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Outsourcing Management Standard Guide

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This Outsourcing Management Standard Guide should be used as a reference for all the aspects of outsourcing in relation to IT services. It can be used as a company-wide manual that helps employees familiarize themselves with all aspects of outsourcing. Before implementing the manual as a company policy, make sure to read through the chapters and customize it by removing or adding sections as they pertain to a company. Use this guide as a reference for all aspects of outsourcing in relation to IT services.

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									This Outsourcing Management Standard Guide should be used as a reference for all
the aspects of outsourcing in relation to IT services. It can be used as a company-wide
manual that helps employees familiarize themselves with all aspects of outsourcing.
Before implementing the manual as a company policy, make sure to read through the
chapters and customize it by removing or adding sections as they pertain to a company.
Use this guide as a reference for all aspects of outsourcing in relation to IT services.
Table of Contents
1     Introduction ......................................................................................................................... 3
2     Benefits of Outsourcing ....................................................................................................... 3
3     When to Consider Outsourcing........................................................................................... 4
4     Success Factors for Successful Outsourcing ....................................................................... 4
5     Formulas that Must be Understood .................................................................................... 6
    5.1     Unit Cost Formula........................................................................................................ 6
    5.2     Net Present Value........................................................................................................ 6
6     Outsourcing Agreement ..................................................................................................... 6
7     Exit Strategy ........................................................................................................................ 7
8     Common “Pitfalls” ............................................................................................................... 7
9     Steps of Outsourcing .......................................................................................................... 8
10 SLA Metrics ....................................................................................................................... 10
    10.1        Volume of Work ...................................................................................................... 10
    10.2        Quality of Work ....................................................................................................... 10
    10.3        Responsiveness ....................................................................................................... 12
    10.4        Efficiency ................................................................................................................ 13
11 Conclusion ......................................................................................................................... 14




© Copyright 2011 Docstoc Inc..                                                                                                       2
1. Introduction
In its most extensive form, outsourcing can mean the handing over of entire operations (such as
hardware, software, staff, premises, telecoms, development, training and maintenance) to an
independent outside organization. That organization then has the responsibility of managing
resources and delivering the services previously provided by the outsourcing client.



2. Benefits of Outsourcing
    1. Improvement of company focus
    2. Access to world-class capabilities
    3. Acceleration of reengineering benefits
    4. Shared and minimized risks
    5. Resources are available for other purposes
    6. Cash is infused into the organization
    7. Makes capital funds available
    8. Reduces and controls operating costs
    9. Provides resources not available internally
    10. Helps manage or control difficult or out-of-control functions
    11. Provide the organization’s buyer(s) with greater flexibility
    12. Decreases the organization’s product-design cycle time
    13. Improves efficiency and establishes competitive advantages
    14. Gives access to technology that would be too expensive to duplicate internally
    15. Improves employee morale by outsourcing mundane, non-critical tasks, leaving more
        critical duties to the remaining in-house labor force
    16. Improves turnaround times and corrects poor financial performances
    17. Increases control and effectiveness, enhances operations, and improves customer service
    18. Continuously improve the organization’s state-of-market expertise, including best
        business practices
    19. Allows for complete solutions and better network performance to be acquired
    20. Helps avoid large capital expenses


© Copyright 2011 Docstoc Inc..                                                              3
    21. Frees up management’s time
    22. Frees up non-capital resources for use elsewhere
    23. Replaces outdated systems
    24. Improves service levels
    25. Centralizes and increases on-time delivery
    26. Eliminates inventory



3. When to Consider Outsourcing
     1. There is a large backlog of projects and tasks.
     2. There is not a comprehensive, long-term plan addressing the organization’s strategic
         objectives.
     3. There is a loss of confidence concerning in-house expertise.
     4. There is a sense the organization is in transition.
     5. There is a trend of increasing costs with no clear understanding of the cause.
     6. There is pressure to increase profits or decrease operating costs.
     7. There are significant fixed costs.
     8. There are problems with the quality of the organization’s service.
     9. There is a need for a structural change in technology.
     10. There is a need to address the organization’s standard.
     11. There is an organizational slowness to adjusting to change.
     12. There is a sense that the time and effort required to get desired effects is excessive.
     13. There is a need for a fast start-up.

4. Success Factors for Successful Outsourcing
In order to enhance the probability that outsourcing will be successful, the following points
should be considered:
    1. Clarify and address the organization’s objections to outsourcing.
    2. Evaluate the effectiveness of the outsourcing provider.
    3. Ensure the organization is committed to the outsourcing initiative.
    4. Ensure the organization’s long-term focus is well-defined and communicated throughout
        the organization.

© Copyright 2011 Docstoc Inc..                                                                     4
    5. Know the organization’s strengths and weaknesses and how they relate to outsourcing.
    6. Know the specific requirements, specifications, quality, and standards required by the
        organization and the organization’s customers.
    7. Know and define the measurement and monitoring procedures the organization requires
        before outsourcing negotiating begins.
    8. Develop relationship criteria and policies that will be applied between outsourcers and
        providers.


The relationship between outsourcer and provider will be rocky at times. There will be quality,
delivery, and trust issues. Outsourcing relationships work best when they involve:


        1. Clearly defined products and services that are specified in detail
        2. Expectations that are well-defined
        3. Communication that is frequent, open, and numerous throughout all levels of the
            organization
        4. Contracts that are long-term in nature
        5. Shared risks and rewards
        6. Minimization of similar products provided by suppliers
        7. A selection that is not based solely on the lowest price, but on total value
        8. Integrated communications technology
        9. A shared culture of improved quality
        10. A mechanism for joint problem solving
        11. A commitment to a shared, customized investment
        12. A commitment to flexible schedules
        13. A commitment to limit the number of vendors invited to participate in the outsourcing
            process




© Copyright 2011 Docstoc Inc..                                                             5
5. Formulas that Must be Understood

        A.      Unit Cost Formula
        Unit Cost = Direct Variable Costs + Overhead Costs + Semi Variable Costs + Fixed
        Costs + Specialized Expenses

        B.      Net Present Value
        Project Cash Flow NPV = Year-one cash flow (discount factor) + Year-two cash flow
        (discount factor) + Year-three cash flow (discount factor) + Year-four (discount factor) +
        Year-five (discount factor) + terminal value


        When the cost of outsourcing, as determined from the marginal cost, is lower than the
        NPV of the project, and when the process or product is not a core competency,
        outsourcing is a viable alternative to consider.



6. Outsourcing Agreement
This governs the relationship between supplier and customer. It will frequently be a lengthy and
detailed document. There will also be a substantial number of schedules containing details on
matters such as hardware, service levels, charges, licensed software, personnel and the exit
strategy.


The contract will be for a relatively long term as this is required to make it commercially
attractive for the outsourcing supplier. Generally, the supplier does not make a profit at all
during the first two years of the contract and will look to make its profit in the later years. A
period of up to five years is common, often with an option to renew for further periods. Ideally,
the customer should include a term that the supplier cannot terminate the contract — only the
customer should be able to do so after having giving the requisite notice.


There will need to be an agreement on a price for the transfer of assets to the outsourcing
supplier — frequently this will be nominal. One point for the customer to bear in mind will be to


© Copyright 2011 Docstoc Inc..                                                              6
check that there are no adverse tax consequences for the transfering out of the company of low-
value items. This work will normally need to be “outsourced” to the customer’s accountants.



7. Exit Strategy
One area that is frequently given insufficient attention in the outsourcing agreement is the exit
strategy. This is what happens when the contract ends and the resources are either taken back in-
house, or, more likely, transferred to another outsourcing supplier.


The aim of any customer should be to avoid accepting any costs on termination of an outsourcing
agreement other than the costs of transferring knowledge and enhanced book values for
equipment.



8. Common “Pitfalls”
The following are some of the more common pitfalls:


     Too tight a service specification.          Specifications should not be too specific (i.e.,
        specifying the quality of carpet to be used in the computer room, if this is not integral to
        the service being provided).       The service levels should be set out in general (and
        measurable) terms (i.e., “what,” not “how”).
     Underestimating the importance of staff issues. Staff members have the power to ensure
        an outsourcing project fails if it is dealt with insensitively.
     An assumption that the relationship is static. It is not static and will change from the
        very start of the contract. Adequate change control measures and contract monitoring
        procedures should be in place within the contract.
     Unclear exit strategy. There is a great temptation to devote too little attention to this at
        the start of the contract because it is not topical. It must, however, be thought through
        and set out in detail, generally in one of the schedules to the contract.




© Copyright 2011 Docstoc Inc..                                                               7
9. Steps of Outsourcing
There are seven distinctive steps to outsourcing:
        1. Planning the outsourcing initiative
                     Assess risks
                     Announce the initiative
                     Form project teams
                     Engage advisors
                     Train the team
                     Acquire other resources
                     Set objectives
                     Issues     that   need    addressing:   resource   management,    information
                         management, project management


        2. Exploring strategic implications
                     Understand the organization’s vision, core competencies, and structure
                     Transformation tools, value chain, and strategies.
                     Determine applicable decision rights, contract length, and termination date
                     Align the outsourcing initiatives with the organization’s goal.


        3. Analyzing costs/performance
                     Measure activity costs
                     Project future costs
                     Measure performance: existing and future cost of poor performance


        4. Selecting providers
                     Set qualifications
                     Set evaluation criteria
                     Identify providers
                     Screen providers
                     Draft a request for proposal
                     Evaluate proposals: qualification cost

© Copyright 2011 Docstoc Inc..                                                               8
                     Perform due diligence
                     Determine: total cost buyout; short list of providers; finalist provider
                     Review criteria, provider attributes and risks with management.
        5. Negotiating terms
                     Plan negotiations
                     Address high-level issues and determine deal breakers
                     Prepare term sheets
                     Negotiate contract: scope, performance standards, terms and conditions


        6. Transitioning resources
                     Adjust team roles
                     Compare/merge transition plans
                     Address transition issues: communication, human resources, other
                         production factors
                     Meet with employees: organization and provider
                     Make offers/terminations
                     Provide counseling
                     Physically move


        7. Managing relationships
                     Adjust management style
                     Setup oversight council
                     Communicate
                     Define and design: meeting agendas, meeting schedule, and performance
                         reports
                     Perform oversight role
                     Confront poor performance
                     Solve problems
                     Build relationships




© Copyright 2011 Docstoc Inc..                                                                   9
10. SLA Metrics
When setting up a SLA to control and manage the factors for outsourcing, there are many
possible metrics from which to choose. The simplest way to approach these metrics is to group
them into categories, decide which ones in a given category work best for the particular project,
and then construct the desired metrics. The key factors can be managed through four major
categories of SLA metrics:

        A.      Volume of Work
        The volume of work is typically the key sizing determinant of an outsourcing project,
        specifying the exact level of effort to be provided by the service provider within the
        scope of the project. Any effort expended outside of this scope will usually be separately
        charged to the company, or will require re-negotiation of the terms of the SLA. Broadly
        defined as the number of units of a work product or the number of deliverables produced
        per unit of time, volume of work metrics should be specified for every major deliverable
        cited in the SLA. Pick the simplest volume metrics possible to ensure consistent results.
        More complex metrics, such as function point-based volume measures, can be difficult
        and costly to obtain for many organizations, and risk inconsistency and subjectivity.
        Projects that are billed on a time and materials basis may discuss volume in terms of
        number of resources, while a fixed price project will generally specify volume of
        deliverables. Example metrics include number of support calls per month, number of
        maintenance requests per month, etc.

        B.      Quality of Work
        Quality metrics are perhaps the most diverse of all of the SLA metrics. They cover a
        wide range of work products, deliverables and requirements and seek to measure the
        conformance of those items to certain specifications or standards. When deliverables fail
        to meet the acceptance criteria in the specifications or standards, quality problems arise.
        It is best if each major deliverable contained in the SLA has corresponding acceptance
        criteria to judge the quality of the deliverable. When that is the case, quality of work can
        be expressed positively (percentage of deliverables accepted) or negatively (percentage of
        deliverables rejected).


© Copyright 2011 Docstoc Inc..                                                               10
        A quality definition may contain several individual metrics that may form part of the
        deliverable's acceptance criteria, or that may serve as standalone measurements of a
        single aspect of service. These metrics include, but are not limited to:


         Defect rates

            These include the counts or percentages that measure the errors in major deliverables,
            including number of production failures per month, number of missed deadlines, and
            number of deliverables rejected (reworks), etc.


         Standards compliance

            This includes internal standards for application source code, documentation, reports
            and other tangible deliverables, including the number of enhancement tasks passing
            standards reviews, number of documented programs, etc.


           Technical quality

            This includes measurements of the technical quality of application code, normally
            produced by commercial tools that look at items such as program size, degree of
            structure, degree of complexity and coding defects. The actual metrics depend on the
            tool used, but may include items such as McCabe Cyclomatic Complexity, McCabe
            Essential Complexity, average program size, etc.


         Service availability

            Service availability is the amount of time /window of time that the services managed
            by the outsourcer are available, ranging from on-line application availability to
            delivery of reports by a specified time-of-day. Measures can be reported positively or
            negatively, and usually incorporate some level of tolerance (i.e., including an online
            application availability of 99 percent of the time between the hours of 8:00 a.m. -
            6:00 p.m.).



© Copyright 2011 Docstoc Inc..                                                              11
         Service satisfaction

             Included should be the client's level of satisfaction with the perceived level of service
             provided by the outsourcer captured for each major function through internal and/or
             external surveys. Ideally, these surveys are conducted periodically by a neutral third
             party. Although subjective, such surveys are good indicators of the validity of the
             other SLA metrics. For example, if an outsourcer meets all specified performance
             targets, but receives a substandard satisfaction rating, the current SLA metrics are
             clearly not targeting the right factors. Within the SLA, metrics specify the minimum
             satisfactory ratings in key survey categories.



        C.      Responsiveness
        Responsiveness metrics measure the amount of time that it takes for an outsourcer to
        handle a client request. They are usually the most important ones from the client's
        perspective, and figure heavily in its perception of the quality of service provided by the
        outsourcer.     Responsiveness to requests often motivates business areas to seek
        outsourcing in the first place. Metrics include:


         Time-to-market or time-to-implement

             These metrics measure the elapsed time from the original receipt of a request until the
             time when it is completely resolved. Sample metrics include the time required to
             implement an enhancement, time to resolve production problems, etc.


         Time-to-acknowledgement

             These metrics measure how responsive the outsourcer is by focusing on when a
             request is acknowledged and the accessibility of status information. Sample metrics
             include the time required to acknowledge routine support calls, programmer response
             time to production problems, etc.


© Copyright 2011 Docstoc Inc..                                                                 12
         Backlog size

             Another measure of responsiveness is the size of the backlog, typically expressed as
             the number of requests in the queue or the number of hours needed to process the
             queue. Metrics include the number of resource-months of enhancements, number of
             unresolved support requests, etc.



        D.      Efficiency
        Efficiency metrics measure the engagement's effectiveness at providing services at a
        reasonable cost.     Pure cost metrics, while important, miss the relationship between
        volume of work and effectiveness of its delivery. For example, an outsourcer may
        commit to handling 1,000 telephone-support requests per day for a fixed price of $20,000
        per day. Even if the outsourcer doubles its effectiveness, it still handles 1,000 calls and
        charges $20,000. If an efficiency metric, such as an average cost per call is used instead,
        the client will see a change from $20/call to $10/call.      For the client, increases in
        efficiency often produce cost reductions.      For the outsourcer, improved efficiency
        translates into increased profits. Outsourcing arrangements often share these benefits
        between client and outsourcer to encourage them to seek efficiency improvements.
        Establishing a history of efficiency metrics also enables volume adjustments. If the client
        later needs 1,500 calls/day, pricing is more straightforward. Similarly, efficiency can
        translate into either the same volume of service for less money or a greater volume of
        service for the same money. Examples of efficiency metrics include:


         Cost/effort efficiency

        This efficiency indicator is typically tied to an index that is based upon cost per unit of
        work produced, and it is used to document cost reductions or increases in productivity.
        Sample metrics include the number of programs supported per person, cost per support
        call, etc.


© Copyright 2011 Docstoc Inc..                                                               13
         Team utilization

            These metrics track the workload of each team member to aid in wise utilization of
            resources. Engagements that charge on a time-and-materials basis should include
            metrics on staff utilization to measure the effectiveness of staff deployment in order
            to encourage the outsourcer to make staff reductions as efficiency is gained. Sample
            metrics include the percentage of time spent on support, percent utilization, etc.


         Rework levels

            Although rework metrics are also quality measures, they can be applied on a
            percentage basis to measure the effectiveness of implementing quality improvements.
            These metrics track the percentage of work products that returned to a previous step
            for additional work, correction or completion. They track "wasted effort" and help to
            measure the quality of a process and its efficiency. Metrics measure rework rates for
            particular tasks and for specific processes.



11. Conclusion
Handled properly, outsourcing can be a “win/win” situation for both parties with the customer no
longer being distracted from its core business by the provision of IT services.            However,
outsourcing           is         not      a         panacea         for         IT        problems.




© Copyright 2011 Docstoc Inc..                                                                   14

								
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