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.
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.
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.
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.
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.