Implementing service delivery models kpmg.com

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1 Obstacles and remedies Implementing service delivery models kpmg.com

2 Implementing service delivery models by Ryan M Harper, Director, KPMG Shared Services and Outsourcing Advisory and Ron Walker, Principal, KPMG Shared Services and Outsourcing Advisory Over the years, the fundamental role of the CIO has not changed to provide technology services that drive business results. However, the world around the CIO is dynamic. The pace of business is increasing and more companies depend on a growing number of new and disruptive technologies to support their mission and to maintain their competitive advantage. Executives who regularly take stock of their departments likely will find them to be inefficient and cost-ineffective. To address these issues, executives develop business plans, form exploratory committees, consult with consultants, and determine what the service delivery model (SDM) should look like. These same executives delegate the implementation of the new SDM to a highly respected project manager and team with the expectation that the business case will be met once the SDM is implemented. However, obstacles can arise that can complicate successful deployment. The good news is that experience and the insights discussed here can help overcome these difficulties, and ultimately help build new and more reliable service delivery models. In this paper we explore some obstacles we ve encountered that are rooted in human nature: impatience, unrealistic expectations, opposition (us vs. them), second thoughts and overconfidence. We also discuss how smart planning and proactive organizational actions can help remedy them. 2 Management Consulting / Implementing service delivery models / March 2013

3 Impatience The most common obstacle manifested by human nature is impatience, which results from organizations taking on too much all at once. Some companies want to establish IT outsourcing (ITO), finance and accounting outsourcing (FAO), human resources outsourcing (HRO), a new shared service center (SSC), and a center of excellence (COE) all on a global scale, and all at the same time. When an organization wants to go everywhere at once, costs increase, and valuable time is lost. One client wanted to aggressively move IT, F&A, and HR to a global SSC model while simultaneously outsourcing. There was nothing wrong with this plan on the surface. But moving everything at once without understanding the ramifications of this aggressive model caused difficulties within the organization. Before embarking on such radical change, it is critical for organizations to recognize their own process maturity, organizational readiness, and what they realistically can handle. Key questions, such as What is our organization s track record when taking on large projects? and Do our projects come in on-time, on-budget, and with minimal disruption to the business? are important in assessing and effectively pacing implementation of a new model. Clearly, you can t skip the planning process. But being so methodical runs counter to human nature. Companies that always act as if they are in crisis mode are likely operating inefficiently and facing higher costs. So, in the short term, plowing ahead might be a viable option; but in the long term, much will be lost by not thinking things through. While planning helps reduce wasteful spending, such savings can evaporate as quickly as they materialize without a long-term plan. Tempering expectations can help offset tendencies toward excess: Organizations can drive strategic change at a rapid pace, but change must be targeted and focused for efficient implementation. If not, the new SDM may not be considered a win by the business units. Don t take everything on all at once. This is a journey, not a destination. Understand cultural changes inherent in moving to a new SDM. Organizations often underestimate what the transition requires. Be aware that business units will no longer be required to focus on processes, but rather on the outcomes of the processes. For example, for accounts payable, the business unit should focus on the payments made within the invoice terms and not on who actually processes the invoice and payment. It is critical for organizations to recognize their own process maturity, organizational readiness, and what they realistically can handle Management Consulting / Implmenting service delivery models / March

4 Unrealistic expectations In a new SDM, there is another tendency driven by human nature to demand more and want it sooner rather than later. Organizations demonstrate unrealistic expectations in their desire for cost reduction, transformation, and consulting work from their outsourcing provider/shared services team even when the focus is on cost reduction (e.g., labor arbitrage). For example, a large international company created a global SSC, and outsourced its IT and most of its finance and accounting work. Within three months after the initial transfer to the outsourcing partner, the business unit s key stakeholders complained that the new SSC and provider were not delivering transformation or innovation to the organization. The stakeholders didn t seem to remember that the original business case for outsourcing was labor arbitrage and not innovation. They wanted it all regardless of the agreed-upon scope of work. Several factors can help organizations better manage their expectations when it comes to speed and project scope: The organization (and not just the executives) must clarify the importance of the approaches it employs, such as innovation, technology, pricing, access to leading practices, regional requirements, and bundled solutions. Have a highly engaged, highly visible, and highly respected senior-level executive (C-Level) communicate expectations to all business-unit stakeholders about why the organization is moving to this new model. The executive should acknowledge the difficulties of the journey, including risks and potential pitfalls along the way. Involve key stakeholders in advance and get their buy-in and have them identify barriers and restrictions. Having these key leaders in the organization on board makes it easier to build momentum, communicate the why the organization is moving to the new SDM, and what the goals are. Additionally, unrealistic expectations can also lead to conflict in a new SDM. There may be fresh client demands such as: Give us the same service you give other clients. Give us what leading organizations are getting. Of course, each initiative is different. Don t expect the same experience with a provider that others have had. There are unique drivers of those deals, internal organizational requirements, key stakeholders, constraints on the organization, and level of desire for true transformation. Leading projects require a company-specific investment. Often, when the Global Business Services model (see below) is presented, organizations immediately want to be at Level 5, which may or may not be the right course for them. This can also lead to internal disagreement and yield client-provider opposition. Smart leaders are not just focused on what other organizations are doing; they also consider what their own organization s appetite for change is and its success in leading large scale transformational projects. Moving up the maturity curve to Level 5 might be right for one company while being at Level 3 might be better for another organization. It is vitally important to an organization to understand its needs and to stay true to them. Global Business Services model Value Capture and Performance Sustainability Level 5 Integrated Globally integrated services portfolio with aggressive use of alternative and mixed delivery models Level 4 Strategic Optimized balance of internal and external delivery capabilities, global sourcing with multifunction focus Level 3 Optimized Traditional outsourcing relationships with global delivery; non-integrated internal shared services capabilities Level 2 Rationalized Single function shared services with tactical onshore or offshore provider relationships Level 1 Sub-Optimized Decentralized and duplicative functions; little central control over business support services The Journey... Development Stages... Time 4 Management Consulting / Implementing service delivery models / March 2013

5 Opposition (us vs. them) Unrealistic expectations can also fuel adversarial relationships when implementing new SDMs. It is normal for human nature to be competitive, but this can spur an us vs. the service provider mentality if not done in a shared goal approach. If there aren t mutually shared goals, the worst possible outcomes can happen. Initially, the client-provider relationship starts positively: Everyone, for the most part, enjoys the newness of the relationship. However, conflicts can arise and drive a wedge between the organization and the service provider. For example, one organization didn t benchmark itself internally before moving to an outsourced provider. As the work transitioned, the bumps in the process became much bumpier than expected. The service never reached the desired performance level, and the provider began to question the service level agreements they had to deliver on. A C-level executive asked the provider to perform a root cause analysis, and in doing so, the provider was prescient: The provider obtained the client s historical data when the work was performed in-house to benchmark the metrics prior to outsourcing. The provider found that it was actually performing better than when the service was managed in-house. This type of analysis could apply to either outsourcing or new shared services environments. The key here is to avoid the natural temptation to be adversarial. It is important to avoid thinking such as: We did it so much better when the work was with us, and These new guys can t get it right at all. The most effective remedy is to avoid client-provider conflict in the first place. This is easier said than done. Since unrealistic expectations can often arise, the result can be an ever-escalating hostile environment. We recommend setting mutually shared goals beforehand: Organizations should offer clear, measurable, outcome-based goals based on prior internal performance where both the new provider/ssc and business focus on the results together. Clearly communicate how the provider is expected to measure up against agreed-upon goals. Employ good governance to manage the provider and the business unit s key stakeholders, and establish mutually shared outcomes. Buy-in from senior executives can help keep everyone focused on meeting project goals, maintaining a collaborative relationship, and preventing an adversarial environment from developing. Aligning everyone with the action plan will help ensure that the client and provider tackle the issues and not each other. Remember, damaged relationships are difficult to repair, so avoid the temptation to take things out on the other team.

6 Second thoughts Soon after an engagement begins, we get the first real glimpse of the service provider without its sales team, and the provider sees its new partner after the negotiating and transition teams have finished their roles. Over time, both realize that real results are not always perfect results. Implementing a new SDM is time consuming (from proposal to engagement) and expensive, and ultimately the client not the provider takes control. A significantly high number of SDM relationships do not achieve thier objective. To stave off second thoughts, realize that despite human nature, the provider relationship is not one to be entered into arbitrarily: Ideally, the provider s services and approach to work should complement the organization s overall mission and strategy. When entering into a relationship, be clear on the aspects of the solution you deem to be the most important, such as innovation, technology, price, access to leading practices, and bundled solutions. Some of these can be mutually exclusive. Remember: Low-cost providers give you exactly that low cost. They are not transformation leaders, whose services involve more time and money, and aren t low cost. These considerations will be an important factor in determining the most appropriate providers to meet the organization s long-term needs. Understand that needs and wants are very different. Know what you need; the wants can cloud your judgment unless they become true needs. Real results are not always perfect results 6 Management Consulting / Implementing service delivery models / March 2013

7 Over-confidence In our experience, overconfidence can be the biggest problem with a potential transaction. With overconfidence, the client knows without a doubt what the correct process/approach/design should be, regardless of what the experienced providers have seen work and not work. KPMG LLP s (KPMG) advisors have on average more than 20 years of experience, and have a demonstrated track record of working successfully with leading organizations. For expediency, organizations often repurpose business unit employees to serve in the new SSC or at the outsourced provider. This same-old same-old approach generally does not work. Organizations cannot maintain the same people with the same skills, and expect them to lead transformative change. True change requires new investment and significant work in processes, talent, and technology. While the executives, stakeholders, and project team may know their organization well, outside advisors with the experience and knowledge of what s going on in the marketplace can and should be trusted to deliver recommendations to organizational needs. The executive sponsor must understand that when the advisor recommends an approach, it shouldn t be discounted because it might take longer than what the opportunity case indicated, or is different from what the board wants. The new SDM is not an instant fix. To succeed, organizations need a trusted advisor to help them along the way. Case in point: An organization recently sought KPMG s advice. When we offered our ideas, the organization indicated that they like to move fast and couldn t wait for all this planning stuff. This client felt that it knew what was best and wanted to move ahead without any competitive bidding, negotiations, or planning with its advisors. Just get it done, was the unofficial, counterproductive company mantra. In the end, the company abandoned its efforts because the new SDM failed to deliver any cost reductions. In fact, it wound up costing the company much more than what was envisioned. The antidote to overconfidence? Humility. Listen to advisors, and more importantly, find a trustworthy advisor to help with the tough decisions. Truly successful SDMs result from the combined efforts of the client, the provider, and consultants. Moving to a new SDM is indeed a journey that promises great improvements, resulting in a more effective and efficient state. Hiring the right advisor with years of experience and fresh insights can help you consider all the angles, avoid costly decisions, improve efficiency with the new SDM and keep human nature in check. To succeed, organizations need a trusted advisor to help them along the way Learn More For related articles and research from KPMG, please visit our Shared Services and Outsourcing Institute: Management Consulting / Implmenting service delivery models / March

8 Ron Walker is a Principal in KPMG s Shared Services and Outsourcing Advisory practice specializing in transformation, shared services, outsourcing and G&A processes. He has led hundreds of improvement initiatives over the course of his career including more than 80 shared services and/or new outsourcing relationships. He has also led multiple outsourcing transactions ranging from $1.5M to $1.5B across multiple functional areas including IT, HR, F&A, Supply Chain, Customer Care, and Real Estate and Facilities Management (REFM). Ron is an early practitioner in the business process outsourcing (BPO) industry and was a founding member of an F&A BPO service provider. Ryan Harper is a senior manager in KPMG s Advisory Services practice with more than 15 years of accounting, finance, and outsourcing/shared services experience. He is skilled in evaluating business processes against leading practices; he has depth both as a practitioner and as a consultant in the full suite of financial processes including Financial Planning and Analysis, Budgeting/Forecasting, Data Mining, and SOX Controls Design and Testing. He also has in-depth experience in designing and leading finance process transformations. During his career, he has led process design and process re-engineering engagements, and assessments of overall business. He also designed and ran the Governance Function over a third-party vendor in an outsourcing relationship. His current and past clients include some of the leading entities in the media, entertainment, and telecommunications industries. Contact us Ryan Harper KPMG Shared Services and Outsourcing Advisory Director T: E: ryanharper@kpmg.com Ron Walker KPMG Shared Services and Outsourcing Advisory Principal T: E: rwalker@kpmg.com KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks of KPMG International Cooperative ( KPMG International ). The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. March 2013_6243