Sourcing Optimization Series

Transcription

1 Sourcing Optimization Series Part I - Contractor Consolidation Deepak Deb, Virat Bhartiya The boom years following the economic slowdown witnessed significant growth in the use of third-party IT labor. Spurred by business demands and technology change, corporate IT organizations looked to overcome resource shortages and fill skill gaps by taking on a mix of independent contractors, staffing agencies, and domestic and offshore service providers. In some companies, however, this growth took place in the absence of an overall sourcing strategy, which led to increased operations costs and management overhead, suboptimal resource utilization, inconsistent standards and processes, and low institutional knowledge. Responding to these problems, leading corporate sourcing practitioners developed programs to reduce and consolidate contractors and service providers and optimize both internal and third-party resources. This trend continues in the current economic environment as more and more CIOs, faced with cost constraints and stakeholders demands for closer business / IT alignment, look for ways to do more with less. This paper, the first in a series on sourcing optimization, describes a framework for achieving successive third-party resource reductions through the use of welldesigned segmentation and assessment mechanisms. It examines the potential risks associated with such undertakings and the critical importance of organizational readiness especially stakeholder involvement and communication -- in the development and execution of a well-balanced and effective consolidation initiative. For more information, Contact askus@infosys.com Dec 2010

2 Introduction Infosys Strategic Global Sourcing (SGS) organization has participated in several client contractor1 consolidation initiatives; closely observing how leading practitioners have gone about the process. In almost every case, bringing disparate external staffing and sourcing operations together has been part of a larger effort; ranging from the centralization of sourcing management and governance to the transformation of the sourcing strategy as a whole and its alignment with the client business strategy. Typically, clients do not seek to simply reduce the total number of contract IT staff. Rather, their aim is to decrease the number of third-party resource channels individual contracts, agencies, and service providers to a smaller and more manageable number. Although the specific goals and objectives of contractor consolidation initiatives vary, however, once the decision to consolidate has been made, leading clients have tended to follow the same basic framework. This paper, the first in a series on sourcing optimization, describes such framework; designed for the purpose of simplifying IT outsourcing through contractor consolidation. Other papers in the series will focus on implementing a consolidation framework, migration to managed service and use of transaction/unit based pricing models. The papers in this series will help CIOs and IT Managers design less complex, cost-effective and low-risk sourcing solutions. Consolidation Process Framework Consolidation is the process of determining which external sources to eliminate, retain, or add as replacements for the purpose of optimizing the target sourcing model. It is measured along two dimensions contractor coupling with IT systems and system maturity. The former indicates the degree of dependence on the contractors as measured by their roles, responsibilities, expertise and skill attributes. A loose coupling would indicate higher replaceability, i.e., the ease with which work being performed by a contractor or incumbent vendor staff can be transferred to another. System maturity is determined by the business criticality, complexity, process maturity and health-index of IT systems. Contractors working on applications with high system maturity would be easier to replace Illustrated in Figure 1, the first step involves tailoring the framework to the specific context and data collection and validation. In each subsequent step, the number of contractors under consideration is successively reduced based on well defined selection criteria. 1 The term Contractor is used to identify both independent contractors and resources provided by staffing agencies as well as service provider personnel Figure 1-Contractor Consolidation: 4 Step Process Step 1: Pre -Assessment Framework Customization and Data Collection Count of in-scope contractors Step 2: Segmentation Contractor selection based on Vendor, Department/Unit, Role and Experience considerations Step 3: Assessment Suitability assessment of segmented contractors for consolidation -causing minimum disruption to business Step 4: Consolidation Grouping of contractors into logical clusters to leverage benefits ensuing from managed services model Successive reduction of contractor count in each step optimizes effort and time required for this initiative 2 Infosys White Paper

3 Step-1 Pre-Assessment As illustrated in Figure 2, the pre-assessment consists of two related tracks. The first, framework customization, involves adapting and aligning the basic four-step process framework with the client sourcing strategy. In the second track - data collection -- input data is created by merging existing data repositories from various information systems with data collected from business and IT stakeholders through surveys and interviews. Figure 2: Step1 -- Pre-Assessment Track1: Framework Customization Track2: Data Collection Step 1 Step 2 Survey HRIS 1 Step 3 Configure Step 4 App Data Alignment of the 4 step process with the organizational sourcing strategy 1 HR Information Systems Creation of input data by merging existing data from the information repositories with the data collected via surveys The purpose of the framework customization track is to capture, clarify, and document the specific goals and objectives of the consolidation exercise, including: Definition of expected results Critical success measures Timelines for achieving the results It is imperative to institute a steering committee with adequate representation from all stakeholder organizations. This committee is responsible for approving the final framework and all subsequent decision making and conflict resolution. The data collection track runs in parallel with the framework customization activities. Current contractor and application data is collected and analyzed. Total IT experience (i.e., number of years of relevant IT industry experience of a contractor) Tip It is important to decide the medium of surveys and subsequent data collection strategy. Web enabled surveys are most efficiently administered. Survey results can be obtained as predefined reports. Obtain signoff from all stakeholders on the quantitative aspects of the assessment to maintain objectivity and equity in evaluation Have a mutually agreed target contractor count to consolidate (replace) Pitfall Failure to baseline the data in this step may lead to rework and schedule slippage and technical skills are examples of contractor data which are typically obtained from the HR Information Systems (HRIS). Infosys White Paper 3

4 End user volume and level of documentation are examples of application data. A detailed list of these attributes is provided in Step-3. It is critically important to identify data gaps and develop alternate means of data collection employed to fill those gaps, if any, as there is a tendency among IS organizations to rely on individual and institutional knowledge instead of detailed documentation. In such cases, follow-up questionnaires and interviews may need to conducted, targeting such groups as: Reporting managers, to collect recent contractor data Vendors, to collect historical contractor data Application owners, to collect application data Final data is created by merging existing data from information repositories with survey data. The merged data is then closely reviewed by HR and IT Stakeholders and corrected iteratively till acceptable tolerance levels are achieved, after which the data is baselined. Step-2 Segmentation - First level filtration The aim here is to select the most suitable functional units2, vendors, roles and experience bands that will yield maximum benefit at minimum risk. This step focuses on identifying a sub-set based on segmentation criteria which is typically a function of vendor, functional unit, role and experience (Figure 3). It is a good practice to design the segmentation criteria in the framework customization track. Figure 1: Segmentation criteria for identifying the most suitable subset for consolidation Experience band Functional Units 1. Vendor fragmenta on 2. Complexity of applica ons 3. Cri cality of applica ons 4. Health Index of applica ons 5. Risk: Ra o of contractors to employees Vendors 1. Posi on in the value chain 2. Value of the vendor 3. Breadth of the vendor 4. Depth of the vendor Role & Exp band Iden fy in-scope roles and experience bands to minimize impact to business Role Vendor Functional Unit At the highest level, depicted as the outer most circular band in the figure, the suitability of a Functional Unit for consolidation is determined by analyzing the following considerations of the functional unit: Vendor fragmentation: This is calculated by finding the ratio of contractors to vendors in a Functional Unit. A low value would imply high vendor fragmentation, indicating a favorable case for consolidation in the Functional Unit Complexity of applications: This is the average complexity of applications in the Functional Unit, computed based on the relative complexity of their system design, platform and sub-domain. A detailed list of attributes to consider for determining the complexity of an application is provided in Step-3. Functional Units with high complexity would require higher effort during consolidation, indicating higher cost involved. Criticality of applications: This is the average criticality of applications in the Functional Unit. A detailed list of attributes to consider for determining the criticality of an application is provided in Step-3. High criticality would indicate higher business risk involved in consolidating the Functional Unit Health Index of applications: This indicates the overall health of applications in the Functional Unit. A detailed list of attributes to consider for computing the health index of an application is provided in Step-3. A Functional Unit with 4 Infosys White Paper

5 high Health Index would be favorably positioned for consolidation People Risk: This is calculated by finding the ratio of contractors to employees. Functional Units with very low count of employees run a significantly higher risk during consolidation owing to their increased exposure in the event of contractor attrition. At the next level, vendors within each selected Functional Unit can be targeted for consolidation by considering their following attributes: Position in the value chain: Strategic vendors, providing managed services, are at the upper end and Preferred Vendors, operating in a staff augmentation mode, are at the lower end. The hierarchy of vendors in the value chain is illustrated in Figure 4 Figure 2: Vendor Value Chain Preferred Vendors Specialty Vendors Niche Vendors Strategic Vendors IT Firms that provide general IT skills, primarily in a staff augmentation mode IT Firms that specialize in one or more specific technologies. Maintain a large bench within their specialty offerings. Generally hourly billed, or a combination of fixed fee services. Expertise in proprietary software or specializing in unique technologies Consulting firms that provide a mixture of high level thought leadership and technical resources. Having both the capability to cover a wide variety of industry trends and in - depth knowledge of many technical platforms Value of the vendor: value for money, overall performance, Satisfaction Index delivered by the vendor. Breadth of the vendor : % of contractors from the vendor in the functional unit, indicating the spread of the vendor in the functional unit Depth of the vendor : % of contractors from the vendor working on niche and proprietary skills, indicating the vendor s level of specialization Vendors may be selected for removal from more than one functional unit. Such vendors may be removed from the entire organization if they are found to be suitable for removal from most functional units. Other considerations such as experience bands and roles help in mitigating the associated risk to ongoing business. For example, less experienced contractors are easier to replace due to lesser dependency. It is recommended to consider non-key roles and non-specialist roles in the initial phases of consolidation and replacement A decision matrix indicating the suitability of functional units and vendors for consolidation helps in accelerating the process and generating consensus among the stakeholders. Figure 5 illustrates one such two dimensional matrix based on a consolidation program Infosys conducted for one of the largest insurers in US. Infosys White Paper 5

6 Tip Surveys for collecting missing information should be rolled out as soon as possible, preferably in the Pre-Assessment phase. Ample response time for answering surveys should be factored into the plan. Pitfall Cherry picking of contractors should be discouraged at this stage. The focus in this step is on groups of contractors rather than on individual contractors. Watch out for delays in completion of surveys Figure 3: Segmentation Decision Matrix This Functional Unit has been selected for consolidation based on the values of various attributes such as number of vendors, complexity, criticality etc This Vendor has been selected for consolidation within Functional Unit 3, based on the values of various attributes such as position in value chain, no of contractors, overall value proposition etc. 6 Infosys White Paper

7 Step-3 Contractor and Application Assessment In this Step, the segmented contractors from previous step and associated application(s) are further evaluated to assess the overall impact to ongoing business and thus determine their suitability for consolidation. As illustrated in Figure 6, this evaluation is executed in two parallel tracks, contractor assessment and application assessment. Figure 4: Contractor and Application Assessment Skill/ Knowledge Process Maturity Responsibility Performance Health Index Complexity Service duration Contractor Assessment Cost Business Criticality Application Assessment Risk Key attributes used for Contractor Assessment Key attributes used for Application Assessment Assessment Ease of consolidating a contractor is determined by considering the results from both contractor and application assessments The contractor assessment track focuses on evaluating contractors to determine the degree of dependence on them by measuring them on a set of attributes. Some of the key attributes that indicate a contractor s coupling with the IT landscape have been listed below: Service duration Experience in the current role, organization and total IT experience are rated. Lower experience would indicate higher Replaceability. Responsibility Role, service line, number of applications, availability of backups and end user interaction are some of the parameters measuring responsibility of the contractor. Higher dependence would indicate lower Replaceability Skill/Knowledge Technical and domain competency, experience in multiple technologies, knowledge of rare and proprietary technologies help in determining the skill level of the contractor Performance appraisal ratings and SLA breaches indicate the performance of the contractor. Low performance would contribute to higher Replaceability scores. Cost Other parameters remaining favorable, higher cost would imply higher replaceability To assess the overall impact and risk exposure from the proposed consolidation, it is necessary to also consider the nature of applications that the segmented contractors develop, enhance, maintain and support. In application assessment track, applications of segmented contractors are evaluated on the following attributes: Business criticality severity of service levels, end user volume, frequency of usage, organization reach (number of departments using the application), usage by external customer are variables that help in determining the business criticality of the application Health index service request volume, frequency of releases, level of documentation, ease of maintenance, recovery capability and age of application measure the general health of the application Infosys White Paper 7

8 Process maturity compliance with architectural standards, maturity level of the operational process and adoption of quality model/framework determine the process capability of the application Complexity Number of interfaces, Number of technologies, use of third party components, complexity of business logic, sensitivity to regulatory compliance, life-cycle phase of the application are some of the parameters that measure the complexity of the application Risk Contractor to employee ratio indicates the risk exposure of the application Tip Automate the quantitative aspects of the evaluation to save effort and minimize manual errors Pitfall Watch out for stakeholders with conflicting interests and priorities, not in line with organizational objectives for this exercise Ease of replacing a contractor is determined by considering the results of both contractor and application assessment on a normalized scale. In the final replaceability calculation, the contractor assessment is given a higher weight over the application assessment. The exact weight percentage would be a function of sourcing maturity, overall health index of the IT landscape and degree of alignment between business and IT. A list of contractors ranked by ease of replacement is one of the outputs from this step. Figure 7 shows additional analysis that can be carried out, based on organizational objectives, to identify specific categories of contractors Figure 5: Analysis to identify specific categories of contractors Contractor Cost High cost and less critical contractors Contractor Offshoreability Easily replaceable contractors whose work is offshoreable Application Criticality Easily replaceable contractors working on less critical apps Contractor Replaceability Contractor Replaceability Contractor Replaceability Step-4 Consolidation - Synergistic Grouping In the final step of the consolidation process, synergistic grouping, contractors ranked by ease of replacement can be grouped into clusters defined by category. Examples of categories include functional unit, application or technology platform; service type (e.g., maintenance, testing, etc.), or project execution methodology. Contractors can also be grouped under two or more categories; for example on-site ERP maintenance and support. Each grouping has benefits and challenges from implementation point of view. Groupings based on their ranking or strategic directions on desired sourcing capabilities give the ability to implement the consolidation recommendations in phases or waves for better manageability and minimal impact to ongoing operations. 8 Infosys White Paper

9 Tip Be prepared to make exceptions in order to arrive at optimum groupings Pitfall Groups must be finalized in consultation with the steering committee as a whole. Organization level considerations must supersede individual Functional Unit interests Figure 8 depicts how a fragmented contractor landscape can be grouped by a combination of functional units and technologies. Functional units have clusters based on portfolio/ application that help to identify which vendor and associated contractors can be targeted for consolidation. As the end state, this could result in a single vendor in some cases or a select few in others. Figure 8: Synergistic Grouping - Leading to Optimized State Multi -vendor fragmented landscape Functional Unit 1 Functional Unit 2 Functional Unit 3 Single vendor consolidated view Functional Unit 1 Functional Unit 2 Functional Unit 3 Vendor (V1) Vendor (V2) Vendor (V3) Vendor (V4) Vendor ( V5) Vendor ( V ) Vendor (V6) Technology CoE (.NET/JAVA/Mainframe ) Vendor (Vn) Services CoE (Testing/Performance/Arch&Design...) In a fragmented landscape, Functional Units are serviced by a number of vendors, each working in their silos. This obstructs organization wide implementations of best practices Logical clusters based on applications, service lines and technologies can be more easily formed with fewer vendors in the landscape, leading to an optimized delivery framework Conclusion The consolidation framework and process described in the paper has been a success with many clients. Challenges to successes can be addressed with organization readiness check before embarking on the consolidation initiative. It helps to build consensus among senior management on purpose of the exercise to the overall souring strategy and ensure availability of contractor and application data for analysis. Given the organization wide impact of the consolidation program, it is imperative to form a steering committee comprising of representatives from participating functional units. This committee reviews the feasibility of the process and suggests modifications to suit the organization culture. Apart from monitoring the progress and providing guidance from time to time, the committee also plans for organizational change management and establish a clear & honest communication. The entire process of consolidation can become effort intensive due to lack of readily available data - few techniques like automating data collection, administration of surveys and assessment of applications and contractors mentioned in the paper can significantly cut down required effort and time. The implementation phase of consolidation should begin as the recommendations are finalized. If delayed, it runs the risk of losing the currency of data analysis, assessment and recommendations from the exercise. Infosys White Paper 9

10 About the Authors Deepak Deb is a Senior Global Sourcing Manager with Infosys Strategic Sourcing Unit of Infosys. An IAOP Certified Outsourcing Professional, Deepak has over 27 years IT industry experience and over 10 years of experience in outsourcing. His expertise spans across industries and various IT disciplines. Deepak has consulted clients in consolidation journeys and helped in optimized cost base with streamlined IT operations and has also developed various innovative frameworks to accelerate the IT transformation. Virat Bhartiya (Virat_Bhartiya@Infosys.com) is a Senior Outsourcing Specialist with Infosys Strategic Sourcing Unit. He designs sourcing solutions for large deals and specializes in consolidation strategies. In an IT career spanning 12 years, he has managed the delivery of large outsourcing engagements, migration and transformation programs.