outsourcing and vendor management

OUTSOURCING AND VENDOR MANAGEMENT

SUBMITTED BYGROUP#9 MBA-IT 2012-14

AGENDA

• Introduction to Outsourcing• Reasons for Outsourcing• Types of Outsourcing• What can be Outsourced• When to Outsource• How to Implement Outsourcing• Model Of Outsourcing • Vendor Management • Case Study Vendor management• TCO• Conclusion

INTRODUCTION

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Outsourcing denotes the continuous procurement of services from a third party, making use of highly integrated processes,

organization models and information systems

OUTSOURCERCOMPANYServices

OrganizationLevel

Agreement

ServiceLevel

Agreement

REASONS FOR OUTSOURCING

• Traditional role - reaction to problem• Reduction and control of costs• Avoid large capital investment

costs • Insufficient resources available

• Modern role – business strategy• Allows company to focus on

their core competencies• Keeping up with cutting-edge

technology• Creating value for the

organization and its customers • Building partnerships

TYPES OF OUTSOURCING

Businessprocesses

Application Development and Maintenance

IT-infrastructure

BPO: Business Process Outsourcing

ASP: Application Service Provider

DBRO: Design, Build, Run & Operate

ADM: Application Develop. & Maintenance

ITO: IT Infrastructure Outsourcing

ITS: IT Services, Managed Hosting

Administrative processes

APO: Administrative Process Outsourcing

Outsourcing models:

BPO

AMO

SDO

AMO - Application Management Outsourcing

SDO – SERVICE DELIVERY OUTSOURCING

7

Services

Data Centers

Desktop Mgmt.

& Mobility

Technical Support

Network Services

Security SupplierMgmt.

Client Operations Management

Messaging & Collaboration

Technical Support

Desktop Management & Mobility

Network Management

Hosting

Sales Support and Mobilization

Security Operations

Delivery capabilities

• Security • End-to-end security services

including firewall management, intrusion detection, identity management and security policy

• Data Centers• Remote and on-site managed

server hosting• Data centers

• Technical Support • - Help desk, desk-side and self-

service support• - Global hubs

• Network Services • Managing data and voice

networks• Desktop Management and

Mobility• PC, laptop, hand-held, distributed

• Supplier Management

BPO-BUSINESS PROCESS OUTSORCING

REVENUE DISTANCE MODEL

GLOBAL DELIVERYMODEL

BUILD OPERATE TRANSFER MODEL(BOT)

BLENDED OFFSHORE OUTSOURCING MODEL(BOOM)

WHAT CAN BE OUTSOURCED

• System integration • Data network • Mainframe data center • Voice network,

internet/intranet • Maintenance/repair • Applications development • E-commerce • End-user support system

WHEN TO OUTSOURCE

GreyArea

Not Outsourced

In House if Possible

Outsource

Competitive

Strategic Non-Strategic

Non-Competitive

PricewaterhouseCoopers Model

HOW TO IMPLEMENT OUTSOURCING

• Program initiation • Opinions and ideas shared to

form draft contract• Program implementation

• Transferring staff • Service Level Agreement (SLA) • Establish communications

between partners • Actual transfer of the service • Establish management

procedures • Contract agreement

• Contract fulfillment

LEAD SUPPLIER MODEL

• LEAD SUPPLIER MODEL• Continuation of the

traditional outsourcing model

• One supplier – responsible for the the activity

• Activities carried out by subcontractors

• Cooperation and coordination between all the suppliers

COLLABORATIVE PARTNERING MODEL

• COLLABORATIVE PARTNERING MODEL

• Choice of several lead suppliers

• Clear parameters, roles, and responsibilities

• Usage of sub-suppliers for specifics activities

• Cooperation and exchange of knowledge

• Competitive environment

7 STEPS TO A SUCCESSFUL SOURCING STRATEGY

• Identify the company’s needs and determine the needs of your customers. • Carry out a SWOT analysis to evaluate the risks the company is exposed to • Set out and carefully choose one or multiple outsourcing partners through a

thorough and extensive • research • Once the supplier/s is/are selected, choose on an outsourcing model that

works best for the company’s need (near-shoring,off-shoring,multi-sourcing etc.)

• Begin talks and discussions with your outsourcing partner/s to clarify processes and procedures as well backup, recovery, and business continuity plans

• Set clear SLAs, Set KPIs and ROI evaluation systems• Evaluate carefully the expenditures on the outsourcing partnerships

CORPORATE GOVERNANCE

• Focus on outcomes not on transactions

• Focus on the WHAT, not the HOW

• Agree on clearly defined and measurable outcomes

• Optimize pricing model incentives for cost/service trade-offs

• Governance structure provides insight, not merely oversight

PREPARING FOR OUTSOURCING DO NOT FORGET TUPE

• TUPE stands for The Transfer of Undertakings (Protection of Employment) Regulations 1981. The Regulations were introduced to safeguard employees’ rights in the event of a transfer of an undertaking, business or part of a business. This includes:

– The obligation to inform and consult all employees in scope transfer

– Transferee inherits all claims and statutory rights– Continuity of employment is preserved for employees– Employees transfer on their existing terms and conditions

of employment– Transfer connected dismissals are automatically unfair

CASE STUDY

Insurance Company’s outsourcing challenge

• Multiple company locations across geographies• Lack of accountability due to inadequate and unclear• support delegation• High Turnaround Time (TAT)• Unclear support procedures• Customer dissatisfaction• Employee frustration• Growing resource costs due to delay• High incidence of repetitive and abandoned calls• Burden of regular training and technology updates for

support functions• Absence of data capture on requests, solutions

provided and follow-up

ack of accountability d

ue to inadequate and unclear

• support delegation

• High Turnaround Time (TAT)

• Unclear support procedures

• Customer dissatisfaction

• Employee frustration

• Growing resource costs due to delay

• High incidence of repetitive and abandoned calls

• Burden of regular training and technology updates for support functions

• Absence of data capture on requests, solutions provided and follow-up

RESULTS

Some of the key result areas identified were: Annual revenue savings close to 60 percent Better process standardization using a detailed manual on process maps / flow charts Leveraging core competencies and reducing onshore load Better efficiency at lower delivery cost following a continuous process improvement model Improved TAT through implementing a TAT monitoring system and access provisioning More flexibility to changing technology environment Specialized and continuous training programs to help staff stay current Value-add in business model through customer relationship building

VENDOR MANAGEMENT

• Vendor management is a discipline that enables organizations to control costs, drive service excellence and mitigate risks to gain increased value from their vendors throughout the deal life cycle – “Gartner”

• Vendor management allows you to build a relationship with your suppliers and service providers that will strengthen both businesses.

• It is not negotiating the lowest price possible but it is constantly working with your vendors to come to agreements that will mutually benefit both companies.

• A well managed vendor relationship will result in increased customer satisfaction, reduced costs, better quality, and better service from the vendor

FOUR STEPS FOR SUCCESSFULVENDOR MANAGEMENT

Risk AnalysisDue Diligence

in Vendor selection

Supervision and

Monitoring of Vendors

Documenting the Vendor

Relationship Contract

Issues

STEP 1: RISK ANALYSIS

Risk Analysis requires the Company to identify the importance of the function to the organization, the nature of the activities the vendor will perform, and the inherent riskiness of the activity.

- What would be the effect on the company if the function failed or was not adequately performed ?

- Will outsourcing this function cause dependency on the third-party provider for an essential function?

- Are there other potential vendors that could quickly provide the same service if the current vendor fails?

STEP 2: DUE DILIGENCE IN VENDOR SELECTION

• Due diligence requires a reasonable inquiry into a vendor's ability to operationally meet the requirements for the proposed service and an inquiry into the vendor's financial ability to deliver on its promise

• Company should question operational issues, staffing, expertise, and the vendors internal control

• The Company must consider the financial condition of the vendor. It should analyse any available audited financial statements or balance sheets.

STEP 3: DOCUMENTING THE VENDOR

RELATED CONTRACT ISSUES

All contracts should be in writing and, to the extent applicable, should cover• Expectations and responsibilities• The scope of work and fees• Type and frequency of reporting on the status of work involved• Process for changing scope of work• Ownership of any work product • An acknowledgement that the vendor is subject to regulatory review• privacy and information security, and supervision and dispute resolution

Legal counsel should review all significant contracts

If the contract is a technology contract, a service level agreement (SLA) is essential. An SLA will establish the performance standard and service quality expected under the agreement.The term of the contract is another essential factor.

STEP 4:ONGOING SUPERVISION AND MONITORING OF VENDORS

• To adequately supervise a vendor, an officer must review and be accountable for the performance of the vendor

• Monitoring and supervision should include ongoing (at least annual) review of the vendor's financial condition and insurance coverage

• The vendor's contingency plans should be reviewed to be certain that they remain in place and have been adequately tested.

VENDOR MANAGEMENT – CISCO CASE STUDY

CHALLANGE• More than 35000 employees, 100’s of

locations, Huge IT Infrastructure Budget, Each office has complex requirements

• Cisco uses its own products and services wherever possible, but still spends US$500M a year globally on other IT products and services.

• Lack of Consistent Processes and Strategic Planning cost CISCO significant amount of money

• It had signed multiyear contracts for products that became obsolete as they moved to new technologies

SOLUTION• Global vendor Management

Office(VMO) within CISCO that supports strategic vendor relationships across IT Organizations

• VMO has Defined Seven Phases of CISCO Vendor ManagementENGAGEINVESTIGATEEVALUATENEGOTIATECONTRACTCOMPLIANCERENEW

VENDOR MANAGEMENT – CISCO CASE STUDY

S

ENGAGE : When changing business climates or technologies generate the need for products or services within Cisco, the VMO leads the engagement of vendors to help ensure consistency and fairness of communications

INVESTIGATE : The VMO also works with sales, marketing, development, business units, finance, and procurement to identify potential vendors, and investigate possible solutions.

EVALUATE : The VMO initiates a bid process. The VMO will issue a RFI to gain more information from vendors if needed; or a more detailed RFP

VENDOR MANAGEMENT – CISCO CASE STUDY

NEGOTIAION : Low Prices, Strong Strategic Partnership, clear deliverables and fair prices of product deliverable

CONTRACT: Cisco purchasing group confirms the contract, working closely with the Cisco legal department to resolve any contract issues. Contract length no more than 24 to 36 months

COMPLIANCE : VMO generates quarterly reviews that compare commitments and performance with established criteria

RENEW : VMO proactively reengages with vendors and Cisco client groups to restart the process

Life Cycle Of Vendor Management

Evaluate and Select the Highest Value Vendors

• Standardize required phases and steps.

• Capture key documents and information.

• Enforce review and approval processes to ensure stakeholder buy-in.

• Capture critical information supporting decisions for historical and compliance purposes

Life Cycle Of Vendor Management

Life Cycle Of Vendor Management

Manage and Measure

• Centralize vendor information.

• Track and monitor vendor commitments — contractual or otherwise .

• Establish alerts to ensure commitments are met, issues addressed, and renewals tackled.

Life Cycle Of Vendor Management

Life Cycle Of Vendor Management

• Systematically score vendors across multiple categories of performance, while allowing stakeholders to rate vendors in the categories that apply to them

• Conduct period-over-period performance reviews of like vendors to identify consolidation opportunities.

Optimize and Consolidate

Perform portfolio-level analysis and reporting to support a fact-based, systematic program for strategic IT vendor management. Life Cycle Of Vendor Management

BMC Supplier Management Tool

TOTAL COST OF OWNERSHIP

TCO is Philosophy, Methodology and tool for analyzing all the relevant

quantitative and qualitative cost of acquisition of project

in IT in order to make decision.

NEED OF TCO

• Performance measurement• Framework for cost analysis• Benchmarking performance• More informed decision making• Communication of cost issues internally and with

suppliers• Support external teams with suppliers• Better insight/understanding of cost drivers• Support an outsourcing analysis

METHODOLOGY TO CALCULATE TCO

• Advisory services• Vendor performance• Time and effort for acquiring Etc.

Acquisition Costs

• Hardware• Human resources • infrastructure• Communication system Etc.

Ownership Costs

• Maintenance• Disaster recovery and maintenance Etc.

Post Ownership Posts

TCO BASED ON OUTSOURCING SECTOR

CASE STUDY

CONCLUSION

• Invest in Planning

• Focus on Total cost of Ownership

• Manage costs holistically

• Use real time expertise to provide offshore knowledge and process management

THANK YOU