The Outsourcing Enterprise
The Outsourcing Enterprise series, sponsored by Logica, provides leading edge thinking from the perspective of the Chief Executive and suggests the nature of the involvement the CEO should have, as well as those issues which should be considered in order to ensure the success of an IT or Business Process outsourcing decision.
The series is derived from rigorous and independent, internationally-acclaimed case and survey research in over 1600 organisations conducted in Europe, USA and Asia Pacific over the last 17 years.* In the course of that research and related advisory work, we have been able to achieve in-depth understanding of what makes for success, what does not work, why some organisations are effective users of outsourcing, and have achieved strategic advantage, while others have very mixed experiences.
Research and conclusions
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Outsourcing Enterprise 5 Step-change: Collaborating To Innovate The paper reports on how CEOs and their senior executives can make this step-change, and the practices on which it needs to be based. In particular, it shows how collaboration is developed by successful organizations, and how deeper collaboration creates the environment for innovation, enabling organisations to change their business priorities, and achieve innovations in IT operations, business processes, and business model and market offerings. |
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Outsourcing Enterprise Special Edition Outsourcing in Difficult Times Outsourcing is concerned with leveraging the distinctive and evolving capabilities provided by the external services market to achieve business advantage. This concept of outsourcing as a strategic sourcing tool applies in a downturn, and in recessionary times, as much as in periods of economic growth. Based on the most recent research, this special edition paper acknowledges the tough global economic climate that organisations are experiencing and provides practical advice on how a well-managed sourcing strategy can help to overcome the downturn and prepare for the next economic upturn. |
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Outsourcing Enterprise 4 Building core retained capabilities To help organisations ensure success in outsourcing arrangements, the fourth research paper identifies nine core capabilities that organisations should retain in-house. These retained capabilities provide a solid operating framework that provides governance, control, risk mitigation and flexibility in outsourcing arrangements and form the basis for maturing an organisation’s ability to lead in outsourcing. |
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Outsourcing Enterprise 3 The CEO guide to selecting effective suppliers The third paper in the Outsourcing Enterprise series outlines 12 key supplier capabilities that companies should be able to display from the outset. It also highlights the fact that successful outsourcing is not about the client getting the lowest price at all costs but about obtaining the best price for sustainable solution under a fair contract. Failing to do so can result in the "winner's curse" where both the supplier and client lose. |
Press release |
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Outsourcing Enterprise 2 This is the second in the series of Outsourcing Enterprise research papers and includes Logica’s Top Ten Predictions for Outsourcing Relationships 2005 - 2010. The report finds that the days of traditional outsourcing contracts, in which companies rely on punitive service level agreements (SLAs) and penalties are numbered and by carefully managing relationships business are able to benefit by 25-40% of the contract value. |
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Outsourcing Enterprise 1 The CEO’s role in delivering strategic advantage A critical factor in outsourcing success is CEO engagement. Why do successful CEOs care about outsourcing? What do they care about? What key developments in the outsourcing phenomenon need to shape CEO and top team thinking over the next five years? |
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*About "The Outsourcing Enterprise" series
The Outsourcing Enterprise series of white papers draws on a series of interrelated research studies conducted by Professor Leslie Willcocks, Sara Cullen of Cullen Group, Dr. Mary C. Lacity of the University of Missouri, St. Louis and Andrew Craig of Carig Ltd; four leading authors on outsourcing. The findings are sourced from over 1600 organisations located throughout Europe, the USA and Asia along with ongoing, un-published research. The Outsourcing Enterprise series, sponsored by Logica, provides leading edge thinking from the perspective of the Chief Executive and suggests the nature of the involvement the CEO should have, as well as those issues which should be considered in order to ensure the success of an IT or Business Process outsourcing decision.
The research base used for the Outsourcing Enterprise series includes 450 sourcing case histories held by the researchers at Warwick, Melbourne and Missouri, St. Louis Universities; covering all major economic and government sectors, including financial services, energy and utilities, defence/aerospace, retail, telecoms and IT, oil, transportation, central, state and local government, health care, industrial products and chemicals; and is drawn from medium, large and multinational organisations based in Europe, USA and Asia Pacific.
About the Authors
Leslie Willcocks has an international reputation for his work in outsourcing, IT and change. He is Professor of Technology, Work and Globalisation at the London School of Economics, and also Associate Fellow at Templeton College, Oxford, Visiting Professor at Erasmus and Melbourne universities, and Editor-in-Chief of the Journal of Information Technology. He has written twenty-five books and over 160 journal articles. In 2001 he won the PriceWaterhouseCoopers Michael Corbett Associates World Outsourcing Achievement Award.
Sara Cullen is the Managing Director of the Cullen Group, which offers consulting, training, and advice on commercial agreements. A former partner at Deloitte, she received her PhD from Melbourne University in outsourcing. Dr. Cullen has acted as a consultant for 87 private and public sector organizations in 51 countries on 116 outsourcing projects with contract values of up to $1.5 billion per year. She has conducted seven government reviews and been featured in more than fifty articles in addition to carrying out research with universities that include the London School of Economics, Melbourne, Oxford, and Warwick. She has written twenty-five publications including Intelligent IT Outsourcing.
Dr. Mary C. Lacity is Professor of Information Systems at the University of Missouri-St. Louis, Research Affiliate at Templeton College, Oxford, and Doctoral Faculty Advisor at Washington University. Her research interests focus on IT sourcing, privatisation, relationship management and project management. She has conducted case studies of over 100 organizations and has surveyed the practices IT managers in both the US and Europe. She has written more than 50 articles and six books, most recently Global Sourcing of Business and IT Services, and Netsourcing Business Applications. She was the recipient of the 2000 PricewaterhouseCoopers Michael Corbett Associates World Outsourcing Achievement Award.
Andrew S. Craig heads the IT leadership and governance stream of Carig Ltd and is also a director of Board Coaching Ltd. In addition to coaching he teaches at Ashridge and Warwick business schools on leadership and is a visiting Senior Research Fellow at the LSE. Current assignments include coaching the CEO of a FTSE-250 leisure company and working with the Board. He is also working with individuals and teams in the Defence Procurement Agency, Balfour Beatty, HSBC and finance and fund management companies. In his professional Army career, as Brigadier, he directed the recruiting operation- an annual requirement of 16,000 people- and was responsible for Human Resource planning for a workforce of 120,000. He commanded engineering operations worldwide,including in the first Gulf War and Bosnia, and led the UK’s planned military response to nuclear, biological and chemical terrorism. He was awarded an OBE, for leadership, in 1998.
Eight key lessons from Outsourcing Enterprise 5
Through analysis of our new research and our existing research bases, representing 17 years of combined research into over 1600 organizations, we see eight key lessons emerge:
- Innovation is even more important in economic recessions. Innovations can be changes in IT operations, business processes or in products and services offered or in the business model of how the firm competes. To survive and thrive through a recession requires sustainable change. A focus on cost-cutting alone, or even cost-efficiency solves short-term problems, at the expense of building the future business.
- Innovation using the external services market is increasingly realistic as both clients and suppliers are maturing their ability to go beyond traditional outsourcing relationships and build the collaborative arrangements necessary for innovating. This means clients can move from contract administration and outsourcing management to a new phase of collaborative leadership. They can also develop a new performance agenda.
- Innovation with large-scale, long term impact requires deep collaboration within clients, and with and across their external suppliers. Without this, innovation, and the consequent high performance, cannot be delivered.
- Collaborating to innovate requires a step-change in objectives pursued, relationships with suppliers, and how work and innovation is conducted. Our study of effective practitioners suggests distinctive practices for success. These can be classified into a fourfold framework - Leading, Contracting, Organizing and Behaving.
- Leadership shapes the context for collaboration, innovation and high performance and is primary. Leadership deals with adaptive challenges, and must be at all levels in each of the collaborating parties. Leadership also changes the approach to risk in order to share and manage down risk and manage in opportunity.
- New forms of contracting are required for collaborative innovation to succeed. Such contracts share risk and reward in ways that incent innovation, collaboration and high performance to achieve common goals.
- Organizing for innovation requires more co-managed governance structures and greater multi-functional teaming across those organizations and people responsible for delivering results. Teaming now requires the ability to collaborate within a client organisation, between client and supplier and between suppliers in multi-vendor environments.
- Leading, contracting, and organising in these ways incents behaviour and enables collective delivery of superior business performance. Collaborative innovation is most effective when it generates high personal, competence-based and motivational trust amongst the parties. High trust is a key component and shaper of the collaborative, open, learning, adaptive, flexible and interdependent behaviours required.
Four key lessons from Outsourcing in difficult times
Organisations might be tempted to return to the corporate equivalent of comfort food – cost cutting and a focus on the core business – but there are smarter ways to ride the waves of downturn and emerge winners. In order to steer a course through the present economic circumstances without losing control, executives must:
- Develop a dynamic strategy with business, sourcing and IT objectives and actions closely linked
- Leverage suppliers through collaboration and look for innovation as well as cost reduction opportunities.
- Reduce the pressure through more BPO and Offshoring.
- Retain key capabilities and maintain control of their outsourcing arrangement
Ten key lessons from Outsourcing Enterprise 4
Through analysis of our research bases, which represent 15 years of combined research into over 1200 organisations, we see ten key lessons emerge for sourcing business and IT services externally:
- Getting innovation and added business value from outsourcing requires proactive business leadership, alignment of business and sourcing strategies, and organised, in-house core capabilities to be applied to the task.
- Nine retained capabilities are required to provide leadership, governance and control, elicit and deliver on business requirements, retain control over technical direction and manage external supply. Under resource these capabilities at your peril.
- Organisations need to develop long term strategic focus by applying all nine capabilities rather than being drawn into firefighting and focusing only on the shorter term capabilities in the core capabilities framework.
- High performers with distinctive skills, capabilities and orientations need to be developed or appointed. This should be embedded in Human Resource policies. These performers need to be welded into a high performance team.
- Where implemented, core IS capabilities can experience high levels of success. But a range of factors inhibit performance: weak governance mechanisms, inflexible outsourcing contracts and deals, under resourced organisations, insufficient supplier capabilities and sluggish supplier responsiveness to new demands.
- Programme management and security are increasingly regarded as core retained IS capabilities.
- In modern outsourcing, adaptive challenges far outweigh technical ones. Thus leadership – the ability to shape the context for and mobilise adaptive work - becomes critical.
- Selecting and leveraging the right supplier is made possible by developing leadership capability for outsourcing. The leadership payoff is control, flexibility, governance, leveraging the relationship and innovation.
- Look to be smart in your ignorance. Evolve capabilities and outsourcing incrementally at a pace of change and learning you can absorb. This means diagnosing where you are, and passing through up to three stages: Delivery, Reorientation and Reorganisation.
- Manage beyond the quick fix. Having diagnosed your position, prioritise the development of retained core capabilities, use the external services market selectively and develop and apply creative and flexible business and IT leadership.
Eight key lessons from Outsourcing Enterprise 3
Through analysis of the research base, which represents 15 years of combined research into over 1200 organisation, we see eigh key lessons emerge.
- The supplier selection and negotiation phase is when the client enjoys most bargaining
power. If this power is not used wisely at this point, there can be very negative
repercussions. The CEO’s authority and influence is a key resource in this process. - Customers need to assess suppliers’ capabilities and competencies rather than their
resources. Twelve key capabilities can be leveraged into delivery, relationship and
transformation competencies that are of overriding importance to clients. - Choosing the right supplier model, or configuration of suppliers, is the essential first step. This is part of a sourcing strategy and the CEO should be closely involved.
- Customers should assess a supplier’s capabilities and competencies for each new business context: not every business context requires suppliers to excel in all twelve capabilities and all three competencies. In assessing suppliers there are three different
sets of criteria: mandatory, qualitative and price. - It is vital for CEOs to avoid the ‘winner’s curse’ – deals which excessively favour the client at the expense of the supplier, as these do not work to the client’s advantage in the long run. The key for the CEO is getting the best value in return for a fair price.
- Tendering is generally the most common and effective strategy to select suppliers.
Joint decisions involving the CEO, business executives and IT are the most effective.
Direct negotiation without tendering and competition is only for highly experienced clients. - The more interaction and transparency between client and potential supplier at bid and negotiation stage the better. A range of techniques have been developed to facilitate this on both sides.
- Fundamentally, the client CEO has two key roles to play. The first is ensuring the right supplier is selected at the right price. The second is shaping the context and contract as well as staffing retained management such that the supplier will perform to the best of its capabilities.
Seven key lessons from Outsourcing Enterprise 2
Through analysis of the research base, which represents 15 years of combined research into over 1200 organisation, we see seven key relationship lessons emerge.
- Outsourcing relationships accounting for 20 per cent or more of the IT or business process outsourcing budget are themselves strategic assets and demand on-going senior executive investment and attention.
- Outsourcing arrangements with well-managed relationships are more likely to be successful. Relationship management can create a 20 per cent to 40 per cent difference on service, quality, cost and other performance indicators. Globally, organisations investing most in developing successful relationships consistently perform better than competitors or agencies in the same sector.
- There is no such thing as an instant relationship: trust is earned and relationships built through performance, day by day.
- Management needs to be proactive and sew the seeds for a successful relationship before the start of the deal and cultivate it thereafter at three levels - executive, managerial and operational.
- For all but short-term arrangements, power-based relationships are poor substitutes for cooperation and trust building processes given the high transaction costs of monitoring and of imposing sanctions, the negative orientations and behaviours adopted, and the limited goals that can be pursued by the parties.
- The contract is a necessary but insufficient governance tool for outsourcing. That said, poorly constructed contracts, based on faulty costservice analyses, and containing ambiguities, loopholes and incomplete terms, can seriously damage outsourcing health.
- In outsourcing relationships, you mainly hit that at which you aim. Using measures like relationship values charters, regular relationship health checks and contract scorecards sets and aligns targets and encourages superior performance.
Six key lessons from Outsourcing Enterprise 1
Through analysis of the research base, which represents 15 years of combined research into over 1200 organisation, we see six key lessons emerge.
- Organisations fail because they outsource problems, messes, and things they do not
understand. The lower risk option is to outsource well understood activities for which it
is possible to write detailed contracts and monitor. Partnering arrangements are for
mature clients to undertake. - Outsourcing disappoints where the CEO and senior management see it as about
spending a little as possible on an activity or function, and about stepping aside from
management. In fact, outsourcing is still about managing but in a different way, with
different skill sets, if the organisation is to retain control of its own destiny. - Signing long-term outsourcing contracts for short-term reasons has been, and will
continue to be, a regular source of serious disappointment. - Vendors still tend to be better at selling their services than clients are at buying them.
This Outsourcing Enterprise series is dedicated to developing better customers. - Client organisations, and their CEOs, still expect too much from ITO/BPO vendors, and
not enough from themselves. So what should clients be able to do?
a. Formulate and monitor sourcing strategy that fits with dynamically changing strategic
and operational business needs for the next five years.
b. Understand, in detail, the external services market, vendor strategies and capabilities,
where vendors are coming from, and what a good deal with this vendor looks like.
c. Put in place a process for the management of all outsourcing arrangements across
the life cycle.
d. Arrive at a contract that delivers what is expected and needed without sustaining
high hidden or switching costs over 3-5 years.
e. Put in place and sustain a post-contract, in-house management capability that
keeps control of the IT/business function destiny and leverages supplier capabilities
and performance to mutual advantage. - There is a recommended path and a flawed path. The difference between the two is
management, which will initially cost money.