during transition and beyond

During Transition

and BeyondThe Outsourcing Business Case Is Essential to Value Realization

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1 During Transition and Beyond The Outsourcing Business Case Is Essential to Value Realization

Simply put, a business case is a decision-making tool. This tool weighs in on the potential profitability a particular decision or scenario will have. A well-structured business case should demonstrate how the decision will alter both economic and noneconomic aspects of the services over time.

By its very definition, the business case implies the problem companies often face when outsourcing contracts are executed. Once the decision is made to contract with a particular provider or providers and such contract is signed and executed, all too often the business case is filed away. It is assumed at this point that the business case has done its part and can retire. People often joke that the contract is put on a shelf to collect dust. If this is true, the business case is sent to the archives. Unfortunately, if you have ever taken part in any long-term project, you know the gears in the business continue to grind upon execution. New milestones are brought into the picture, financial data once relied upon is manipulated, and the very assumptions that were the structure for the business case may change altogether.

Introduction

Not tracking benefits realization for key vendor agreements often results in value leakage—not achieving planned benefits—such as:

• Consumption higher than planned

• Planned headcount reduction not achieved

• Business changes not factored into an updated business case.

One of the biggest issues is not being able to validate that the business case objectives were or were not achieved—and if they were not, what the causes were for variances.

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 273448

2During Transition and Beyond The Outsourcing Business Case Is Essential to Value Realization

Consider the baseline financial data elements collected during the assessment phase. Arguably 80 percent of data in the scenarios modeled are based on assumptions. Typically, these assumptions are at a very high level and range from the number of resources in scope in each business unit to the time lines for transition. Interestingly enough, much of the time spent in terms of modeling the business case is spent in the assessment phase because less is known. As an organization moves through the process from assessment to transaction, the data requirements become more finite, granularity increases, and the confidence

in the business case grows. The business case may be more solidified and contract terms may be set, but the outsourcing agreement is still built on assumptions and most of these are uncovered during the transition period—after contract signing. It is imperative to start validating the assumptions and changing the business case as needed immediately after signing, through transition and into the ongoing contract. The point being—the assumptions are always changing and the business case must be treated as an ongoing tool—not an ongoing concern revisited each year or in some cases, never.

Data RequirementsOver Time

Gra

nu

lari

ty

Built on Assumptions

Typical Assumptions That Should Be Validated Continuously Through

the Contract Life

• Transition timing

• In-Scope resources

• Volume differences

• Service scope differences

• Hardware and software needs

• Differences in expected service levels



Most assumptions that are invalid will become visible as time progresses. If the business case has been put on the shelf, these assumptions are solidified and stand little chance of being critiqued and corrected.

In a recent case study, a FORTUNE 500 company shut down its business case as soon as transition started for its outsourced technology contract. During the first year, many of the assumptions changed drastically, but the team never revisited the business case to determine the financial impacts. They operated under the assumption that the savings outlined in the initial business case would be achieved. The business case was no longer a tool that could be used to forecast the financials proactively, and in turn, perhaps drive different decisions. At a minimum, complicated conversations with

leadership could have been avoided had insight and greater transparency through a current business case aided planning and forecasting.

A third party was engaged to assess the impact of the business case due to the changes and incorrect assumptions that were known but not quantified. After transition delays, carrying unexpected retained third-party costs, and mistakes in occupancy assumptions, realized savings were nearly 60 percent lower than expected. The end result of not keeping the business case tuned on a regular basis cost this particular company nearly $10 million a year in expected savings.



Getting through transition and into service delivery is the first major milestone. However, the road to maintaining value does not end there. Contract durations are anywhere from three to seven years. During this time, organization realignments can occur, leadership can change, new services can be offered, company strategy can change—the dynamics of a firm do not

change simply due to somewhat static sourcing contracts. The individuals responsible for the contract as well as the contract itself must be able to flex with the changing dynamics of the company.

Continuing Value Realization



“Net” Value Gainedfrom the Sourcing

Relationship

Total Potential ValueGained from the Sourcing

Relationship

OperationalChallenges

PerformanceChallenges Portfolio

ManagementChallenges

EffortsDuplicated Resources

WastedChanges

NotManaged

PerformanceNot at

ExpectedLevels Service

Providers/Deployed against

Conflicting orWrong Goal Opportunities

Untapped

PotentialLoss ofValue

EffortsDuplicated

ResourcesWasted

Changes NotManaged

PerformanceNot at Expected

Levels

ServiceProviders/

Deployed againstConflicting orWrong Goal

OpportunitiesUntapped

• Business units fund shadow organizations vs. understanding scope and applying a more pragmatic approach to solving a service gap. Business units also hire other third parties to do in-scope work.

• Resources can be wasted because too many resources are kept in their current roles. These roles are often not redefined well enough to now be based on outcome and performance.

• Organizations also don't do a good job defining the new engagement model—how to work with the Service Provider—and resources are wasted.

• If there is not a well-defined process for issue management and problem resolution, costs will increase.

• Retained organization changes attributable to provider performance not contemplated in original business case (both ways).

• Providers spend effort on initiatives not aligned with department and company goals due to lack of visibility or direct linkage to strategy.

• Change controls not captured as baseline vs. savings—the value is lost.

• Assumptions made inthe business case arenot aligned to thebudget process.

• Soft costs notconsidered in thebusiness case are nottested and captured(e.g., HR budgets, otheroverhead budgets).

• Transition delays.

• Changes in volumeare not isolated andbusiness case is oftendeemed obsolete.

• Transformation delays.

• Resource unit variancefrom original baselinesfrom incorrect duediligence (both ways).

• SLA penalties maydrive requirement toincrease retainedorganization tocover gap.

• Acquisitions andDivestitures—visibilityinto cost that wasnot considered.



In summary, it is imperative to have a business case that is consistent through all stages of the service delivery life cycle. Steps you can take to help ensure this are:

• Procure the governance Finance and Contract resources before transition starts. That way, they are up-to-speed and ready to go in a time that is the most volatile.

• Invest in a targeted governance organization with dotted line responsibility to the business units. The governance organization comprises the structures, capabilities,

and processes that enable the decisions and actions that are in alignment with the desired outcomes of the relationship. Governance is needed for management of complex, multiparty, internal and external relationships to achieve specific goals or to ensure desired behavior. This organization should have its finger on the pulse of all the business units and functions the outsourcing contract touches. Make sure this organization understands not only the contract terms but the assumptions the business unit made around expectations, savings and requirements.

Conclusion


During Transition and Beyond The Outsourcing Business Case Is Essential to Value Realization 8

• Maintain the business case tool; don’t put it on a shelf. Perhaps invest in a tool that can be leveraged by the provider and the business units to ensure live updates of forecasts and scope changes and be willing to update both the assumptions and the business case throughout the life of the agreement to help maximize your benefits realization.

• Understand the financial assumptions going in—focus on hard-dollar cost savings and memo those that are not.

• Implement rigorous scope and contract change control procedures. Each scope or contract change should have an accompanying business case that should augment the existing case. Reasonable flexibility should be built into the contract to address foreseeable and unforeseeable changes. Variable pricing mechanisms and a flexible service commencement date allow the business case to be updated more fluidly. This forces the focus of the practitioner to be forward-looking with a predictive analysis mind-set versus being mired in administrative contract churn, and be willing to update both the assumptions and the business case throughout the life of the agreement to help maximize your benefits realization.

• Meet contractual obligations

• Ensure effective management

• Rapid resolution of issues

• Ensure management control

• Provide consistent direction to provider

• Ensure delivery of expected savings

• Ensure market pricing

• Manage demand

• Create optimization through standardization

• Leverage and focus provider capabilities

• Institutionalize process improvement

Risk Mitigation Value Realization


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

KPMG LLP does not provide legal services.

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. NDPPS 273448

kpmg.com

Tracy NewtonDirector, Advisory ServicesT: 770-335-7830 E: [email protected]

Tracy is a director in KPMG’s Shared Services and Outsourcing Advisory practice and has almost 20 years of advisory and industry experience in the sourcing marketplace. Her background in finance, consulting, and strategy helps clients navigate the financial decisions related to IT, F&A, or HR outsourcing and those inherent in complex transformation journeys.

Paul R. BucklesSenior AssociateT: 313-999-0057 E: [email protected]

Paul has nearly five years of financial analysis and project leadership experience. In his role, he is responsible for providing financial modeling and project management for shared services and outsourcing assessments and transactions across all functions – F&A, HR, Procurement, IT and Supply Chain.

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