Determining the scope of  outsourcing: Assess

Aims and objectives

The overall objective of this phase is to determine whether  or not outsourcing should be pursued as an option and, if  so, the likely size and shape of the deal. This view must be  complemented with a mature view of the strategies to be  adopted when looking at critical issues such as overall deal  scope, location and sourcing strategies.

A key element of this phase is to identify all key  stakeholders and engage with them early in the  outsourcing process. This is especially critical where  those stakeholders have little or no experience of  outsourcing. Expectations set in this initial phase will be  difficult to change later in the process.

Overview

The Assess phase ensures that due consideration is  given to all key aspects of the outsourcing lifecycle,  particularly with regard to:

  • The overall objectives for the deal, which should be more than simple, short term cost reduction
  • The financial benefits which can be delivered by an appropriate outsourcing contract
  • The costs which will need to be incurred in order to deliver these benefits
  • The risks which must be mitigated in order to ensure a successful outcome
  • The overall size and shape of the deal, ensuring that this is aligned with business requirements
  • The degree of change required by both business and IT functions in order to ensure that the outsource is successful for the full lifetime of the contract

Once the initial business drivers are understood, a high-  level business case has been agreed, and the decision  to go forward with an outsourcing initiative has been  made, it is tempting to rush straight into the creation  of the Request For Proposal (RFP) and the design of the  ‘to be’ structures (see the Prepare phase description in  the next section).

However, conducted Assess phase ensures that this  temptation is avoided by delivering high-value analysis  early in the deal lifecycle.

The goals and strategies defined in the Assess phase  should endure throughout subsequent phases,  providing a clear statement of objectives and a clear  scope and approach to team members, stakeholders  and vendors alike.

The Assess phase requires appropriate resourcing  to solicit input from a wide range of stakeholders,  including senior business and IT leaders. Securing the right resources is often an initial stumbling block,  testing the importance of the potential outsource  relative to other priorities.

  • Outsourcing market trends
  • Deal structures
  • Successful sourcing strategies
  • Likely costs and timescales for securing the best deal
  • Vendor capabilities and preferences

Where a degree of outsourcing is embedded or the use  of external managed services already exists then it may  also be necessary to undertake a formal legal review of  existing contracts in order to ensure that there are no  onerous, termination or novation costs.

 

 

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Business case

This is the first and arguably most important step in the  outsourcing journey. The initial business case will define:

  • The scope and timescales of the outsourcing project
  • The shape and size of the deal
  • The pace of change necessary to deliver required benefit

All of these will impact the whole of the deal and the  subsequent outsourcing contract, and the business  case will evolve over the period.

Developing a realistic initial business case will require a  thorough assessment of existing spend, which can be  challenging if this is not currently under the control of  a single department (i.e. for IT outsourcing deals it is  often the case that business units retain responsibility  for some IT provision alongside a central IT function).

Another critical dimension to the business case is  the setting of challenging yet realistic value goals.  Many first generation IT outsource deals were  focused exclusively on cost reduction, with some  considering only short term rather than full contract  term reductions in IT cost. As more complex and  sophisticated outsourcing models have emerged

it has become easier to focus on the addition of  value, typically through improved levels of service or  an increased ability to deliver innovation whilst still  ensuring that overall costs are reduced.

Any failure to set goals in line with the real business  objective of the outsource runs the risk of setting the  project off in the wrong direction, leading at best to a  waste of elapsed time and cost and at worst to a deal  which is designed to fail at meeting the real objectives

Process and scope

Whilst it is tempting to think of the scope of an  outsource deal in terms of the impacted organisation –  technology towers (mainframe, storage, desktop etc.)  or business products (invoices, expense claims) – early  consideration of the maturity and coverage of current  processes will add clarity to the overall deal process and  will help to eliminate any perceived ‘fuzzy boundaries’  between client and vendor as the deal progresses.

Once an outsource arrangement is operational it is the  process handover points which will drive many of the  day-to-day interactions between vendor and client,  with the client-retained teams existing to execute those  processes deemed to be out of scope for the outsource

Whilst ‘as is’ and ‘to be’ processes do not need to be  modelled in detail at this early stage, it is important that  all key process areas are reviewed and understood.  Particular emphasis should be given to the processes  relating to the management of the outsource vendor or  vendors. If there is no history of outsourcing within the  organisation then a number of new processes will need  to be created and for existing processes the focus will  be on agreeing the division of responsibilities between  the client and vendor.

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It is imperative that the sourcing strategy gives  careful consideration to the option of completing  any transformational activities prior to outsourcing  and that it takes into account the fact that the post-  transformation organisation may deliver a level of  quality and value for money which dilutes, or even  negates, the value of outsourcing.

The key challenges to this approach are the availability  of sufficient in-house resources to undertake the  transformation whilst maintaining existing operations,  and the feasibility of re-skilling a large workforce to operate efficiently in the post-transformation  organisation.

Location management

A discrete location strategy is required where buildings  are to be sold to the outsource vendor as part of the  deal, where additional location-sensitive capacity is to be provided by the vendor or where offshoring of  services is within the scope of the deal.

The location strategy will be shaped by a combination  of logistical and technical factors. These typically relate  to the physical limitations on where processing can be performed relative to the locations of users, and  regulatory and legal factors, will determine who can  handle what data in which locations.

Where offshoring of services is being considered, it is  important to take a rounded view of capabilities and  risks rather than focusing solely on short term cost  savings. Many offshore locations have seen marked  increases in labour costs in recent years, with increasing  levels of geopolitical risk and instability of energy  supplies increasing the risk associated with some  regions.

Technology and tools

When outsourcing business processes the supporting  IT systems also need to be considered. A full  assessment should be undertaken to understand what  the impact will be on both the IT systems and the IT  organisation.

Architecture Considerations in IT Outsourcing Deals

In IT outsourcing deals an early decision needs to be made about the position to be taken  on technical architecture. At one end of the scale it might be appropriate to have a very  prescriptive technical architecture, with specific hardware and software being mandated to  vendors. At the other end of the scale a more outcome-based approach can be followed,  where technical architecture decisions are left to vendors, and IT is defined in terms of  services rather than technologies.

The latter option is becoming more prevalent with the advent of cloud computing, where  the technology is deliberately abstracted from the user, who is usually completely unaware  of the technologies which are used to deliver the service.

Organisations often adopt a hybrid approach to technical architecture, with some areas  being defined in technical detail (often the case when a specific set of technologies is  required to deliver required performance levels, support key legacy applications, enable  integration or meet regulatory or legal requirements) and others being defined in an  outcome-based manner, in order to encourage vendors to provide innovative solutions.

It may be necessary to guard against additional technical projects being included in  the scope, as the outsourcing project may be regarded as a vehicle to deliver technical transformation, regardless of whether or not this transformation is related to the outsource.

Points to remember

  • Be honest about current capabilities and performance. Any significant issues with current provision will become obvious during the remainder of the deal process, so tackle them up front.
  • Set expectations appropriately, both with senior business and IT leaders and, where appropriate, with staff who may be impacted by any outsource deal. Do not underestimate the effort which will need to be focused on internal stakeholder  communications and management.
  • Manage resources carefully. There will be key in-house team members who are the main, or even sole, experts within functions in critical areas. Consequently, it is unlikely that they will be free to work on the deal on a full-time basis, so their input will need to  be optimised.

FORFIRM Accelerators and Tools

  • Business Case Method

The Business Case Method provides rigorous analysis  and quantification of expected project outcomes and  benefits, so that these can be considered before the  procurement project is commenced. The method  provides guidance, tools and sample deliverables to  support the Assess, Prepare and Evaluate phases of  an IT Sourcing engagement.

  • Industry print and global process builder FORFIRM proprietary tools that include good practice process definitions and process diagrams. These can  be used to define the process scope and assist with  the definition of process splits and process maturity  assessments.
  • Market intelligence databases

This provides a repository of IT outsourcing deals  across industries and vendor capabilities. This can  help with the initial supplier longlist.