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Today’s webinar                                                  Upcoming webinar
Vanilla, Chocolate, or Rocky Road: What Flavor                   Key Market Developments in Q1-2010: Market
of Outsourcing Do You Want?                                      Vista Report Briefing

Synopsis:                                                        Date & Time:
Everest expert, Eric Simonson, will discuss how                  Thursday, May 13, 2010
buyers can capture hidden value by understanding                 9:00 AM CDT/10:00 AM EDT
and identifying their company s outsourcing solution
                      company’s                                  Speakers:
as one of four basic outsourcing models.                            Eric Simonson, Managing Principal- Research,
                                                                    Everest Group
                                                                    Anand Ramesh, Research Director, Everest
                                                                    Group

About Outsourcing Center
Outsourcing Center is the world’s most prominent internet portal for authoritative information on outsourcing.
The Center’s mission is to build the industry by helping people understand how to create value through
outsourcing.
outsourcing We serve the outsourcing community through:

  Trusted and objective third-party perspective
  Database of over 81,000 opt-in subscribers
  Relevant media including editorials, research, whitepapers, and the annual Outsourcing Excellence Awards

For more information, contact Peter Bowes at pbowes@everestgrp.com

                                                                                                                   1
                                    Proprietary & Confidential. © 2010 Outsourcing Center
Q&A
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            q               (Q&A) button located on the floating tool bar in the bottom right
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                             Proprietary & Confidential. © 2010 Outsourcing Center
Introduction




                   Eric Simonson
                   Managing Principal,
                         g g      p ,
                   Research
                   Everest Group
                   esimonson@everestgrp.com




                                                                       3
               Proprietary & Confidential. © 2010 Outsourcing Center
Vanilla, Chocolate, or Rocky Road:
What Type of Outsourcing Do You
Want?




April 27, 2010
Everest serves the outsourcing and offshoring market
through a unique portfolio of offerings




  Consulting                                                     Research

    Comprehensive portfolio of services that spans                  Central source of strategic intelligence, analysis,
    the sourcing lifecycle                                          and insight
    Deep industry and functional expertise
        p        y                  p                               Recognized for fact-based analysis and insight into
                                                                         g                           y           g
    Approach that joins corporate strategy and                      emerging issues
    experience-based insight                                        Recognition as market authority in Global Sourcing
                                                                    and location-related topics


  Flexible delivery model

    Broad range of options for engaging with Everest in manner which best meets the needs of a situation or
    organization
    Support can range from targeted inquiries to full support for critical initiatives


  Everest advantage

     Served over 25% of the Global 250                              Proven methodologies for approaching complex
     Extensive touch points across the sourcing value               projects
     chain
      h i                                                           Recognized thought leadership – Total Value
                                                                    R       i d th   ht l d hi       T t lV l
     Deepest primary research agenda on Global                      Equation (TVE), Joint Design, NASSCOM India
     Sourcing                                                       BPO study, and other industry-leading innovations
                                                                                                                          5
                                    Proprietary & Confidential. © 2010, Everest Global, Inc.
As an industry, outsourcing is still working to identify
what types of solutions are optimal

Historical context                                          Current state
  IT infrastructure began with a                                There are a wide array of solutions
  “complete transfer” model
                                                                The positioning of these alternative
  This shaped much of the                                       solutions is often unclear and confusing
  industry’s belief system regarding                            – even to those whom develop them
  how to define a “solution” (e.g.,
  scope, flexibility, pricing models,                           Many concepts are being used to
  delivery models)                                              describe the future direction of
                                                                outsourcing, often implying that the
  BPO and offshoring spurred the                                concept is the best or only option.
  growth of outsourcing i the l
       h f            i in h last                               Examples i l d
                                                                E      l include:
  decade and challenged many                                      Platforms
  industry beliefs – often in subtle                              Transaction pricing
  ways which were/are not fully                                   Non-linear growth
  recognized
         i d                                                      Cloud
                                                                  Cl d



   Although the design of the solution is important, the associated
         g          g                       p       ,
   management model for capturing the value is equally important; pricing
   models must then reflect the nature of the solution
                                                                                                       6
                              Proprietary & Confidential. © 2010, Everest Global, Inc.
Three discussion topics




     1. Solution design                                    2. Intended approach
                                                            for capturing value




                          3. Pricing models




                                                                                  7
                     Proprietary & Confidential. © 2010, Everest Global, Inc.
Four basic solution types in outsourcing


                    Description                                         When applicable/common

Managed service       Solution is pre-built and                             Generally point solutions (e.g.,
                      common across buyers y                                p y ,
                                                                            payroll, managed data back-up)
                                                                                         g                 p)
                                                                            which are modular and limited scope
     Plug & play


Transfer and sell     Solution must be tailored to each                     Solution is technology-centric and
back                  buyer, but supplier’s experience
                        y ,        pp         p                             p
                                                                            previous investments by supplier in
                                                                                                   y pp
      Purchase        provides a robust template                            technology add significant value
   transformation                                                           Buyer willing to change to new
                                                                            model to take advantage of these
                                                                            investments

Pure lift & shift     Solution is similar to current state,                 Limited change is appropriate
                      but with labor arbitrage and/or                          Environment already optimized
   Near-term cost     incremental process                                      Desire near-term cost savings,
      savings         improvements                                             but limit change in the near-term

Guided                General direction of solution is                      Nature of required change is not fully
optimization          known, but will evolve in the                         known, so solution must be easy for
     Co-manage/       near- and medium term (e.g.,                          supplier and buyer to change
      transform       p
                      process model refinements,  ,                         Buyer committed to actively
                                                                               y                      y
                      business requirements change)                         managing the solution in partnership
                                                                            with supplier
                                                                                                                     8
                               Proprietary & Confidential. © 2010, Everest Global, Inc.
Examples of solution types


                    Finance & accounting                            Information technology
Managed service       Collections                                       Managed data back-up

     Plug & play



Transfer and sell     Shared service center                             Traditional asset-heavyy
back                  transfer with transaction                         model for IT infrastructure
      Purchase        pricing                                           (includes assets and data
   transformation
                                                                        center services)

Pure lift & shift     Department transfer with                          Remote infrastructure
                      FTE pricing                                       management (RIMO)
   Near-term cost
      savings



Guided                Shared-service center                             Large scale application
optimization          optimization with FTE                             modernization
     Co-manage/
     Co manage/       pricing
      transform

                                                                                                      9
                             Proprietary & Confidential. © 2010, Everest Global, Inc.
Example of multiple solution models of IT
infrastructure outsourcing
                                                                                                          EXAMPLE – DATA CENTER
                                                                                                                         C

Traditional Infrastructure Outsourcing (IO)                          Infrastructure Management Outsourcing (IMO)
Infrastructure Tower            Application Hosting                  Infrastructure Managed                      Remote Infrastructure Mgmt.
Outsourcing                     Services                             Services (IMS)                              Outsourcing (RIMO)
Transfer of responsibility      Assumption of delivery of            Assumption of operational                   Transfer of responsibility for
for entire IT towers (e.g.,     several cross-tower                  responsibility by supplier                  delivery of Remote
Data Center) including          functions related to                 of certain end-to-end                       Infrastructure Management
management and                  operations and support of            functions related to the                    (RIM) tasks to an external
operations                      an application (e.g., SAP)           physical IT infrastructure                  supplier

Example: Data Center            Example: SAP hosting                 Example: Managed                            Example: Server
Outsourcing                                                          Back-up Service                             Monitoring Outsourcing

Management




                                                                                     Outsource function
Operations
                                                                                                                   Remote
                                            Outsourced
                                            application




                                                                                                                   services




                                                                                             ed
Software                                                                                                                           Outsourced
                                                                                                                                   labor/task
Hardware


                  Data center   Data center           Network               Data center                           Data center


                                                                                                                                            10
                                        Proprietary & Confidential. © 2010, Everest Global, Inc.
Three discussion topics




     1. Solution design                                    2. Intended approach
                                                            for capturing value




                          3. Pricing models




                                                                                  11
                     Proprietary & Confidential. © 2010, Everest Global, Inc.
Capturing value from outsourcing – two primary
management models
                                                                                  Most natural
                                                                                  alignment
Monitor and      Traditional three-level approach for
                                                                                  Managed service
measure          “governance”
                 Focuses on managing the contract
                 and supplier performance                                              Plug & play

                 Governance team represents
                 business users, but is                                           Transfer and sell
                 separate/centralized                                             back
                 Mindset: hold the supplier                                             Purchase
                 accountable (their problem now)                                     transformation



Joint            Focuses on finding ways to                                       Pure lift & shift
transformation   improve the solution, regardless of
                 which party is “responsible”                                        Near-term cost
                                                                                        savings
                 Intentionally strives to challenge
                 the status quo via new initiatives
                 Many responsibilities closely                                    Guided
                 tied/embedded with business users                                optimization
                 Mindset: leverage the supplier to                                     Co-manage/
                 help improve results                                                   transform


                                                                                                      12
                       Proprietary & Confidential. © 2010, Everest Global, Inc.
Traditional three-level governance models utilize
defined structures and processes to monitor
performance and resolve issues

                                                   Strategic




                                                                                                                                                            egic
                                                                                                                                                       Strate
High-level
High level performance reporting




                                                                                                                                         ponsibility
                                                                                 Functional direction/strategy
(e.g., Supplier scorecard)
                                                                                 Tactical priorities to support strategy
Major project status
                                                                                 Approval of plans/budgets
Plans/budgets for review
                                                                                 Decisions on out-of-scope changes
Out-of-scope change requests
                                                                                 Resolution of issues




                                                                                                                                nance Resp
                                                                                                                                                       Managerial
                                                                                                                                                                l
Escalated issues
                                                  Managerial

Summary performance reporting (e.g.,                                             Tactical direction
service levels met/not met)                                                      Prioritization of projects




                                                                                                                                                       M
Project status                                                                   Decisions on out of scope changes
                                                                                                out-of-scope




                                                                                                                           Govern
Out-of-scope change requests                                                     Resolution of issues
Plans/budgets for input




                                                                                                                                                           ational
Escalated issues                                Operational /
                                                  Tactical




                                                                                                                                                       Opera
Detailed performance reporting (e.g.,                                            Operational priorities
specific service level metrics)                                                  Performance enhancement plans
Issues                                                                           Resolution of issues

                                              Service Delivery

                                                                                                                                    13
                                        Proprietary & Confidential. © 2010, Everest Global, Inc.
Joint transformation enables optimization of end-to-end
processes that “de-risks” delivery and identifies
opportunities the change scope

                                                                                            Existing step
   Original end-to-end process                                                              Originally transitioned to supplier
                                                                                            Added by buyer (shadow)
                                                                                            Eliminated post-services integration
                                                                                            Transitioned to supplier post-services
                                                                                            integration




   Process after initial/typical transition


                                                                                         Buyer:
                                                                                         B               -11 + 4 = - 7
                                                                                                          11
                                                                                         Supplier:                +11




   Process after joint transformation


                                                                                         Buyer:          - 11 + 1 -5 = -15
                                                                                         Supplier:
                                                                                           pp            +11 - 2 + 5 = +14



                                                                                                                          14
                              Proprietary & Confidential. © 2010, Everest Global, Inc.
Joint transformation can drive tighter integration
between suppliers and buyers, helping both achieve
their near and long-term objectives



                                                                          Drive organizational changes
                                                                          needed to effect the transition

                       Achieve the business                              Enforce accountability for the
                               case                                   actions required to capture benefits

                                                                      Track cross-process impacts of the
                                                                                   changes
Joint transformation
                                                                                  Enhance visibility
                                                                                    and control

                       Optimize value from                                Strengthen alignment with the
                            supplier                                                business

                                                                          Extend leverage of supplier’s
                                                                                   capabilities



                                                                                                            15
                       Proprietary & Confidential. © 2010, Everest Global, Inc.
Three discussion topics




     1. Solution design                                    2. Intended approach
                                                            for capturing value




                          3. Pricing models




                                                                                  16
                     Proprietary & Confidential. © 2010, Everest Global, Inc.
Three approaches to pricing in an outsourcing
relationship

 Economic Model Continuum



   Input                                                   Output                               Outcome
                      Hybrids                                                         Hybrids
   model                                                   model                                 model


   Labor                                                 Payment


                                                                                                Business
  Material            Process                             Invoice
                                                                                                Outcomes


  Facilities                                               Claim


                                           Pricing Mechanisms
 Per unit of                                     Per unit of process or                           Value
 Input                                           business activity                                Share




                                                                                                           17
                            Proprietary & Confidential. © 2009 Everest Global, Inc.
Each of these approaches have clear value and risks,
that need to be assessed for applicability


                Pros                           Cons                                      Commonly used when…

                 Simple and easy to               Does not create natural                 Transaction volume is
                 understand                       incentives for supplier                 unknown / not validated
Input model      Ease of market price             improvement                             Transaction volume is not
                 comparability                    Not closely tied to business            closely tied to supplier’s
                                                  need/outcome                            cost drivers
                                                  Does not provide useful                 Output is not defined
                                                  consumption data

                 Closely tied to buyer’s          Not directly tied to desired            Transaction
                 business activities; only        business outcome                        volumes are known
Output model     pay for consumption              May not provide strong                  Supplier’s cost drivers are
                 Encourages productivity          incentive for suppliers to              aligned with revenue units
                 and efficiency                   innovate                                Detailed consumption data
                 Enhanced visibility into         Can be more difficult to                is needed for buyer’s
                 consumption pattern              budget and benchmark                    internal cost allocation


                 Closely tied to desired          Difficult to isolate supplier           Desired outcome and
                 business outcome                 contribution and quantify               accountability can be clearly
Outcome model    Properly aligns buyer            impact on outcome                       defined and captured
                 and supplier interests to        Supplier’s ability to achieve           contractually
                 encourage partnership,           outcome may be restricted by            Innovation / improvement is
                 innovation, and                  buyer’s process, system, etc.           critical to success
                 continuous improvement           Impossible to benchmark

                                                                                                                        18
                               Proprietary & Confidential. © 2009 Everest Global, Inc.
Broadly, the use of output-based pricing is on the rise



                             Predominant pricing
Process                      (varies by solution type)                      Pricing trend
F&A                          Input-based
                             Input based                                    Increasing shift to Output based
                                                                                                Output-based

HR                           Output-based                                   Output based with more nuances

Procurement                  Output-based                                   Output-based (combined with value-
                                                                            share)
IT Infrastructure Output-based                                              Output-based

IT – Remote IT               Input-based                                    Input-based
Infrastructure
IT –                         Input-based
                               p                                            Early signals in adoption of Output-based
                                                                                 y g            p           p
Applications                                                                pricing
Dev and Maint.



Source: Everest Research Institute (2008)

                                                                                                                  19
                                            Proprietary & Confidential. © 2009 Everest Global, Inc.
Summary of key messages


 Choose the solution based upon an intersection of:
   Preferred type of solution
   Experience and preference of supplier with the solution type (different than scope of
   service)

 Solution design and the management model for capturing value must be aligned

 Pricing models are impacted by the solution and how value will be measured

 In contrast to traditional outsourcing philosophies (e.g., tightly define scope), in some
 situations outsourcing is more effective with active changes to scope, processes, and
 incentives which help focus the efforts of the supplier and buyer on the most relevant
 sources of value




                                                                                             20
                             Proprietary & Confidential. © 2009 Everest Global, Inc.
Q&A
  Attendees will receive an email with a link to download today’s webinar presentation. To access a
  recorded audio version of this webinar, please contact Mark Williamson,
  mark.williamson@everestgrp.com

  For advice or research on outsourcing, please contact Everest:
    Eric Simonson, esimonson@everestgrp.com

  For background information on Everest, please visit:
          g                            ,p
    www.everestgrp.com
    www.everestresearchinstitute.com

  Thank you for attending today



To ask a question during the Q&A session

  Click th
  Cli k the question mark (Q&A) button located on the floating tool bar in the bottom right of your
                ti       k      b tt l     t d    th fl ti t l b i th b tt             i ht f
  screen. This will open the Q&A Panel

  Be sure to keep the default set to “send to a Panelist”

  Then, type your question in the rectangular field at the bottom of the Q&A box and click the send
  button to submit
                                                                                                      21
                                  Proprietary & Confidential. © 2010 Outsourcing Center

More Related Content

Vanilla, Chocolate, or Rocky Road: What Flavor of Outsourcing Do You Want?

  • 1. Today’s webinar is brought to you by Outsourcing Center Today’s webinar Upcoming webinar Vanilla, Chocolate, or Rocky Road: What Flavor Key Market Developments in Q1-2010: Market of Outsourcing Do You Want? Vista Report Briefing Synopsis: Date & Time: Everest expert, Eric Simonson, will discuss how Thursday, May 13, 2010 buyers can capture hidden value by understanding 9:00 AM CDT/10:00 AM EDT and identifying their company s outsourcing solution company’s Speakers: as one of four basic outsourcing models. Eric Simonson, Managing Principal- Research, Everest Group Anand Ramesh, Research Director, Everest Group About Outsourcing Center Outsourcing Center is the world’s most prominent internet portal for authoritative information on outsourcing. The Center’s mission is to build the industry by helping people understand how to create value through outsourcing. outsourcing We serve the outsourcing community through: Trusted and objective third-party perspective Database of over 81,000 opt-in subscribers Relevant media including editorials, research, whitepapers, and the annual Outsourcing Excellence Awards For more information, contact Peter Bowes at pbowes@everestgrp.com 1 Proprietary & Confidential. © 2010 Outsourcing Center
  • 2. Q&A To ask a question during the Q&A session Click the question mark ( q (Q&A) button located on the floating tool bar in the bottom right ) g g of your screen. This will open the Q&A Panel Be sure to keep the default set to “send to a Panelist” Then, type your question in the rectangular field at the bottom of the Q&A box and click the send button to submit 2 Proprietary & Confidential. © 2010 Outsourcing Center
  • 3. Introduction Eric Simonson Managing Principal, g g p , Research Everest Group esimonson@everestgrp.com 3 Proprietary & Confidential. © 2010 Outsourcing Center
  • 4. Vanilla, Chocolate, or Rocky Road: What Type of Outsourcing Do You Want? April 27, 2010
  • 5. Everest serves the outsourcing and offshoring market through a unique portfolio of offerings Consulting Research Comprehensive portfolio of services that spans Central source of strategic intelligence, analysis, the sourcing lifecycle and insight Deep industry and functional expertise p y p Recognized for fact-based analysis and insight into g y g Approach that joins corporate strategy and emerging issues experience-based insight Recognition as market authority in Global Sourcing and location-related topics Flexible delivery model Broad range of options for engaging with Everest in manner which best meets the needs of a situation or organization Support can range from targeted inquiries to full support for critical initiatives Everest advantage Served over 25% of the Global 250 Proven methodologies for approaching complex Extensive touch points across the sourcing value projects chain h i Recognized thought leadership – Total Value R i d th ht l d hi T t lV l Deepest primary research agenda on Global Equation (TVE), Joint Design, NASSCOM India Sourcing BPO study, and other industry-leading innovations 5 Proprietary & Confidential. © 2010, Everest Global, Inc.
  • 6. As an industry, outsourcing is still working to identify what types of solutions are optimal Historical context Current state IT infrastructure began with a There are a wide array of solutions “complete transfer” model The positioning of these alternative This shaped much of the solutions is often unclear and confusing industry’s belief system regarding – even to those whom develop them how to define a “solution” (e.g., scope, flexibility, pricing models, Many concepts are being used to delivery models) describe the future direction of outsourcing, often implying that the BPO and offshoring spurred the concept is the best or only option. growth of outsourcing i the l h f i in h last Examples i l d E l include: decade and challenged many Platforms industry beliefs – often in subtle Transaction pricing ways which were/are not fully Non-linear growth recognized i d Cloud Cl d Although the design of the solution is important, the associated g g p , management model for capturing the value is equally important; pricing models must then reflect the nature of the solution 6 Proprietary & Confidential. © 2010, Everest Global, Inc.
  • 7. Three discussion topics 1. Solution design 2. Intended approach for capturing value 3. Pricing models 7 Proprietary & Confidential. © 2010, Everest Global, Inc.
  • 8. Four basic solution types in outsourcing Description When applicable/common Managed service Solution is pre-built and Generally point solutions (e.g., common across buyers y p y , payroll, managed data back-up) g p) which are modular and limited scope Plug & play Transfer and sell Solution must be tailored to each Solution is technology-centric and back buyer, but supplier’s experience y , pp p p previous investments by supplier in y pp Purchase provides a robust template technology add significant value transformation Buyer willing to change to new model to take advantage of these investments Pure lift & shift Solution is similar to current state, Limited change is appropriate but with labor arbitrage and/or Environment already optimized Near-term cost incremental process Desire near-term cost savings, savings improvements but limit change in the near-term Guided General direction of solution is Nature of required change is not fully optimization known, but will evolve in the known, so solution must be easy for Co-manage/ near- and medium term (e.g., supplier and buyer to change transform p process model refinements, , Buyer committed to actively y y business requirements change) managing the solution in partnership with supplier 8 Proprietary & Confidential. © 2010, Everest Global, Inc.
  • 9. Examples of solution types Finance & accounting Information technology Managed service Collections Managed data back-up Plug & play Transfer and sell Shared service center Traditional asset-heavyy back transfer with transaction model for IT infrastructure Purchase pricing (includes assets and data transformation center services) Pure lift & shift Department transfer with Remote infrastructure FTE pricing management (RIMO) Near-term cost savings Guided Shared-service center Large scale application optimization optimization with FTE modernization Co-manage/ Co manage/ pricing transform 9 Proprietary & Confidential. © 2010, Everest Global, Inc.
  • 10. Example of multiple solution models of IT infrastructure outsourcing EXAMPLE – DATA CENTER C Traditional Infrastructure Outsourcing (IO) Infrastructure Management Outsourcing (IMO) Infrastructure Tower Application Hosting Infrastructure Managed Remote Infrastructure Mgmt. Outsourcing Services Services (IMS) Outsourcing (RIMO) Transfer of responsibility Assumption of delivery of Assumption of operational Transfer of responsibility for for entire IT towers (e.g., several cross-tower responsibility by supplier delivery of Remote Data Center) including functions related to of certain end-to-end Infrastructure Management management and operations and support of functions related to the (RIM) tasks to an external operations an application (e.g., SAP) physical IT infrastructure supplier Example: Data Center Example: SAP hosting Example: Managed Example: Server Outsourcing Back-up Service Monitoring Outsourcing Management Outsource function Operations Remote Outsourced application services ed Software Outsourced labor/task Hardware Data center Data center Network Data center Data center 10 Proprietary & Confidential. © 2010, Everest Global, Inc.
  • 11. Three discussion topics 1. Solution design 2. Intended approach for capturing value 3. Pricing models 11 Proprietary & Confidential. © 2010, Everest Global, Inc.
  • 12. Capturing value from outsourcing – two primary management models Most natural alignment Monitor and Traditional three-level approach for Managed service measure “governance” Focuses on managing the contract and supplier performance Plug & play Governance team represents business users, but is Transfer and sell separate/centralized back Mindset: hold the supplier Purchase accountable (their problem now) transformation Joint Focuses on finding ways to Pure lift & shift transformation improve the solution, regardless of which party is “responsible” Near-term cost savings Intentionally strives to challenge the status quo via new initiatives Many responsibilities closely Guided tied/embedded with business users optimization Mindset: leverage the supplier to Co-manage/ help improve results transform 12 Proprietary & Confidential. © 2010, Everest Global, Inc.
  • 13. Traditional three-level governance models utilize defined structures and processes to monitor performance and resolve issues Strategic egic Strate High-level High level performance reporting ponsibility Functional direction/strategy (e.g., Supplier scorecard) Tactical priorities to support strategy Major project status Approval of plans/budgets Plans/budgets for review Decisions on out-of-scope changes Out-of-scope change requests Resolution of issues nance Resp Managerial l Escalated issues Managerial Summary performance reporting (e.g., Tactical direction service levels met/not met) Prioritization of projects M Project status Decisions on out of scope changes out-of-scope Govern Out-of-scope change requests Resolution of issues Plans/budgets for input ational Escalated issues Operational / Tactical Opera Detailed performance reporting (e.g., Operational priorities specific service level metrics) Performance enhancement plans Issues Resolution of issues Service Delivery 13 Proprietary & Confidential. © 2010, Everest Global, Inc.
  • 14. Joint transformation enables optimization of end-to-end processes that “de-risks” delivery and identifies opportunities the change scope Existing step Original end-to-end process Originally transitioned to supplier Added by buyer (shadow) Eliminated post-services integration Transitioned to supplier post-services integration Process after initial/typical transition Buyer: B -11 + 4 = - 7 11 Supplier: +11 Process after joint transformation Buyer: - 11 + 1 -5 = -15 Supplier: pp +11 - 2 + 5 = +14 14 Proprietary & Confidential. © 2010, Everest Global, Inc.
  • 15. Joint transformation can drive tighter integration between suppliers and buyers, helping both achieve their near and long-term objectives Drive organizational changes needed to effect the transition Achieve the business Enforce accountability for the case actions required to capture benefits Track cross-process impacts of the changes Joint transformation Enhance visibility and control Optimize value from Strengthen alignment with the supplier business Extend leverage of supplier’s capabilities 15 Proprietary & Confidential. © 2010, Everest Global, Inc.
  • 16. Three discussion topics 1. Solution design 2. Intended approach for capturing value 3. Pricing models 16 Proprietary & Confidential. © 2010, Everest Global, Inc.
  • 17. Three approaches to pricing in an outsourcing relationship Economic Model Continuum Input Output Outcome Hybrids Hybrids model model model Labor Payment Business Material Process Invoice Outcomes Facilities Claim Pricing Mechanisms Per unit of Per unit of process or Value Input business activity Share 17 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 18. Each of these approaches have clear value and risks, that need to be assessed for applicability Pros Cons Commonly used when… Simple and easy to Does not create natural Transaction volume is understand incentives for supplier unknown / not validated Input model Ease of market price improvement Transaction volume is not comparability Not closely tied to business closely tied to supplier’s need/outcome cost drivers Does not provide useful Output is not defined consumption data Closely tied to buyer’s Not directly tied to desired Transaction business activities; only business outcome volumes are known Output model pay for consumption May not provide strong Supplier’s cost drivers are Encourages productivity incentive for suppliers to aligned with revenue units and efficiency innovate Detailed consumption data Enhanced visibility into Can be more difficult to is needed for buyer’s consumption pattern budget and benchmark internal cost allocation Closely tied to desired Difficult to isolate supplier Desired outcome and business outcome contribution and quantify accountability can be clearly Outcome model Properly aligns buyer impact on outcome defined and captured and supplier interests to Supplier’s ability to achieve contractually encourage partnership, outcome may be restricted by Innovation / improvement is innovation, and buyer’s process, system, etc. critical to success continuous improvement Impossible to benchmark 18 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 19. Broadly, the use of output-based pricing is on the rise Predominant pricing Process (varies by solution type) Pricing trend F&A Input-based Input based Increasing shift to Output based Output-based HR Output-based Output based with more nuances Procurement Output-based Output-based (combined with value- share) IT Infrastructure Output-based Output-based IT – Remote IT Input-based Input-based Infrastructure IT – Input-based p Early signals in adoption of Output-based y g p p Applications pricing Dev and Maint. Source: Everest Research Institute (2008) 19 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 20. Summary of key messages Choose the solution based upon an intersection of: Preferred type of solution Experience and preference of supplier with the solution type (different than scope of service) Solution design and the management model for capturing value must be aligned Pricing models are impacted by the solution and how value will be measured In contrast to traditional outsourcing philosophies (e.g., tightly define scope), in some situations outsourcing is more effective with active changes to scope, processes, and incentives which help focus the efforts of the supplier and buyer on the most relevant sources of value 20 Proprietary & Confidential. © 2009 Everest Global, Inc.
  • 21. Q&A Attendees will receive an email with a link to download today’s webinar presentation. To access a recorded audio version of this webinar, please contact Mark Williamson, mark.williamson@everestgrp.com For advice or research on outsourcing, please contact Everest: Eric Simonson, esimonson@everestgrp.com For background information on Everest, please visit: g ,p www.everestgrp.com www.everestresearchinstitute.com Thank you for attending today To ask a question during the Q&A session Click th Cli k the question mark (Q&A) button located on the floating tool bar in the bottom right of your ti k b tt l t d th fl ti t l b i th b tt i ht f screen. This will open the Q&A Panel Be sure to keep the default set to “send to a Panelist” Then, type your question in the rectangular field at the bottom of the Q&A box and click the send button to submit 21 Proprietary & Confidential. © 2010 Outsourcing Center