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 Definitions
CIM: Legacy System: Corporate Information Management Transaction Processing System Originally Designed for a Specific Task System Designed for a Specific Task by an Internal IM Organization On-line publishing, digital video, image communication over the internet, digital copying and printing

Proprietary System:

Emerging Technology: (as it relates to this case)

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
1,100 1,800 3,000 18,000 286 Xerox Sharp Ricoh Minolta Canon

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

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

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

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

Image and Positioning Objectives Core Competencies / Strengths Weaknesses

Competitor Strength Grid

Assets and Competencies Technology Alliances Financial Position Sharp Canon Minolta Rocoh Xerox

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.

Background History
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

120 100 80 60 40 20 0 1961-64 1965-68 1969-72 1973-76 1977-80 1981-84 1985-88 1989-92 New Product New Copier Introduct ions

New Product & Copier Introductions

35 30 25 20 Low-End Copiers Mid/High End Copiers

Market Share

15 10 5 0 1984 1993

Yet, Net Income is Declining

$800 $600 $400 $200 $0 ($200) ($400) ($600) ($800) ($1,000) ($1,200) 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

 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

Information Management IT Strategy Consulting Firm Finds Problems

Wallington Presents at Presidents Council Meeting April, 1993

Centralizing IM

$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 Project Mid-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 2000 Internal 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 2000 External 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?
Others 22% Admin 9% Mkt & Sales 14%

Fin 11%

HR 15%
Admin Mkt & Sales IT HR Fin

IT 29%
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.

Porters Five Forces

Threat of new entrants

Bargaining power of suppliers

Competition among existing firms

Bargaining power of existing firms

Threat of substitute products

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
Competitive Advantage Lower Cost Broad Target Differentiation

Cost Leadership

Differentiation

Competitive Scope

Narrow Target

Cost Focus

Differentiation Focus

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 90s.

Outsourcing Process
Phase I - Fact Gathering

Phase II - Request for Proposal and Data Gathering

Phase III - Feasibility and Management Approval

Phase IV - Baseline Building and Evaluation

Phase V - Due Diligence and Contract Awarded

Phase I - Fact Gathering

Vendor Selection Benchmarking

IT Partner

Outsourcing Objectives

Phase I - Fact Gathering

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 companys resources on the primary mission.

Xerox Benchmarking
Outsourcing Strategies Outsourcing Processes Vendor references Human resource impact
AT&T Kodak Sun Microsystems McDonnell Douglas

Companies
Salomon Brothers General Motors Equifax First Boston

Vendor Selection
Qualifications
Global Presence Capability to manage globally Experienced in large scale outsourcing Core strengths in various frameworks Mgmt processes and strengths

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

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

Human Resources
Treatment of Xerox employees Human resource values

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

Outsourcing Process
Phase I - Fact Gathering

Phase II - Request for Proposal and Data Gathering

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
Phase I - Fact Gathering

Phase II - Request for Proposal and Data Gathering

Phase III - Feasibility and Management Approval

Phase III - Feasibility and Management Approval

Outsourcing feasibility Recommendation to Management for approval to proceed

Outsourcing Process
Phase I - Fact Gathering

Phase II - Request for Proposal and Data Gathering

Phase III - Feasibility and Management Approval

Phase IV - Baseline Building and Evaluation

Phase IV - Baseline Building and Evaluation

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 I - Fact Gathering

Phase II - Request for Proposal and Data Gathering

Phase III - Feasibility and Management Approval

Phase IV - Baseline Building and Evaluation

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

Xerox

Information Technology System Development

EDS

Tactical Implementation Infrastructure Management

Telecommunications Mainframe Computer Systems Local Area Networks Desktops

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 1000s 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 Views
EDS Literature Collaborative Value Transition Employees Communication Key Xerox Testimonials Technology Transition Painful Standard Architecture not as Complete as Proprietary Systems Spent More Time CoManaging Than Expected More Costly

Conclusion

Summary - Decision
Printing, 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 Dont Compromise Service Levels with Price Negotiation