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The complexities associated with large outsourcing portfolios can take a toll on outsourcing gains. Analysis has revealed that even in competitively benchmarked outsourcing arrangements, buyers with unwieldy portfolios may lose up to 20 percent on the sourcing spend. This webinar will explain the complexities that might be impacting your outsourcing gains and how to realize incremental sourcing gains by addressing these complexities at the grassroot level, using Everest Group’s proprietary Outsourcing Portfolio Rationalization
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Proprietary & Confidential. © 2011, Everest Global, Inc. 1
Today’s Webinar
Outsourcing Portfolio Rationalization: Getting the Most out of Outsourcing Synopsis: The complexities associated with large outsourcing portfolios can take a toll on outsourcing gains. Analysis has revealed that even in competitively benchmarked outsourcing arrangements, buyers with unwieldy portfolios may lose up to 20 percent on the sourcing spend. This webinar will explain: The complexities that might be impacting your outsourcing gains How to realize incremental sourcing gains by addressing these complexities at the grassroot level, using Everest Group’s
proprietary Outsourcing Portfolio Rationalization
About Everest Group
Everest Group is an advisor to business leaders on the next generation of global services with a worldwide reputation for helping Global 1000 firms dramatically improve their performance by optimizing their back- and middle-office business services. With a fact-based approach driving outcomes, Everest Group counsels organizations with complex challenges related to the use and delivery of global services in their pursuits to balance short-term needs with long-term goals. Through its practical consulting, original research and industry resource services, Everest Group helps clients maximize value from delivery strategies, talent and sourcing models, technologies and management approaches. Established in 1991, Everest Group serves users of global services, providers of services, country organizations and private equity firms, in six continents across all industry categories. For more information, please visit www.everestgrp.com and research.everestgrp.com. For more information, contact Mark Williamson at [email protected]
Today’s Webinar is brought to you by Everest Group
Outsourcing Portfolio Rationalization: Getting the Most out of Outsourcing September 22, 2011
Proprietary & Confidential. © 2011, Everest Global, Inc. 3
Introductions
Rahul Gehani Research Director Everest Group [email protected]
Sarthak Brahma Practice Director Everest Group [email protected]
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Agenda
Portfolio misalignment in large outsourcing contracts
Methodology for resolving portfolio misalignment
Case Study
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Buyers focus on aligning their contracted pricing but tend to ignore portfolio misalignment issues that bleed away precious dollars
Misaligned portfolios, which do not have a MECE set of resources, service providers, and locations aligned with business imperatives, can inflate outsourced spend by upto 20%
Issue Potential impact
Fragmented service provider portfolio
4-5% increase in spend due to high governance cost for buyers 1
Multiple rates for similar resources
8-11% increase in spend on account of procurement of resources at higher rates 2
Excessive use of specialized resources
5-10% increase in spend on account of premium pricing for specialized resources 3
Inverted pyramids Excessive usage of senior resources leading to 5-10% increase in spend 4
Redundancies in location mix
Increased exposure to location-specific disruptions 5
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Access to complementary service providers capabilities Introducing competitive dynamics within service providers
Advantages of a wide portfolio of providers Hidden costs Excessive vendor management expenses for buyer Reduced economies of scale and scope for service provider
By limiting the portfolio to 3-5 key service providers, buyers can enjoy the benefits of a multi-vendor sourcing arrangement while reducing the ‘hidden’ costs
1
1 Characterized by multiple service providers (20-30) in the ADM portfolio; 2-3 key service providers and the rest being small scale 2 Annualized one-time costs considering average term of a deal as 4 years 3 Characterized by fewer service providers (3-5) in the ADM portfolio, with each having significant scale Note: Scenario assumed is an organization with large outsourced ADM spend (>US$300 million ACV)
Savings from service provider consolidation Percentage
TCO of a fragmented service provider portfolio1
One-time2 TCO of a consolidated portfolio3 after service provider’s savings
One-time2 Ongoing TCO of consolidated portfolio (buyer’s savings only)
Ongoing
18-23% savings from reduced service provider fees Driven by increased offshore
leverage and synergies in onsite relationships
Ability to realize benefit depends on the extent of current leverage
4-5% savings driven by reduced internal buyer costs in setting up and managing relationships
22-28%
4-5%
Buyer savings service provider savings
Buyer’s costs
Service provider’s costs
Buyer’s and service provider’s costs
Fragmented service provider portfolio Large buyers frequently have fragmented portfolios with more than 15 service providers
TCO savings of up to 28%
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Onsite rates for Project Manager for a leading communications company Median rate, base index=100
Procurement of similar resources with widely varying prices can be attributed to: Lack of checks and balances to prevent procurement outside of MSA by business units Lack of standardized skill definition for procured roles Buyer-provider alliances at the line functions
Resource up-skilling Irrelevant ‘value-add’
Resource ‘force-fit’ Pricing misalignment root causes
60%
Benchmark price range
May lead to ~10% higher outsourced
spend
Multiple rates for similar resources Price variations for similar resources can be as high as 60% 2
Proprietary & Confidential. © 2011, Everest Global, Inc. 8
Buyers frequently carry as much as 25-30% of their volumes in “specialized” skills, due to: Evolving IT resource requirements, as a result of which buyers end up paying “specialized “ skill premiums even for
common skills procured on an ad-hoc basis Service providers continue to charge past-contracted premiums for erstwhile specialized skills
Usage of specialized and standard skills for a leading healthcare provider
Standard skills
Specialized skills
Specialized skill premium US$1.25 X US$1.16 X
Excessive specialized skill usage; high skill premium
Excessive use of specialized resources Resources are often tagged as “specialized” based on buyers’ perceptions, not on what they cost to the service provider
3
Over leverage of “specialized”
resources can inflate spend by 5-10%
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Inverted pyramids Complex outsourcing portfolios often exhibit inverted pyramids as opposed to the typical bottom-heavy pyramids
4
Apparent reasons Unstated reasons Experience requirement on mission-critical projects Need for deep domain knowhow even at entry-level
roles
Career advancement in service providers is quicker than in buyers. Providers tend charge higher billing rates for promoted resources even without a change in responsibilities
Providers up-skill their resources while staffing project teams
Assessment of staffing pyramid for a leading energy company
Managerial Roles (3-5%)
Middle level roles (40-45%)
Junior roles (50-55%)
Managerial Roles (8%)
Middle level roles (52%)
Junior roles (40%)
~10% increase in outsourced spend
Typical staffing pyramid Inverted staffing pyramid
Proprietary & Confidential. © 2011, Everest Global, Inc. 10
Redundancies in location mix Buyers are extremely selective while deciding the right portfolio of providers but tend to neglect efficiencies in location mix
5
Attributes of an efficient location mix
Enable buyers to: Leverage complementary skills in each location Plan for risk and continuity by not having all similar resources in the same location Monitor cost arbitrage, risk, and skill availability periodically to shuffle the location mix as and
when needed Manage multiple sourcing models such as captive and third-party to serve complementary
agendas in multiple locations
Issue Buyers frequently source similar skills from same delivery locations without significant value-add Increased exposure to location-specific risks e.g. environmental or geo-political disturbances in
one location can severely disrupt operations
Assessment of service provider-skill-location mix for a leading information services company
Significant exposure to location-specific
disruptions
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Agenda
Portfolio misalignment in large outsourcing mandates
Methodology for resolving portfolio misalignment
Case Study
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Sourcing design Objective Recommend exhaustive
process and controls to help sustain sourcing benefits in the present and future
Scope Service provider selection and
negotiation process Contracts (pricing) database
management Reconciliation of actual
usage/service levels, sourcing contracts, and invoice payments
Portfolio optimization Objective Create a MECE portfolio of
service providers and resources for current and future sourcing needs
Scope Service provider portfolio to
map competency, arbitrage, location, risk coverage etc.
Resource/skill portfolio to map all generic, specialized, ad-hoc requirements and variations
Benchmarking Objective Optimize sourcing spend by
assessing resource unit pricing and pricing drivers
Scope Price benchmarking Operational metrics
benchmarking (skill pyramids, offshore leverage etc.)
Contract benchmarking (service levels, T&Cs etc.)
Outsourced Portfolio Rationalization
Internal assessment External assessment
Comprehensive portfolio rationalization comprises of an internal assessment to target sourcing design and scope issues and an external market comparables assessment
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Typical design issues Irreconcilable outsourcing spend/savings across
user, sourcing, and finance functions
Control lapses leading to procurement outside of MSA (non-contracted providers or resources)
Redundancies in procurement between core team and business units
Loss of negotiating leverage due to disaggregated procurement across multiple user functions
Difficulty in assessing service provider performance across multiple user functions
Problem in deploying a common consumption/pricing model due to disaggregated demand and preferences
Focus areas Sourcing risk map highlighting process
redundancies, control gaps, and recommendations
Provider and contracts (pricing) database due-diligence
Impact assessment based on reconciliation of actual usage/service levels, contracts, invoices, payments
Sample risk maps
Sourcing Design Assess client’s sourcing/procurement functions and standard operating procedures to eliminate root causes behind unmanageable portfolios
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Portfolio Optimization Buyer demand analysis to finalize a MECE portfolio that eliminates any redundancies in service providers, locations, price or skills being sourced
Typical portfolio issues Multiple service providers for similar resources in a
location
Multiple rates for similar resources
Inadequate location mix (over leverage/under leverage)
Inverted-skill pyramid (more senior to junior resources)
Excessive use of “specialized” or ad-hoc resources at high premiums
Resource up-skilling
Focus areas Priority map to reconcile all sourcing
stakeholder requirements (BU, Finance, HR, Procurement)
Standardized resource nomenclatures
Redundancies and recommendations in the sourcing portfolio (providers, skills, price, and locations)
Sample Outputs Standardized Resource Nomenclature Assessment of Sourcing Portfolio Redundancies
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Benchmarking Conducting benchmarking of FTE rates, contractual T&Cs and operational metrics to identify high impact levers of optimization
Benchmarking
Pricing of FTE Roles
Determination of benchmark rates Comparison of existing service
provider rates with benchmarks rates to assess savings potential
Contractual Term and Conditions
Evaluation of contracted terms & conditions affecting pricing e.g., payment terms, volume-based clauses, inflation adjustment clauses etc.
Operational Metrics
Benchmarking of supply-side operational levers affecting pricing e.g., Span of Control (SPOC), delivery-mix etc.
Sample Outputs
Estimating opportunity for rate renegotiation Benchmarking Span of Control
Benchmarking volume and inflation adjustment clauses
Proprietary & Confidential. © 2011, Everest Global, Inc. 16
Agenda
Portfolio misalignment in large outsourcing mandates
Methodology for resolving portfolio misalignment
Case Study
Proprietary & Confidential. © 2011, Everest Global, Inc. 17
Masked case study: Portfolio rationalization for a leading information services company (page 1 of 3)
The client had a complex portfolio of IT services comprising: More than 1100 FTEs mapped to 91 roles across 20 ADM and Infrastructure functions 12 service providers in 3 broad categories i.e. Tier-1 Indian (35%), Tier-2 Indian (46%) and Nearshore(19%) 8 delivery locations across India, US, and nearshore locations Procurement at the centre and business unit level
Key findings from diagnostic assessment Cluttered skill portfolio (ambiguous role definitions,
proliferation of roles, and role redundancies) Sub-optimal service provider mix Irregular staffing structures Non-competitive service provider pricing
Everest proprietary “Resource / Job Group” methodology Inputs into the Resource Group exercise: Client’s existing job structure Current service providers’ rates Map of service providers’ rates into client job structure
Map all existing roles into standardized roles
Break down existing rates into Resource Groups to accommodate whole portfolio
Rationalize resource groups by combining/splitting groups
Refine resource groups after completion of benchmarking exercise
1 2 3 4
ILLUSTRATIVE
Levers for portfolio rationalization Skill portfolio rationalization Service provider mix optimization Staffing pyramid optimization Price benchmarking
Sourcing environment
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Masked case study: Portfolio rationalization for leading information services and publishing company (page 2 of 3)
Skill portfolio rationalization Comprehensive analysis of the client’s IT skill demand
profile Creation of a role portfolio fitted to present requirements as
well as future demand (e.g. roles in Scrum and IT Security) Rationalized portfolio consisted of 62 roles across 14 IT
functions
Extract from rationalized skill portfolio
Service provider consolidation
Two-pronged approach for sourcing commoditized skills: Increased leverage of Tier-1 and Tier-2 Indian providers Consolidated set of Tier-1 and Tier-2 Indian providers
Snapshot of skills procured from service providers
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Masked case study: Portfolio rationalization for leading information services and publishing company (page 3 of 3)
Staffing pyramid optimization Presence of an “inverted” pyramid with the senior and
lead levels comprising ~60% of the total headcount No perceptible difference between value being delivered
by junior and senior resources
Price benchmarking Proliferation of roles and large service provider portfolio
compounded by a wide range of prices at offshore and onshore locations
More than 20 instances of cross-subsidization by providers Comprehensive price benchmarking conducted to ascertain
market pricing for the rationalized skill portfolio
Impact Stakeholder workshops revealed practical constraints limiting the
projected gains Strategic relationships with select service providers, restricting the
service provider consolidation Deviations from typical pyramids due to limited availability of
skilled resources for legacy technologies
Annual sustainable sourcing gains estimated to be $7.4 million (~10.9% of annual spend)
Benchmark median
42%
Junior (50%)
Lead (17%)
Senior (30%)
Manager
(3%)
Optimized pyramid
Lead (21%)
Manager
(7%)
Senior (38%)
Junior (34%)
“Inverted” client pyramid
Annual sourcing gains US$ million
Indexed hourly rate for offshore programmer
Proprietary & Confidential. © 2011, Everest Global, Inc. 20
To ask a question during the Q&A session Click the question mark (Q&A) button located on the floating tool bar in the bottom right 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
Attendees will receive an email to download today’s webinar presentation as well as access a recorded version
For scheduling a diagnostic assessment of your portfolio or consultation on pricing alignment, contact: – Sarthak Brahma, [email protected] – Rahul Gehani, [email protected]
For background information on Everest Group, please visit:
– www.everestgrp.com – research.everestgrp.com
Thank you for attending today
Q&A
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