outsourcing - a fact based decision? - ifpug proceedings/isma1-2006... · carl-henric svanberg, ceo...

Outsourcing – A Fact Based Decision?

ISMA Conference, September 2006, San Diego

Pierre Almén & Frank [email protected] & [email protected]

www.compassmc.com

22006-09-15

Agenda

Who are we?

Background

Fact Based Decision – Why

Fact Based Decision – How

Fact Based Decision – Summary

Outsourcing Vendor Evaluation – Case Study

Who are we?

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Compass - A Global CompanyPrivately owned, independent global consultancy

Founded in 1980, 18 offices in 15 countries

Over 450 active clients in 37 countries

Over 1500 client operations analysed in detail in 2005

Offices in:AustraliaAustriaBrazilCanada FinlandFranceGermanyItalyNetherlandsSingaporeSouth AfricaSpainSwedenUKUSA Country of operation

Background

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Different IT views

CEO VIEWCIO VIEWIT Unit IT Total IT BusinessCost Volume Cost Value

Desktop -32% +283% +154% ?

Mainframe -66% +297% +5% ?

Network -42% +210% +80% ?

% Change 5 years

What is the business demand driving IT volumes ?Are IT and business operations aligned to maximise business impact?

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Market

IT services in Europe (source: Forrester Research)

10% yearly growth 2006-2011 for Application outsourcing, IT in total 6%

Outsourcing plans 2006: Applications 53%

Engineer examination

USA: 400.000 / year

India: 375.000 / year (and growing)

China: Today 5 times more engineers compared to USA (and rapidly growing)

India Sourcing MarketServices and Sourcing market: 17.2 billion $ April 2004 – March 2005 (source: National Association of Software and Service Companies, New Dehli)

Doubling every 3 years

65% of world AD/AM offshore and 46% of BPO (call centers, HR, ticket booking etc) (source McKinsey)

2% of BNP year 2000, now 5%, 7% year 2010 (source Nasscom/McKinsey)

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Outsourcing FailuresCauses

(May 2004 study ”Leading Causes of Outsourcing Failures”)

Buyer’s unclear expectations up front as to its objectives

Parties interests are aligned up front but become misaligned as business environment / needs change

Provider’s poor performance against SLA

Carl-Henric Svanberg, CEO Ericsson (source: DI June 23 2005)

“Many companies outsource on incorrect grounds”

“If the business is not efficient, the solution is not to outsource. You must improve your business first. Then a sourcing decision could be considered”.

Fact Based Decision - Why

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Why Software Measurement Has Value

Companies that don’t:

On-time projects: 45%

Late projects: 40%

Cancelled projects: 15%

Defect removal: Unknown

Cost estimates: Optimistic

User Satisfaction: Low

Software status Low

Staff morale: Low

Companies that measure:

On-time projects: 75%

Late projects: 20%

Cancelled projects: 5%

Defect removal: >95%

Cost estimates: Accurate

User Satisfaction: High

Software status High

Staff morale: High

Source: Capers Jones IFPUG 2001

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The Compass Effect

Over a 4 year period, regular clients are on averagemore than 36% more efficient than first time clients

Fact Based Decision - How

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Selection of projects / applications (1)

Make an inventory of all applications / projects and analyze based on Strategic value and Operational Importance

If a specific application fails, how soon will your CEO find out?At what level is this application sponsored? Does application investment and mix apply to current business strategy?

Operational ImportanceHigh

High

Low

Low

StrategicValue

Strategic, High Impact

20%

Strategic, Low Impact

14%Non-strategic,

High Impact12%

Non-strategic,

Low Impact54%

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Selection of projects / applications (2)

Primary selection criteria are Strategic value and Operational importance

Other selection criteria that can be used:

Skill constraintsBusinessTechnical

Phase out ofPlatformProgramming language etc

Flexibility

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Expandable Metrics ScopeOverview

Time Reporting - Financial Reporting - Quality ReportingGenerally available information


DevelopmentAll or specific projects


MaintenanceAll or specific applications


Project/App.#1

FP Level 3

Project/App.#1

FP Level 3

Project/App.#2

FP Level 4

Project/App.#2

FP Level 4

Project/App.#3

FP Level 4

Project/App.#3

FP Level 4

Project/App.#4

FP Level 5

Project/App.#4

FP Level 5

Project/App.#5

FP Level 5

Project/App.#5

FP Level 5

Project/App.#…

FP Level 6

Project/App.#…

FP Level 6

Starting with application development and maintenance basics and expanding upwards

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Expandable Metrics ScopeBasic Building Block

Sample performance indicators;Cost per chargeable hour Cost per worked hour

EmployeesContractors

Resource utilization Cost distributionResource distribution (employees/contractors)Contractor usage Training & EducationManagement & AdminUser, Customer and Employee Satisfaction







Project/App.#1

FP Level 3

Project/App.#1

FP Level 3

Project/App.#2

FP Level 4

Project/App.#2

FP Level 4

Project/App.#3

FP Level 4

Project/App.#3

FP Level 4

Project/App.#4

FP Level 5

Project/App.#4

FP Level 5

Project/App.#5

FP Level 5

Project/App.#5

FP Level 5

Project/App.#…

FP Level 6

Project/App.#…

FP Level 6

• Based on available time, financial and quality reporting and interviews with management

• Covers application development, maintenance and management & administration

• Information period can be e.g.latest 6 or 12 months

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High Level Cost EfficiencyCost per FTE / per Billable Hour

0

20

40

60

80

100

120

140

160

Total annual cost perFTE (K$)

Cost per chargeablehour ($)

Cost comparison

XYZ 2004XYZ 2005Ref Mean 2005

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Expandable Metrics ScopeDevelopment and Maintenance

Sample performance indicators;Cost efficiency within application maintenance Project durations, delivery precision Operation and development environments User/Customer involvementResource split by phases Resource estimationsChange and Release management Scope Creep (hours)







Project/App.#1

FP Level 3

Project/App.#1

FP Level 3

Project/App.#2

FP Level 4

Project/App.#2

FP Level 4

Project/App.#3

FP Level 4

Project/App.#3

FP Level 4

Project/App.#4

FP Level 5

Project/App.#4

FP Level 5

Project/App.#5

FP Level 5

Project/App.#5

FP Level 5

Project/App.#…

FP Level 6

Project/App.#…

FP Level 6

• Based on previously collected information extended with available project / application information and interviews with project and system managers

• Initially focus on a sub-set of projects and a sub-set of applications

• Information period can be e.g.latest 6 or 12 months

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Cost EfficiencyApplication Maintenance

0

500

1000

1500

2000

2500

3000

$

XYZ 2004 XYZ 2005 Ref Mean 2005

Repair cost per problem

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Expandable ScopeProject and Application Size (Complexity)

Sample performance indicators;Development and maintenance productivityCost efficiency within development and maintenanceApplication quality Delivery CapacityScope Creep (functionality)Code re-use







Project/App.#1

FP Level 3

Project/App.#1

FP Level 3

Project/App.#2

FP Level 4

Project/App.#2

FP Level 4

Project/App.#3

FP Level 4

Project/App.#3

FP Level 4

Project/App.#4

FP Level 5

Project/App.#4

FP Level 5

Project/App.#5

FP Level 5

Project/App.#5

FP Level 5

Project/App.#…

FP Level 6

Project/App.#…

FP Level 6

• Based on previously collected information and extended with Function Points for selected projects/applications

• FP information initially only for selected sub-set of projects / applications and within accuracy level 3-6

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Development Productivity

0

2

4

6

8

10

12

14

Environment A Environment B

Development Productivity - FP per PM

XYZ 2004XYZ 2005Ref Mean 2005

Fact Based Decision -Summary

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Critical Success FactorsKnow YOUR performance – Get a baseline

MEASUREMENT is a key component of outsourcing components

Remember that there will be RETAINED services

No matter how good a deal you cut with a supplier – if that deal does not meet the needs of the wider business it is NOT a good deal

Key to your creation of the RFP is keeping the business agenda at the top of YOUR agenda

Stakeholder analysis, peer review and business sponsorship are all key to a successful outsourcing

Outsourcing Vendor Evaluation – Case Study

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Overview of the EngagementClient wanted to migrate a large suite of applications from Mainframe to Client/Server and achieve cost reductions

This involved a two-phase procurementApplication re-development, and ongoing maintenance and support

Infrastructure Services (hosting)

Client was anxious to learn about leading Indian outsourcers andto include them in the process

This included visits to six leading vendors’ off-shore facilities

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As expected, Indian vendors place a very large emphasis on process.

Strong process orientationSEI CMM Level 5, CMMI, ISO 9000, MBNQA, BS 7799, etc.Process maturity is used as marketing leverageBut since all vendors have the same processes, there is little real competitive advantage

Sound processes are essential to the off-shore business modelIn other words, when you have an analyst and programmer working 10,000 miles apart, you’d better give them some good processes!

A corollary: You can use off-shore outsourcing to “buy” process maturity –BUT – only to the extent that your retained organization can assimilate it.

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All vendors use similar staffing models. 30% on-shore and 70% off-shore is the typical resource split.

On-shore resourcesRequirements gatheringAcceptance testing and installationCritical supportOther client-facing functions

Off-shore resourcesTraditional analysis/design/code and testingSoftware maintenance

On-shore resources are often higher during requirements phase, and are typically lower (~20%) for pure maintenance mode

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All Indian vendors emphasize Human Resources and Knowledge Management functions.

Human ResourcesEach meeting included a high-ranking HR manager

Very good recruiting and hiring practices, extensive testing and a <1% offer rate

Extremely friendly work environments (“campuses”)

Emphasis on training – soft skills as well as technical

Knowledge ManagementMore important to off-shore work because of time and geographical considerations

All vendors stressed KM practices and tools

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Overall, the evaluation team members were quite favorably impressed with the Indian vendors.

Team member rankings, at the end of the off-shore visits, were almost identical

However, there was also agreement that even the lowest-ranked vendor could do a very good job with the scope of work

And, as it turned out, the vendor ultimately selected was in themiddle of the pack based on the off-shore site visits

Remember, this was only one step of the process!

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So, does this mean you should outsource everything you do to India? Probably not!

Things that work well off-shore:Tightly-bounded development projects, with good requirements

Routine application maintenance work

Things that DON’T work well off-shore:Projects with poor or ill-defined specs

Staff augmentation (using off-shore resources as contractors)

Critical-application maintenance (where on-site support and immediate response may be required)

“Around the clock” development

The bottom line is, you still have to use your judgment!

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The procurement process should be structured with many vendor interactions and evaluations.

Sample procurement lifecycle:Market and vendor researchRFI developmentRFI issuance and evaluation of vendor responsesRFP development and issuanceVendor question-and-answer sessionOff-shore site visitsOn-shore site visitsMid-term vendor presentationsReference checksVendor proposal evaluationVendor selection, due diligence and contract negotiations

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And a comprehensive set of criteria should be used to evaluate the vendor interactions.

Evaluation Criteria Weight Score Weighted ScorePeopleProcessesToolsSolution DesignAbility to DeliverFinancial PerformanceMeasurement and Continuous ImprovementLeadershipExperienceValue AddAbility to Work TogetherTransition

Sample Vendor Evaluation Worksheet

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Vendor Evaluation - SummaryDo your homework first – Develop a Fact-Based Sourcing Strategy

Be sure to at least consider the leading off-shore outsourcers, as they all have good people and impressive delivery capabilities

Use your judgment, some things don’t adapt well to off-shoring

And use multiple vendor interactions and evaluation criteria to ensure you pick the best vendor for you

outsourcing - a fact based decision? - ifpug proceedings/isma1-2006... · carl-henric svanberg, ceo...

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