David Mitchell, Managing Consultant
Randy Vetter, Director
This article illustrates the importance of really thinking through a sourcing strategy. Using the analogy of “measure twice and cut once,” this paper enforces the need to spend adequate time and energy defining a sourcing strategy prior to moving to a new sourcing model. Spending a few weeks focused on sourcing strategy will substantially reduce wasted time, effort and money in the future.
Most successful senior level executives have built careers on their tendency to be action-oriented and ability to “get things done.” This is a natural and quite admirable trait that allows them to focus on what is important and achieve measureable and sustainable results quickly. However, when it comes to defining an organization’s sourcing strategy, this trait can actually be a detriment and substantially hinder future outcomes. In the rush to make a change, the strategy can be inadequately defined and in some cases blatantly wrong for achieving the intended business objectives.
Based on the well-known philosophy of “measure twice, cut once,” this article focuses on the importance of devoting time and resources developing the right sourcing strategy prior to moving to a new sourcing model. The creation of your sourcing strategy defines the path forward in many ways. Investing a few weeks on your sourcing strategy will substantially reduce the time, effort and money required to re-rework your sourcing relationships in the future.
By focusing on the following areas before making a sourcing decision, you can ensure that you are indeed “measuring twice” before you “cut once.”
Alignment to Business Objectives
It may seem to be such a simple point, but it is not unusual to encounter situations where an organization’s sourcing strategy is just not aligned with its stated business objectives. For example, the sourcing strategy may be almost entirely focused on reducing cost, while the primary objective of the business is to position for growth.
Another example might be that the sourcing strategy is really focused on new and innovative technologies, when the business is looking for heads-down cost reduction or delivery improvement. There are many reasons that these types of disconnects occur, but probably the most common is that the strategy creation occurs in an IT vacuum and the appropriate business stakeholders have not been educated or consulted.
A good sourcing strategy will typically address some combination of the following objectives:
Improve delivery performance
Redeploy business-knowledge resources to higher value work
Improve the ability to flex delivery up and down as business needs change
Gain access to tools, technology and resources
Improve process maturity
Determining the sourcing disposition of each segment of your IT services portfolio requires an objective view of your current situation and an understanding of your desired future state. It also requires an understanding of the IT outsourcing market, as certain parts of your portfolio may be considered as a “standard offering” with relatively low prices and solid delivery, while other parts of your portfolio may cost more to outsource or may be riskier to outsource.
You will also need to consider the logical groupings of services and how they interact. For example, it may not make sense to outsource desktop support services unless you also outsource your service desk function because they are so intertwined. You may want to outsource applications maintenance but keep applications development. There may more strategic parts of your operation that you determine should be retained, such as consumer-facing web applications, while other services are more back office in nature and therefore easier to source. There may be reasons that you want part of your portfolio serviced by one provider and other parts serviced by another provider (one reason would be to bring competitive tension). The possibilities are almost endless, but it is important to think through how each functional area will be sourced, and to do this in a way that aligns with your overall business objectives.
In essence, you need to evaluate each segment of your IT services portfolio in terms of:
Current delivery performance (quality of service)
Desired future state
You should work with IT Finance, Corporate Finance, Human Resources and any other related departments to ensure that all current costs associated with the services to be sourced are accounted for. This may include costs associated with:
Third Party Agreements
These costs are captured as part of an overall base case which serves as the financial baseline for the overall sourcing opportunity.
The base case should then be structured into market-facing towers, in order to allow for proper “apples-to-apples” comparison of costs by tower. Further into the sourcing process, you will receive pricing from the chosen provider, and this new pricing should be incorporated into the base case, along with internal and provider-generated transition and transformation charges, in order to develop a full-blown financial business case. Until you reach that point in the process, you will have to estimate new pricing in order to determine the potential financial benefit of the sourcing strategy.
You will need to consider the speed and timing of transitioning services to an outsourcing provider. Many clients are very aggressive when assuming how quickly services can be transitioned. They want to start receiving the lower price points of an outsourcing agreement as soon as possible. However, often the assumed speed of transition is unrealistic because it does not map to how quickly the retained organization can assimilate change. As a general rule of thumb, you can assume a 3-6 month process to initially transition services to the new provider. Depending on the scope of services to be outsourced, the transition itself may occur in multiple waves, meaning that it could be 12 months or more before you are able to start receiving full run-rate savings.
You also need to consider the organizational disruption and “opportunity cost” of focusing the organization on the sourcing initiative at the expense of addressing other projects. You will need to plan any transition around year-end financial close processing or any other special events that occur in response to your normal business cycle. You may also need to align the end dates of current maintenance agreements and other service agreements so that you minimize overlaps in expense.
An important component of your sourcing strategy is ensuring that your organization is ready to handle such a large transformation. Successfully transitioning to and managing an outsourcing relationship requires a distinct set of skills and capabilities to maximize success. This requires an assessment of your organizational capabilities and capacity to execute to identify potential areas of weakness that you can address as a part of your overall sourcing initiative. Some areas to consider are:
Transition Management - Do you have the capacity and capability for managing a substantial change to the way you deliver IT services? Implementing a new sourcing strategy requires a tremendous amount of project management to coordinate all of the resources required to select provider(s), develop outsourcing agreements and transition services to the new providers, all while continuing to deliver IT services in a seamless manner to the business.
Communications Management - A change of this magnitude requires formal organizational change management and communications management to minimize impact to normal operations. Executive stakeholders are concerned about realizing the stated business benefits, and employees are imminently concerned in terms of how the change affects them in terms of job roles and even employment status.
Retained Organization Design - As you consider the scope of services to be outsourced, you will also need to determine what the retained IT organization will look like. Many roles will transition to the provider(s), some will stay as-is and some new roles will be added. However, it is essential that you retain sufficient business knowledge and expertise within your organization. A mistake many have made is to outsource too much. Additionally, your leadership team will change (in terms of people, skill sets, or both) reflecting the change in responsibility from “managing staff” to “managing services.”
Vendor Management - Outsourcing some amount of delivery to a third party provider (or multiple providers) means that you will become an organization charged with managing the contract from a delivery, governance and relationship standpoint. The Vendor Management Office (VMO) is a stand-alone discipline in most organizations, with responsibility to IT, Procurement and possibly other organizations. The VMO may be built from some portion of the Transition Management team, or the VMO may already exist to manage other agreements and needs to be expanded to manage the new IT services agreement(s). Their focus should ultimately be in four main areas: relationship management, performance management, contract management and financial management.
Operational Alignment - Successfully transitioning to an outsourcer requires that your IT processes must be aligned with the provider’s processes so that end-to-end service delivery is optimized. Are your processes up-to-date and aligned with industry standards such as ITIL and CMMi? If not, you should start working on them immediately. This will help as you lock down the scope of your retained organization and the scope of services that will be outsourced. It will also help when it comes time to transition delivery to the new provider and being best positioned for the potential of moving to yet another new provider at some point in the future.
Service Management - Another success factor for outsourcing is having a structured, well-documented and institutionalized set of service management processes that standardizes the service offerings, optimizes demand management and forecasting processes, controls consumption via request management and charge-back processes, and manages fulfillment with workflow management and process automation. Similar to Operational Alignment, these processes should be developed as soon as possible, as they will help align provider performance to business expectations.
Your sourcing strategy will function as the roadmap for delivering services over the next few years. It will set in motion the rest of the sourcing cycle – RFP creation, provider selection, contract negotiations, contract transition and overall transformation of the IT organization. As such, you should make sure to invest the time up front to ensure your sourcing strategy is thorough, aligned with the business, and defined to enable the proper amount of “internal due diligence” before enacting it. Similar to industry best practices for applications development or manufacturing, the cost for removing defects early in the process is relatively minor compared to addressing the problem late in the process. The same holds true with a sourcing strategy.
“Measuring twice and cutting once” when it comes to your sourcing strategy will help ensure:
Alignment with the business
Proper scope that achieves the desired results
Cost expectations and transition timeframe aligned with the business and reflecting what is required to do things the right way the first time
Organization change management actions are planned to provide maximum benefit
A business case reflecting realistic projections of financial impact is realized