apply significant pressure on enterprises to adopt this approach, emphasizing the benefits of having everything under one contract and of economies of scale. Enterprises, however, should not be swayed by this pressure. When deciding which outsourcing approach to Gartner Entire contents 2002 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 use, enterprises should be driven primarily by their own requirements and sourcing strategies. In this case study, we describe the experience of an enterprise that approached the outsourcing decision with a clean sheet of paper and ended up making a choice that no one could have predicted but that has worked well for all involved. Problem: This multibillion-dollar services enterprise began to consider outsourcing its infrastructure and applications at a time when business conditions and strategic objectives were moving faster than the pace at which its technology operations could respond. Wisely, before considering whether to use the fullservice or selective approach, it developed a sourcing strategy that defined, documented and validated its business and IT objectives. Objective: Some of the objectives for IT services included in the sourcing strategy were: Strategic: Positioning the enterprise for its future state, obtaining more business value from IT spending and improving access to intellectual capital. Efficiency and agility: Deploying IT more rapidly and to innovate more frequently without significant capital investment. Cost-effectiveness: Reducing IT operating costs, improving business and IT productivity and having the ability to fund new development through cost-efficiencies. Employee effectiveness: Retaining IT knowledge and expertise, and putting IT resources to use in strategic areas, such as business analysis and planning. The enterprise determined that its current insourced model would not be able to meet its objectives, so it decided to develop a business case for outsourcing IT services. At this early stage, the enterprise envisioned a single source for whatever combination of services it decided to outsource. Approach: The enterprise used the services of a consulting company that specializes in providing clients with IT outsourcing expertise. As an outsourcing novice, the enterprise wanted to tap into expertise from a company that had been deeply involved in considering outsourcing options and evaluating and selecting ESPs for many years. The consulting company assessed the enterprise's IT state and provided recommendations for IT outsourcing. The sourcing strategy and outsourcing recommendations were presented to the executive committee, and the project was granted permission to proceed. 17 September

3 The evaluation and selection, negotiation and transition processes were completed in five phases: Phase 1: Preparation of a request for proposal (RFP). Phase 2: Receipt of RFP responses from ESPs. Phase 3: Selection of ESPs. Phase 4: Contract negotiation. Phase 5: Contract implementation and transition. The enterprise used a multilayer approach to define services, service levels and the associated evaluation criteria for the services. Criteria were developed for each service layer that was being considered for outsourcing data center, network and distributed computing, desktop support, help desk, information distribution center, application development and maintenance, and enterprise management. The RFP was constructed using this approach, and ESPs were invited to bid on the entire scope of work or on selected layers if they felt they were best able to respond with a selective proposal. The enterprise reserved the right to choose the approach that made the most sense for it. There was healthy competition for the work and the enterprise had many choices to consider. It received multiple bids in three categories: ESPs bidding on the entire scope using their own resources (that is, no subcontractors). ESPs bidding on the entire scope using their own infrastructure resources and a subcontractor for the applications component. ESP bidding on just the infrastructure component or just the applications component. Results: The enterprise reviewed, evaluated and scored the proposals against the evaluation criteria for each service layer and determined that its best solution was to select one of the ESPs for infrastructure and another one for applications. Some of the more-compelling evaluation results that swayed the enterprise toward this decision were: Process and methodology: The enterprise felt that traditionally strong infrastructure ESPs had weaker processes and methodologies for applications outsourcing. It was also concerned about getting seamless services from a prime/subcontractor arrangement with two ESPs using different processes and methodologies. Although the enterprise recognized that using two ESPs would not provide seamless 17 September

4 service delivery, this was offset by the ability to better influence outcomes if it had direct relationships with both ESPs. Flexibility of contract: The enterprise determined that separate contracts for infrastructure and applications outsourcing would provide more flexibility for introducing changes to service levels and new services. It felt that the sheer scope of one contract for all services would be unwieldy, making it more difficult to make changes over time. Continuous improvement: One of the key objectives for outsourcing, as defined in the sourcing strategy, was the ability to introduce efficiencies and innovation. The enterprise felt that the ESPs bidding just for the infrastructure component demonstrated more-solid processes for continuous improvement in this area than in applications outsourcing, and vice versa. Cultural fit: The enterprise was concerned about the cultural fit between its employees who would transition and the ESP that would employ them. It discovered that there was good cultural compatibility between its applications-centric employees and an applications ESP, while the best fit for its infrastructure-centric employees was with a traditionally strong infrastructure ESP. Having completed the evaluation, the ESP selection recommendation was presented to the executive committee. The recommendation stressed that there were many credible bids from ESPs that were able to demonstrate a sound technical approach for the entire scope of work. The deciding factors were essentially in the area of relationship. After reviewing all of the proposals, the enterprise felt that it would fare better with ESP relationships built around two scopes of work. It considered carefully the risk of having two ESPs work together that had not bid together and had never worked together. Even with its own inexperience, the enterprise felt that two ESPs would provide the optimal solution to its outsourcing requirements. The two ESPs were selected and the team went into the negotiation phase of the project. The transition is mostly complete, although there are issues that are being discovered and resolved. Critical Success Factors/Lessons Learned: After nine months of operations, the enterprise is satisfied with its decision and relationships with both ESPs. Moreover, it is satisfied with the working relationship that is developing between the two ESPs. The enterprise has cited several critical success factors and lessons learned that it wants to share with other enterprises. Don't start to consider outsourcing before you have a defined sourcing strategy. 17 September

5 Make sure executives are engaged in the process and stay engaged throughout. Build executive review and approval to proceed into the project plan to keep momentum and focus among the selection team. Hire outside help to assist with the evaluation and selection process, and listen to the advice. Define the services and evaluation criteria before the RFP is sent out. Make sure that each phase of the evaluation and selection process is reviewed against the sourcing strategy to ensure that the strategic objectives for sourcing don't get lost in the detail. If you want to consider alternatives, make sure the RFP is developed to allow and encourage ESPs to propose the scope of services that make sense for them. Require ESPs to agree to work together via a memorandum of understanding that defines accountability for service levels, escalation procedures and management commitment to work together. Lessons Learned: The enterprise underestimated the time it would take for transition because it planned on the basis of full-service outsourcing using a single ESP. It now knows that working with two ESPs involves a double transition. The effort required from each ESP is not much more, but the enterprise definitely has to put in more effort. Negotiations were concluded at different times, resulting in different start dates for the two contracts. With hindsight, the enterprise would have ensured that both contracts were synchronized. Having different contract terms resulted in some challenging situations, where the timing for certain transition activities would have been much smoother if both ESPs had been able to assume responsibility for their scope of work at the same time. For example, the enterprise had to delay some activities in the first contract until the second contract was signed. The enterprise is working to get both ESPs on the same annual contract term so that it will be able to seamlessly introduce operational changes that affect both contracts. Relationship management and sourcing governance are key requirements, requiring sufficient dedicated resources by the enterprise. Although the enterprise planned on resources to manage the relationships, it underestimated the resources 17 September

6 required to govern how the ESPs would interact with each other and with the enterprise's IS and business units. It is re-examining the resource commitments that it made with an eye toward adjusting the mix to have more focus on sourcing governance. Even with a single, full-service ESP, service-level management would have been a challenge. The enterprise has found that it is even more of a challenge with two ESPs because their roles and responsibilities intersect at various places in end-to-end service delivery. Although the enterprise states that the ESPs are working well together and are not engaged in "finger pointing" on service-level issues, it did not develop its service-level management approach with two ESPs in mind. It is revising the service-level management approach to make it easier for contract and relationship managers to assess how well each of the ESPs is performing. Bottom Line: When considering the relative merits of full-service and selective outsourcing approaches, what is right for one enterprise might not be right for others. The sourcing strategy must drive the outsourcing decision, and the objectives for outsourcing must drive the sourcing approach and relationship structures that enterprises choose. 17 September