outsourcing global information technology resources

Outsourcing Global Information Technology Resources

Outsourcing relationships fail for many reasons. Chief among them are unrealistic expectations; lack of a formal bid process; so-called relational contracts that assume the vendor will act as a strategic partner but that fail to spell out the details; and failing to manage the relationship once the contract has been signed - “Divorce Your Outsourcer,” Computerworld, August 1996

Questions to Consider

• Was Information Management (IM) a Core Competency for Xerox?

• Was the IM Outsourcing an Appropriate Decision?

• Does Outsourcing Give Xerox a Competitive Advantage?

• Was the Outsourcing Process Taken By Xerox Appropriate?

Key DefinitionsCIM: Corporate Information Management

Legacy System: Transaction Processing System Originally Designed for a Specific Task

Proprietary System: System Designed for a Specific Taskby an Internal IM Organization

Emerging Technology: On-line publishing, digital video, image (as it relates to this case) communication over the internet, digital

copying and printing

Case Study Team

• Jim Bodine

• Jeff Muckler

• Eric Mendola

• Ron Volans

• Amy Esposito

The Industry

Industry Evaluation

• Market Analysis– Trends– Key Success Factors– Attractiveness

Industry Evaluation

• Environmental Analysis– Threats– Opportunities– Uncertainties

Industry Sales

1998 Sales - in millions

18,000

286

3,000

1,8001,100

Xerox

Sharp

Ricoh

Minolta

Canon

– Overview / History– Image and Positioning– Objectives– Core Competencies / Strengths– Weaknesses

– Image and Positioning– Objectives– Core Competencies / Strengths– Weaknesses

Competitor Strength Grid

Assets and Competencies Sharp Canon Minolta Rocoh Xerox

Technology

Alliances

Financial Position

Strong Average Weak

The Company

Company Background Description

A global enterprise addressing the worldwide document processing market which develops, markets, services, and finances a complete range of products and services designed to make offices around the world more productive.

BackgroundHistory

• 1959 - Model 914 Copier Introduced

• 1970 - Literal Monopoly on the Market

• 1975 - FTC Settlement Occurs

• 1976-1982 - Share Decreases to 13%

• 1980 - Focus on Leadership Through Quality

Xerox Introductions & Market Share

0

20

40

60

80

100

120

1961-64 1965-68 1969-72 1973-76 1977-80 1981-84 1985-88 1989-92

NewProduct

NewCopierIntroductions

0

5

10

15

20

25

30

35

1984 1993

Low-End Copiers

Mid/High EndCopiers

Market Share

New Product & Copier

Introductions

Yet, Net Income is Declining

($1,200)($1,000)

($800)

($600)($400)

($200)$0

$200

$400$600

$800

1993 1992 1991 1990 1989 1988 1987 1986

Net Income

Background Corporate Restructuring — 1992

• Decision Making Moved Closer to Customer

• Greater Focus on Core Competencies

• Focus on Core Business

• Focus on Benchmarks

• Workforce Reduction

Information Management

• 1970s - CIM Established

• 1987 - General Services Division Established

Mission of CIM was now to . . . “develop the IT strategy for Xerox and ensure that it was implemented in all the business units.”

• $500 Million IT Budget

Information ManagementIT Strategy Consulting Firm

Finds Problems• No coordination of money spent each year

• No Corporate-Wide Management of IM Investment Priorities

• A Peripheral Player in IT Management

• Narrowly Focused IM Talent Pool

• Senior Managers Stingy With IT Infrastructure

• Redundant / Overlapping Efforts

• No Staff Development Mechanisms

Centralizing IMWallington Presents at President’s

Council Meeting — April, 1993

• $670 Million spent on IM in 1992 —

• Forecast to grow to $1 Billion by 2000 —

• . . . Amounts to 3.7% of total revenues!

IM 2000 Reengineering ProjectMid-1993

• Identification of IM problem areas

• Strategies to address those problem areas

• Projects implemented to fix problem areas

Goal: Move IM to a new information systems infrastructure.

Regional IM Infrastructure

Product Line Focus(Many different products per circle)

Problems Revealed

• Aging applications portfolio

• Proprietary technologies from previous structure

• Large spending for legacy systems

• Autonomous culture allowed for costly duplication

IM 2000 - Strategies

• Reduce / Redirect

• Infrastructure Management

• Leverage Worldwide IM Resources

• Business Process Driven Solutions

IM 2000Internal Obstacles Remain

• Conflict between IM problems and IM customers - the business divisions

• Little discipline of both time and money

• Internal costs of $55 million for hardware

• Viewed as an “expense center’ by top executives

IM 2000External Forces Create

Final Pressures

• Increasingly competitive environment

• Forced to adapt quickly

. . . “Top IM managers began to realize they would not be able to change quickly enough without outside help.”

Outsourcing & Xerox:What?Why?How?

What was and What is Outsourcing

• Outsourcing was looked upon as the business strategy associated with downsizing

• Outsourcing now is looked upon as utilizing the best expertise in local laws and business customs.

What is Outsourcing?

• Is the strategic use of outside resources to perform activities traditionally handled by internal staff and resources.

• Mgmt strategy by which and organization outsources major, non-core functions to specialized, efficient services providers.

• Wholesale restructuring of the corporation around core competencies and outside relationships.

What is Outsourced?

IT29%

Mkt & Sales14%

HR15%

Admin9%

Fin11%

Others22%

Admin Mkt & Sales IT HR Fin Others

Industry Trends in Outsourcing

• According to the Outsourcing Institute, 80% of Fortune 500 companies outsourced some or all of their information management function in 1997.

• These services accounted for 42 billion dollars in1996, a number expected to grow exponentially in the next decade.

Porter’s Five Forces

Bargaining power of suppliers

Threat of new entrants

Threat of substituteproducts

Competition among existing

firms

Bargainingpower of

existing firms

Reason for Five Forces

• Basis of competition

• Focus on core competency

• Create a competitive advantage– Build barriers to entry– Build switching costs– Change the basis of competition– Balance power in supplier relationships

Basis of Competition

Cost Leadership

Cost Focus

Differentiation

Differentiation Focus

Lower Cost Differentiation

Broad Target

Narrow Target

Competitive Advantage

CompetitiveScope

Need for Outsourcing is driven less by cost than…..

• Rapid access to new technologies and skill sets.

• Better responsiveness to changing conditions.

• Faster IT cycle times.

Top Reasons Companies Outsource

• Reduce and control operating costs.• Gain access to world class capabilities.• Resources are not available.• Allows you to free up resources (people and

capital) to work on your core business (i.e.. focus).• Improves capacity and quality. • Makes new business possible.

Reasons Companies do NOT Outsource

• Difficult to successfully implement.

• Problems regaining knowledge.

• Differing company strategies.

• Core competency.

• Lack of control.

• Lack of expertise.

IT Outsourcing

• Fastest growing area for outsourcing today.

• Executives are currently outsourcing:– Maintenance / repair

– Training

– Applications development

– Consulting and reengineering

– Mainframe data centers

IT Outsourcing

• Executives are considering outsourcing:– Client / servers– Networks– Desktop systems– End-user support– Full I/T outsourcing

Outsourcing at Xerox

• Outsourcing versus integration.

• Create win:win relationship.

• Share values to create a true partnership.

• Develop “spirit of the contract” for senior management to and understand.

• Create infrastructure to support companies strategic direction in the 90’s.

Outsourcing Process

Phase I - Fact Gathering

Phase II - Request for Proposal and Data Gathering

Phase IV - Baseline Building and Evaluation

Phase III - Feasibility and Management Approval

Phase V - Due Diligence and Contract Awarded


Vendor Selection

Benchmarking

OutsourcingObjectives

ITPartner


• Vendor selection team– Cross-functional representatives– Establish outsourcing requirements, objectives,

goals, and timeline– Conduct industry benchmarking

Outsourcing Objectives

• Drive down spending on “legacy” system

• Improve quality and cost of IM services

• Focus company’s resources on the primary mission.

Xerox Benchmarking

• Outsourcing Strategies

• Outsourcing Processes

• Vendor references

• Human resource impact

Companies• Salomon Brothers• General Motors• Equifax• First Boston

• AT&T• Kodak• Sun Microsystems• McDonnell Douglas

Vendor SelectionQualifications• Global Presence• Capability to manage “globally”• Experienced in large scale outsourcing•“Core” strengths in various frameworks•Mgmt processes and strengths

Human Resources• Treatment of Xerox employees•Human resource values

Financial• Translation of productivity savings to Xerox•Flexibility in meeting Xerox financial requirements•Experience in “engineering” financial environment

Technical Solutions• Productivity Commitment• Support for existing Xerox diverse environment•Capability to “migrate”

“Soft” Criteria• “Congruence” with positive Xerox environment• Provide benchmark for desired Xerox cultural traits

Outsourcing Process



Phase II -Data Gathering and Request for Proposal

Prepare a Request for a Proposal Be structured in a way that will allow assessments and

comparisons to be done in meaningful way Define requirements in complete and measurable terms Describe the type of relationship you are looking for Explain the problems that you are trying to solve Ask specific questions about corporate culture Present the current costs to the organization Specify a service level

Phase II -Data Gathering and Request for Proposal

Data Gathering

• Research the Vendors– Financial Stability, potential mergers, takeovers

• Questions and Answers

Outsourcing Process





• Outsourcing feasibility

• Recommendation to Management for approval to proceed

Outsourcing Process






• Evaluate the vendor responses– Systematic– Measurable– Meets objectives

• Select the vendor for contract negotiation

Lessons Learned - Xerox

• “What you want” is essential

• Clear objectives are key

• Cross functional team is a necessity

• A good contract requires a lot of data

Outsourcing Process





Phase V - Due Diligence and Contract Awarded

Phase V -Due Diligence & Contract Awarded

Outsourcing deals that go bad frequently suffer from poorly designed contracts - “Outsource Sense,” InfoWorld, September 1996

Managing the Outsourcing Relationship

• Create a Shared Vision• Include Effective Performance Measures• Use Performance Incentives and Penalties• Establish Clear Communication Mechanisms• Develop a Clear Contingency Plan and Exit

Strategy• Manage People Issues

Negotiate a Sound Contract

• Terms of the Agreement

• Minimum Service Levels

• Ownership & Confidentiality of Data

• Warranty• Incentives

• Disclaimers• Bankruptcy

Contingency• Force Majeure• Performance Measures• Anticipate Change

Global Complications

• Various Human Resource / Employee Laws

• Degree of Risk

• Political Instability

• Various Asset Transfer Laws

Xerox: Outsourcing Partnership

Mainframe ComputerSystems

Desktops

Telecommunications

Local Area Networks

Information Technology System Development

Tactical Implementatio

n

Infrastructure Management

Xerox

EDS

Xerox: Status in June 1994

• Xerox/EDS Core Teams Created • Massive Internal PR Campaign Initiated• Switch Incentives Offered• Assured Confidentiality• Divorce Issues Addressed• Annual Price Benchmarking• Single Global Contract• Key Global Players Added to Team

Xerox: Status 1996/1997

• Xerox “Satisfaction at the Low End and Dropping”• 2000 Employees Transferred to EDS / 700 Remain• After 2.5 Years 15% of Proprietary System Replaced

(Global View)• 600 Novell LANs installed• 1000’s Desktops and Printers Replaced• 12 Person Xerox Team Established to Manage• Contract Amended in Sept 1996

Contract Addendum

• Clarified Terms for Desktop and LAN Support

• Established Formalized Response Metrics

• Established ‘Managed Rate Change”

• Eliminated Billing Inconsistencies

Xerox: Status 1999

EDS Files Suit Against Xerox February 1999

Differing ViewsEDS Literature

• Collaborative• Value Transition

Employees• Communication Key

Xerox Testimonials• Technology Transition

Painful • Standard Architecture

not as Complete as Proprietary Systems

• Spent More Time Co-Managing Than Expected

• More Costly

Conclusion

Summary - DecisionPrinting, Publishing &

Electronic Media Industry: Competitive Environment

Technologically Focused

Emerging Technology: Xerox Core Competency

Information Management Not Core Competency

Outsource Non-Core Competency

Summary - Process

• Process– Focused– Management Buy-in– Benchmarking Utilized

• Implementation– Underestimated Change in Information

Technology– Service Specifics Not Addressed

Recommendations

• Outsource Non-Core Competency Functions

• Write Air-Tight Service Level Agreements for Every Strategic Business Unit & Every Platform

• Define Graduated Levels of Performance and Penalties Based on Customer Satisfaction

• Don’t Compromise Service Levels with Price Negotiation

outsourcing global information technology resources

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