Post on 21-Dec-2015
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Information Technology Sourcing:
More Than A Decade of Learning
Mary C. Lacity
Visit to January 24, 2003
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Presentation OutlineResearch Methods
One-to-one IT Sourcing: Overall lessons
One-to-many Netsourcing The Big Yawn
Business Process Outsourcing: BAE SYSTEMS Case Study
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RESEARCH METHOD:Case Studies
Thirteen year study with multiple coauthors: 90+ case studies, 130 decisions in US, Europe, and Australia
Outsourcing: n= 98 decisionsBritish Aerospace DuPont Inland Revenue Enron GM IRS Rigg’s Bank South Australia Swiss Bank
Insourcing/Backsourcing: n= 18 decisionsContinental Baking Brown Group MEMCOccidental Petroleum Ralston Purina Vista Chemicals Westchester County
Netsourcing: n=10 decisions Corio EDS Host Analytics mySAP Zland
Business Process Outsourcing: n = 4 decisions BAE SYSTEMS Lloyd’s of London
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Dupont
1997 Signed $4 billion in contracts with CSC & Accenture
Outsourced IT infrastructure, applications maintenance, desktops
3100 people transferred
Contracts in 22 countries
Contract is 30,000 lines long, 600 SLA
Decision process took 18 months
Transition period took 2 years
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Multiple stakeholders interviewed at each site...
• Senior executives (CFO, COO, CEO, Treasurer, etc..)
• Chief Information Officers (CIO)
• Contract managers
• Supplier account managers and executives
• Key end-users
• Consultants, internal and external lawyers, union leaders
RESEARCH METHOD:Case Studies
6
CIO-level surveys of Outsourcing experiences:
UK & US (1997, n=101 useable surveys)Scandinavia (1998, n = 40 useable surveys )
CIO-level survey of Netsourcing experiences & plans:28 countries, (2001, n = 274 useable surveys)
RESEARCH METHOD:Surveys
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One to One IT Sourcing
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Case Study Outcomesn = 116 sourcing decisions (one-to-one model)
Outcome Percent of Decisions
Yes, most expectations met 58%
No, most expectations not met
22%
Mixed Results; some major expectations met, other major expectations not met
9%
Too early to determine 11%
9
Year Decision Was Made
YES, most
expectation met
NO, most expectation
not met
MIXED results
Total
1984-1991 14(48.3%)
12(41.4%)
3(10.3%)
29
1992 to 1998 41(73.2%)
8(14.3%)
7(12.5%)
56
TOTAL # OF DECISIONS
55(64.7%)
20(23.5%)
10(11.8%)
85
CONTRACT DATE(n=85 outsourcing decisions with discernible outcomes)
Success Rates Over Time
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Customer Rating of Supplier Performance
One-to-One Outsourcing
4%
2% 2%
5%6%
4%
14%
25%
19%
14%
4%
0 1 2 3 4 5 6 7 8 9 10
Poor Satisfactory Good Excellent
0
5
10
15
20
25
30
Num
ber
of C
ontr
acts
Customer Rating of Vendor Performance113 Contracts Rated
Mean Response = 6.47
Overall, suppliers areearning a “good” reportcard, but there were manyopportunities for improvement.
1997 US & UK data
11
52%
37%
15%
41% 42%45%
42%39%
32%
23%
32%
22%
10% 10%
70%
48%
22%
56% 55%53%
50% 49%
41%
34% 34%
24%
15% 15%
Co
st r
edu
ctio
n (
A&
B)
(A)
So
me
cost
red
uct
ion
(B)
Sig
nif
ican
t co
st r
edu
ctio
n
Bet
ter
qu
alit
y se
rvic
e
Acc
ess
to s
carc
e IT
ski
lls
Ref
ocu
s in
-ho
use
IT
sta
ff
Imp
rove
d I
T f
lexi
bil
ity
Imp
rove
d u
se o
f IT
res
ou
rce
Fo
cus
on
co
re b
usi
nes
s
Bet
ter
man
agem
ent
con
tro
l
Imp
rove
d b
usi
nes
s fl
exib
ilit
y
Acc
ess
to n
ew I
T
Bal
ance
d p
roce
ssin
g l
oad
s
Ass
ist
cash
flo
w p
rob
lem
s
0
10
20
30
40
50
60
70
80nu
mbe
r of
res
pond
ents
AnticipatedActual
Anticipated verses actual benefits from IT outsourcingn = 98 US and European respondents
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Proven Practices in IT Sourcing
Selective Sourcing rather than total outsourcing
Joint Senior executive/IT decisions
Internal & External Bids
Short Term Contracts
Fee-for-service contracts
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Selective Sourcing
Decision: Yes No Mixed Total #
DecisionsTotal
Outsourcing11
(38%)
10
(35%)
8
(27%)
29
Total Insourcing
13
(76%)
4
(24%)
0
(0%)
17
Selective Outsourcing
43
(77%)
11
(20%)
2
(4%)
56
Total # Decisions
67 25 10 102
N = 102 decisions with discernible outcomes
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Managing Sourcing Decisions Through Six Phases
ScopingPhase
MaturePhase
MiddlePhase
TransitionPhase
NegotiationPhase
EvaluationPhase
• Identify core IT capabilities
• Identify IT activities for potential outsourcing
•Measure baselineservices & costs
•Create RFP
•Develop evaluationcriteria
•Invite internal andexternal bids
•Conduct duediligence•Negotiate SLA•Create responsibilitymatrices•Price work units•Terms of employeetransfer•Negotiatemechanism for change
•Distribute contractto users•Interpret contact•Establish post-contractmanagement infra-structures & processes•Consolidation,rationalization, standardization•Validate scope, costs,levels, service levels•Managed additionalservice requests•Foster realistic expectationsof supplier performance•Publicly promote contact•Manage customer/supplier relationships
•Benchmark performance
•Realign the contractto reflect changesin technology &business.
•Recalibrateinvestmentcriteria
•Determineif relationshipis extendedor terminated
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Business and IT Vision
Delivery of IS Service
Design of IT Architecture
Business SystemsThinking
ContractFacilitation
TechnicalArchitecture
ContractMonitoring
VendorDevelopment
TechnicalDoer
RelationshipBuilder IS
Leadership;InformedBuying
Core IT Capabilities
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Managing Sourcing Decisions Through Six Phases
ScopingPhase
MaturePhase
MiddlePhase
TransitionPhase
NegotiationPhase
EvaluationPhase
• Identify core IT capabilities
• Identify IT activities for potential outsourcing
•Measure baselineservices & costs
•Create RFP
•Develop evaluationcriteria
•Invite internal andexternal bids
•Conduct duediligence•Negotiate SLA•Create responsibilitymatrices•Price work units•Terms of employeetransfer•Negotiatemechanism for change
•Distribute contractto users•Interpret contact•Establish post-contractmanagement infra-structures & processes•Consolidation,rationalization, standardization•Validate scope, costs,levels, service levels•Managed additionalservice requests•Foster realistic expectationsof supplier performance•Publicly promote contact•Manage customer/supplier relationships
•Benchmark performance
•Realign the contractto reflect changesin technology &business.
•Recalibrateinvestmentcriteria
•Determineif relationshipis extendedor terminated
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Strategic Sourcing Decision Framework
Critical
Useful
Commodity Differentiate
Leading
Practices
Lagging
Practices
Sub-Critical Mass
Critical Mass
Stand alone
Highly
Integrated
Requirements Known & Stable
Requirements Uncertain
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Managing Sourcing Decisions Through Six Phases
ScopingPhase
MaturePhase
MiddlePhase
TransitionPhase
NegotiationPhase
EvaluationPhase
• Identify core IT capabilities
• Identify IT activities for potential outsourcing
•Measure baselineservices & costs
•Create RFP
•Develop evaluationcriteria
•Invite internal andexternal bids
•Conduct duediligence•Negotiate SLA•Create responsibilitymatrices•Price work units•Terms of employeetransfer•Negotiatemechanism for change
•Distribute contractto users•Interpret contact•Establish post-contractmanagement infra-structures & processes•Consolidation,rationalization, standardization•Validate scope, costs,levels, service levels•Managed additionalservice requests•Foster realistic expectationsof supplier performance•Publicly promote contact•Manage customer/supplier relationships
•Benchmark performance
•Realign the contractto reflect changesin technology &business.
•Recalibrateinvestmentcriteria
•Determineif relationshipis extendedor terminated
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Unbridled Demand: Major Source of Cost Creep
Example: Outsourcing Chauffeur Services at British Aerospace
Before outsourcing, demand was constricted by 4 car fleet
After outsourcing, demand is unbridled and supplier hasincreased fleet to 24 cars to meet demand.
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Managing Sourcing Decisions Through Six Phases
ScopingPhase
MaturePhase
MiddlePhase
TransitionPhase
NegotiationPhase
EvaluationPhase
• Identify core IT capabilities
• Identify IT activities for potential outsourcing
•Measure baselineservices & costs
•Create RFP
•Develop evaluationcriteria
•Invite internal andexternal bids
•Conduct duediligence•Negotiate SLA•Create responsibilitymatrices•Price work units•Terms of employeetransfer•Negotiatemechanism for change
•Distribute contractto users•Interpret contact•Establish post-contractmanagement infra-structures & processes•Consolidation,rationalization, standardization•Validate scope, costs,levels, service levels•Managed additionalservice requests•Foster realistic expectationsof supplier performance•Publicly promote contact•Manage customer/supplier relationships
•Benchmark performance
•Realign the contractto reflect changesin technology &business.
•Recalibrateinvestmentcriteria
•Determineif relationshipis extendedor terminated
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Relationship Management:Often Viewed as Dichotomy
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Relationship Management: A Stakeholder Perspective
ITManagers IT Staff
SeniorManagers
AccountManagers
ITUsers
SeniorBusiness
Managers
IT Staff
Trade UnionSubcontractors
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Quotations From Participants
"A good contract does not ensure a good relationship, but a bad contract does ensure a bad relationship." -- Bob Ridout, Chief Information Officer, DuPont
“This is a commercial business transaction, not a partnership. Suppliers have to keep earning the business everyday.” – Global Alliance Manager, DuPont
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Year Decision Was Made
YES, most
expectation met
NO, most expectation
not met
MIXED results
Total
1984-1991 14(48.3%)
12(41.4%)
3(10.3%)
29
1992 to 1998 41(73.2%)
8(14.3%)
7(12.5%)
56
TOTAL # OF DECISIONS
55(64.7%)
20(23.5%)
10(11.8%)
85
CONTRACT DATE(n=85 outsourcing decisions with discernible outcomes)
Success Rates Over Time
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Over Time: Deals are startingto look alike!
Neoclassical Contracts: SLA Penalties for non-performance Variable Pricing Mechanisms for change
Relationship Management: Boot camps Transition Phase Activities Problem Resolution Systems Joint supplier/customer teams in trenches
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Sources of Customer Learning:Institutional Isomorphism
Customer’s own mounting experience: Customer’s Industry ContactsIncremental outsourcingPast outsourcing successes and failures
Customer’s use of external consultants Customer’s outsourcing sourcesTechnology Partners Incorporated ITTUG
($175 billion worth) Outsourcing SummitGartner Group Sourcing Interest GroupMichael Corbett & Associates
Customer’s use of external legal firms Customer’s use of private & publicMillbank & Tweed researchShaw & Pittman Gartner, Yankee, Cutter, IDC
Over 100 books on OutsourcingCustomer’s use of external benchmarkers:
Gartner GroupCompass
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One-to-many Netsourcing
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Netsourcing Business Applications
Netsourcing is the practice of renting or "paying as you use" access to centrally managed business applications, made available to multiple users from a shared facility over the Internet or other networks via browser-enabled devices.
Netsourcing allows customers to receive business applications as a service.
Netsourcing is a delivery channel
Netsourcing is a pricing model
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Wacky World of Alphabet …
Netsourcing
SSP
BSP
CSP VSP
FSP
MSP
ASP
xSP
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The Netsourcing Service Stack
Business Process Delivery
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
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Business Process Outsourcing: Early Lessons,
Future Directions
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Business Process Outsouring
With BPO, the supplier owns and operates the resources, includinginfrastructure, applications, and people, to deliver a businessprocess as a service to customers.
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BPO Survey: Size of Marketn = 120
Source: Scholl, Rebecca, “BPO at the Cross Roads”, presentationAt World Outsourcing Summit, Orlando Florida, 2002.
Size of Market:
Year 2000: $119.4 billionYear 2005: $234.0 billion
US & Europe comprise 84% of market
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BPO Survey: Size of Marketn = 120
Source: Scholl, Rebecca, “BPO at the Cross Roads”, presentationAt World Outsourcing Summit, Orlando Florida, 2002.
1012.4
33.4
21.624.8
13.4
20.623.1
67.6
43.145.8
26.1
0
10
20
30
40
50
60
70
80
Administration Finance & Accounting Human Resources Payment Services Supply Chain Sales, Marketing,Customer Care
US
$ B
illio
ns
2000 2005
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BPO Survey: Top Driversn = 120
Source: Scholl, Rebecca, “BPO at the Cross Roads”, presentation
At World Outsourcing Summit, Orlando Florida, 2002.
Scale: 1 = not important to 7 = extremely important
0 1 2 3 4 5 6
Focus on Business
Improve Service
Reduce Costs
Reduce Capital
New Technology
Gain knowledge
Supplement Staff
Align IT/Business
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o Prompted by M&A, fragmented, decentralized HRo Ten Year Contracto $1.1 billion over 10 yearso 700 HR employees transferred to Exulto Exult delivers:
Accounts Payable BenefitsPayroll Regional StaffingHR Call centerHR technology
o Guaranteed cost savings to Banko Bank took equity share in Exult & will share in future profits
37
Xchanging Insurance Services (XIS)
Xchanging Claims Services (XCS)
Xchanging Human Resource Services (XHRS)
Xchanging Procurement Services (XPS)
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Transforming Back Office to Front Office:
and Enterprise Partnership for
Human Resource Management
Mary LacityDavid FeenyLeslie Willcocks
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Xchanging Human Resource Services (XHRS)
10 year, £250million deal
Promised benefits to BAE: 15% savings on baseline HR services Service improvement to upper quartile by end of year 5 £20 million investment in technology, facilities & experts, including web-enabled e-hr 50% share in profits from external sales
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Research Method
Face-to-face interviews with 15 people including: HR Director, BAE SYSTEMS Enterprise Relationship Director, BAE SYSTEMS SBU HR Director, BAE SYSTEMS CEO of Xchanging Member, BOD, Xchanging Managing Director, XHRS 3 transferred BAE managers, now:
CFO, XCSHead of Service, XCSHead of Resources, XCS
6 practice directors (Service, Process, Technology, Environment, People, Implementation)
Documentations such as financial reports, practice manuals, performance assessments, annual reports, memos.
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Xchanging provides human resources, procurement, customer administration and accounting services to over 200 customers including BAE Systems, Lloyd's and the London Insurance Market.
Xchanging employs over 1,100 people.
Xchanging takes responsibility for the entire back office, specific functions or a particular business process and transforms them into fit for purpose services. In short, Xchanging cost for profit.
Founded by David Andrews in 1999
About Xchanging
42
About BAE SYSTEMS
Prime contractor and systems integrator in the air, land, sea, space, and command and control market sectors.
Defense, commercial, civil markets
World-class capabilities in naval platforms, military aircraft, electronics, systems integration and other technologies.
Eurofighter Astute Destroyer
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About BAE SYSTEMS
BAE SYSTEMS SALES
8546 8611 8929
1218513138
0
2000
4000
6000
8000
10000
12000
14000
1997 1998 1999 2000 2001
YEAR
UK
po
un
ds
in m
illio
ns
44
About BAE SYSTEMS
After Tax Profits/ Losses
164
693
328
-19
-128-200
-100
0
100
200
300
400
500
600
700
800
1997 1998 1999 2000 2001
YEAR
UK
po
un
ds
in
mil
lio
ns
45
About BAE SYSTEMSStock Price
52 week high: £385.50 on Thursday, April 11, 200252 week low: £158.00 on Wednesday, November 13, 2002Average Price: £194.10 (50-day) 299.37 (200-day)
Interim Financial ResultsReported Sept 12
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About BAE SYSTEMS
January 1999, British Aerospace announced merger withMarconi to create BAE SYSTEMS
Investors promised £275 million in annual cost savings within 3years
"The proposed merger with Marconi Electronic Systems is an important step in the consolidation of the industry in Europe and creates a strong and highly capable business with significant cost benefits." -- Sir Richard Evans, Chairman of the Board, BAE SYSTEMS
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BAE SYSTEMS’ HR
In 1999, Terry Morgan, Group HR Director charged with delivering 15% to 40% cost savings on annual HR spend of £25 million
Group HR was small, focusing on senior pay & benefits, seniorlevel development, organizational design
700 HR professionals in SBUs at 70 sites doing transactional activities such as payroll, benefits, recruiting, training, HR procurement
Shared Services as solution to cost reduction…
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SBUManagingDirector
SBUManagingDirector
SBUManagingDirector
SBUManagingDirector
SBU HRDirector
SBU HRDirector
SBU HRDirector
SBU HRDirector
TransactionalActivity/
ProfessionalServices
Transactional/Professional
GroupHR
Head Office
SBUManagingDirector
SBU HRDirector
SBUManagingDirector
SBUManagingDirector
SBUManagingDirector
SBUManagingDirector
SBU HRDirector
SBU HRDirector
SBU HRDirector
SBU HRDirector
GroupHR
Head Office
SBUManagingDirector
SBU HRDirector
FROM DECENTRALIZED:
TO SHAREDSERVICES:
TransactionalActivity/
ProfessionalServices
Transactional/Professional
Transactional/Professional
Transactional/Professional
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Four Options forImplementing Shared Services
1. Do It Yourself
2. Management Consultancy
3. Fee-for-service outsourcing
4. Enterprise Partnership
Early 2000
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Enterprise PartnershipDavid Andrews proposed that BAE SYSTEMS and Xchanging should form a fifty-fifty jointly-owned enterprise.
The enterprise would be operated as a strategic business unit within Xchanging, giving Xchanging the responsibility and accountability for implementation and subsequent operations.
But both BAE SYSTEMS and Xchanging would sit on the Joint Board of Directors to ensure continued customer involvement and oversight.
The enterprise would initially behave as a traditional outsourcer by transferring BAE SYSTEMS HR assets and personnel to the enterprise governed by a ten-year contract.
The enterprise, in turn, would implement the shared services concept and deliver HR services back to BAE SYSTEMS.
But in the long run, the enterprise would further leverage the HR assets and personnel to attract external HR customers, of which profits would be shared 50/50 with BAE SYSTEMS.
Spring 2000
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Enterprise Partnership
"We soon came up with a story--and Terry really pushed this with his colleagues--about what the real risk is: 'I have got the same people tomorrow doing the job they are doing today. In addition to that, I have got all these new resources with different skill sets that are coming to help these people do it better than they did it before and I have got twenty five million dollars over a five year period to invest in technology that I have not got today. It is guaranteed, it is part of this contract. So it is the same people doing the same job. In addition to all these other resources that are going to help make it move, with some incentives to make it happen that we haven’t got today, what is the risk because if it all goes wrong and these are bad managers, then we just TUPE transfer everybody back and we take it back again, so what is the real risk?'" -- Alan Bailey, XHRS
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Enterprise Partnership?
Because, against their normal practice, BAE SYSTEMS did not do a formal request for proposal, the HR team wanted to step back and invite Xchanging and another supplier to compete.
At this stage in April 2000, Xchanging's team was devastated:. "When we told Xchanging that we were going to do a beauty parade with Xchanging and another BPO supplier, I have to say I have never seen David Andrews so shell-shocked." -- Chris Dickson, Relationship Director, BAE SYSTEMS
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Enterprise Partnership?
Would accept BAE transfers -- Use Exult’s existing staff
Complete attention to BAE -- Just signed other megadeals
Take service as-is -- BAE to clean up mess first
May 2000
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Letter of Intent June 2000
"When I told the CEO of the alternative bidder that they hadn't been chosen, he did say to me, 'okay, but I would like to thank you for the fairness of the way the parade went... it was actually a very thorough process, we had been given a fair crack of the whip.'"-- Chris Dickson, Relationship Director, BAE SYSTEMS
Goal was to sign a contract by September 2000, but…
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BAE/Xchanging NegotiationsJune 2000 – February 2001
Scope Reduction: Eliminate North America Only 462 UK people to transfer rather than 560
"It is my perspective and obviously it is not perfect information but certainly I had a very, very strong view that there were some people in BAE SYSTEMS that had decided to de-scope the deal; who never really knew what the scope was but decided what scope they would find politically acceptable and that was it, that was the deal they wanted" - David Bauernfeind, CFO "So we ended up drawing a line in slightly the wrong place, in my view, so we still had some people in BAE SYSTEMS’ retained HR who were never going to play the strategic role as designed." – Steve Hodgson, Head of Resources,XHRS
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BAE/Xchanging NegotiationsJune 2000 – February 2001
50%/50% Joint Ownership
50%/50% split in cost savings, estimated baseline £25m/year:
YEAR 2001 2002 2003 2004 2005Percent 10% 15% 15% 15% 15% Delivered as a rebate, if £25million costs transferred, Xchanging would only charge £22.5million
50%/50% split on new revenue generation from external sales
57
BAE/Xchanging NegotiationsJune 2000 – February 2001
Services: As-is measured within 6 months By year 5, improvement to upper quartile
Governance:Joint Board of Directors: CEO of Xchanging and Group HR Head BAE
3 Xchanging execs & 2 BAEs non-execs Purpose: Protect the Rights of Shareholders
Service Review Board: 3 members from BAE, 3 members from Xchanging Service specifications, price approval Purpose: Service performance monitoring
Technology Review Board: Joint board to ensure £20 million investment
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D avid O ldf ie ldH R B u s in ess P artner
J im M eechanH ead of R esou rc ing
Joan ne C arrH ead of G radu ate R ecru itm en t
& D evelopm en t
S arah K enn yH ead of R em u neration
& B enef its
H ow ard M cC allumH ead of Train ing
C hris C ableH ead of In ternational A ss ignm en ts
N eil W atk in sonH ead of E m ployee D evelopm en t
& H ead of P rocess
M ark H oggartR em & B en S trategy
S teve H odgsonH ead of R esou rces
T ina Jam esH ead of P ens ion s
S teve D ru ryIT D evelopm en t M an ager
A nn TaylorC ustom er S upport
Team M an ager
R ich ard B eckettF ac ilities M an ager
togeth r
T im H ollan dH R IT O peration s
M an ager
A ndrew P etrieP rojec t M anager
togeth r S ervice C en tre& H ead of In fo S ervices
M ike M argettsH ead of Im plem en tation
P h il B u tlerF inan c ial C on troller
D avid B auern feindC F O
S am S parkesC ustom er R elationsh ip M anager
A vion ics
S im on M ilnerC ustom er R elationsh ip M anager
O perations & A irc raf t S ervices
R u th C ravenC ustom er R elationsh ip M anager
H O
R ach el Ton ucc iC ustom er R elationsh ip M anager
C S & S
L uc inda H ew itsonC ustom er R elationsh ip M anager
P rogram m es
B ryony M ooreH ead of S ervice
A lan B aileyN ew B u sin ess D evelopm en t
R ich ard H ou gh tonC E O
Contract in Effect in May 2001
59
Xchanging’s management believes that the capabilities requiredto transform a back office to a front office requires 7 genericbusiness competencies rather than domain specific knowledge…
How Did Xchanging Complete the Transformation?
60
OperationalCritical activity Preparation
Service
Set-Up
Process
People
Technology
Sourcing
Environment
Preparation Realignment Streamlining Continuous Improvement
2-3mths 3-6mths 6-9mths
Transformation is Implemented in Four Phases
61
People Competency
People Competency builds champion teams from transferred employees by unlocking their talent and energy, primarily through extensive training programs and direct contact with Xchanging’s senior management:
-- Induction Programs to 430 transfers within 6 weeks
-- Management training
-- New job descriptions
-- New Customer-focused culture
62
Preparation Re-alignment Streamlining ContinuousImprovement
MourningForming
StormingNorming
Performing
•Mechanisms•Deliverables•Measures•Benchmarks•Gate
•Mechanisms•Deliverables•Measures•Benchmarks•Gate
•Mechanisms•Deliverables•Measures•Benchmarks•Gate
•Mechanisms•Deliverables•Measures•Benchmarks•Gate
People Competency
63
People Competency
On business as usual in short-term:
"Richard Houghton was saying, it’s business as usual today guys because we don’t want to upset the service. We are not going to go around now to BAE and say, 'I’m not doing that for you any more Mr. Customer because it’s not in the service definition yet.' We have a philosophy that says if he wants you to do something, you just do it. If there is a commercial consequence of that we will worry about it later and talk to your Line Manager but it is a yes to the customer, not a no." -- Alan Bailey, XHRS
64
People Competency
On business not as usual in long-term:
"We started up by saying 'these are the cost reduction commitments', I said 'we’d have to double productivity in five years', I said 'in so far as we can off-set that through third party revenues by effectively using spare capacity to deliver services to third parties we will, but that’s what we are going to do'. " -- Richard Houghton, CEO, XHRS
65
People Competency
On training results:
"The transferred employees had seen Xchanging's management team, because we all went to these things, did Q & As, stood on the stage and answered all their questions, Richard Houghton did all of them, he was committed to doing these. The employees hadn’t seen that before. They had been in an area where they didn’t see the management very often, didn’t get access to them and then all of a sudden, this is an enthusiastic team that they are now seeing and they were part of it, they went back buzzing." -- Alan Bailey, XHRS
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Service Competency
Define the as-is service, measures service, and agrees to service targets through a disciplined methodology called Service1st
The goal is to provide the same levels of service during transition then move to customer-negotiated service levels based on individual customer needs.
67
Service Specification& Reports
Service Objective
Customer Type Service Class
Customer Service Item
Customer Service
Metrics e.g.• accuracy
• cycle time• frequency
• quality• volume
& Standards
Service Competency
68
Service Competency
69
Service Competency
XCS Service Team:
As-Is Service: 400 service levels drafted Service Review Board approved in October 2001
But an extra £80 million a year in indirect procurement spendWas uncovered for fleet, contract labor, recruiting, stationary,And travel! HR was buying services from over 200 suppliers,All in decentralized budgets.
70
Xchanging Procurement Services (XPS)
Separate Enterprise Partnership signed November 2001
Worth £800 million over 10 years
Sourcing Competency
71
Sourcing Competency
Car FleetsNon-technical contract laborLearning & DevelopmentHealth CareRecruitmentRenumeration & BenefitsStationary
£80 million
72
Category Expertise
Sourcing Tools
Spend Aggregation
Sourcing Competency
73
Sourcing Competency
Xchanging Confidential. No part of this information may be circulated, quoted, or reproduced without prior written approval of Xchanging.1
Baselining + Gainshare
Spend‘Unitisation’ of
category
BaselinePriceper unit
Gainshare Delta
Baseline price
New Buying price
Core
CEO oOn average, 12% savings delivered on categories transferred
o Margins range from 5% to 45% depending on category
74
Example of ‘Un-bundling’
Profit
Costs OfCosts Of
Car LeasingCar Leasing
Insurance
Car Purchase
Maintenance Costs
ResidualValue / Depreciation
Fuel Costs
Tax
VAT, Road
Accident Management
Breakdown/Roadside Recovery
Profit
Costs OfCosts Of
Car LeasingCar Leasing
Insurance
Car Purchase
Maintenance Costs
ResidualValue / Depreciation
Fuel Costs
Tax
VAT, Road
Accident Management
Breakdown/Roadside Recovery
Costs OfCosts Of
Car LeasingCar Leasing
Insurance
Car Purchase
Maintenance Costs
ResidualValue / Depreciation
Fuel Costs
Tax
VAT, Road
Accident Management
Breakdown/Roadside RecoveryInsurance
Car Purchase
Maintenance Costs
ResidualValue / Depreciation
Fuel Costs
Tax
VAT, Road
Accident Management
Breakdown/Roadside Recovery
Key Cost Elements of Car Leasing
75
Environment Competency
Goal: create modern and well-branded physical spaces to build a visible front office for customers.
Physical spaces also foster a front office mentality
Xchanging built, bought furniture, and decorated new facilityBy February 2002
Occupancy held up by IT contract with CSC
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Preston
Environment Competency
77
Preston Ready!
Environment Competency
78
Preston Ready!
79
Environment Competency
"Space has a big impact on people's morale and the perception of their value-- Mike Margetts, Implementation Practice Director, Xchanging
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Process CompetencyGoal is to redesign business processes to reduce costs and to improve quality through Six Sigma quality improvementdiscipline.
DPMO
6 3.4 99.99966%
5 233 99.9770%
3 66,807 93.3%
ProcessCapability
Defects Per Million YieldOpportunities
%
4 6,210 99.37%
2 308,000 69.2%
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Process Competency
Process Head &Master Black Belt: Mentors
Black Belts: Full Time
Green Belts: Part-time
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Process Competency
Redesigning Processes such as Senior Leader Peer Review
Old process: 640 senior leaders did paper-based peer reviews, assisted face-to-face by HR personnel
New process: e-hr online peer review
"What would have happened before, thirty people would have happily expanded a task to fill three months and as it is now, eight people have been busy for a month--bang! Done." -- Mike Margetts, Head of Implementation, Xchanging HR Services
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Technology Competency
Goal: Build and implement enabling technology on componentdriven architecture.
Goal: Build and implement e-HR within 6 months
Went on a recruiting rampage on May 1, 2001
Hired 19 full time technology managers, architects & specialists
PeoplePortal went live on October 4, 2001
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Reference Performance
People Relationship
Portal
ContactManagement
HRKnowledge andContent Mgmt.
ServiceManagement
eForms
CCI
PerformanceControl
Core Enterprise HRIS
ESS/MSS
Core DW(Time Rel)
Data and Process Integration
CTRXchanging Self Service
e-HR Application Framework
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Technology Competency
"I think they were absolutely astonished that we delivered on that, I don't think they expected it for one minute." -- Richard Houghton, CEO, Xchanging HR Services
"I think the peopleportal has been the first sign from within the business that something has changed, something has actually happened. I think the first time it was used, it was used for the senior leadership population, we were doing an exercise on pay review so each senior leader within the business (650) of them had access to that peopleportal. We had a lot of very good feedback, it was very good, the technology was great, it was web based, we’ve had some very good feedback but we’ve also had people who just can’t get the hang of using the technology." -- Kim Reid, HR Director, BAE SYSTEMS
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Technology Competency
"I think technology is an expensive resource, so you’ve got to be careful with technology, as you know you can spend a lot of money and not get a lot of value. So I think technology from our perspective is very much used when it’s needed. Just because we have a service delivery platform doesn’t necessarily mean that every service we deliver has to be over the Internet, if it doesn’t make sense, we shouldn’t do it. So technology is a bit of a follower in this case, it definitely follows service, service is always first and it's rarely that we would be in there before process because I don’t want to put technology on top of a broken process." -- Steve Bowen, Technology Practice Director, Xchanging
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Implementation Competency
Goal: to orchestrate the timing and resources required for theOther six competencies.
88
Implementation Competency
No Set Formula:
"I don't want to tell you the perfect process for implementation project management, I actually want to say that I am prepared to do anything I need to to get things done....basically it is an anti-approach. Methods are not really important--the end result is everything." -- Mike Margetts, seconded from his role as Practice Director of Xchanging’s Implementation competency.
89
Implementation Competency
90
Implementation CompetencyPreparation Realignment Streamlining Continuous
ImprovementJune 2000 to May 2001
May 2001 to October 2001
November 2001 toDecember 2002
December 2002To May 2011
Data collected on BAE finances & peopleService objective & preliminary service definition Structure & people plansCost modeling Financial reporting & control plans Technology architecture designedConstantcommunication with targeted transfers
430 BAE staff are transferred & re-oriented, & retrained Detailed "as is" service specification defined & approved Black belts trained and working on first set process improvements; recruiting process redesigned & implemented PeoplePortal launched
New Organizational design
Shared Services established
Preston Service Regional Teams established
Downsized staff
3 more versions of Peopleportal
Process Improvements to more HR services
Future challenges: Attract external customers to increase revenues
Sustain cost cuts and service improvements
Upper quartile performance in all HR service areas
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Findings as of 2002
Prior to the Xchanging partnership, HR at BAE SYSTEMS:
(a) lack of investment, (b) lack of leadership, (c) lack of employee motivation, (d) lack of customer-focused service, (e) bureaucratic and inefficient processes, and (f) outdated and non-integrated technology.
Preliminary findings assess the effectiveness of using an enterprise partnership as a vehicle for transforming this low functioning back office into a commercial enterprise.
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Findings
Finding 1: The Enterprise Partnership Model creates a clash of cultures, but cultural incompatibility may be just what you need.
"What was obvious to me, the Xchanging people were part of a small company desperate to succeed, and that desire to succeed just didn't exist in the BAE SYSTEMS HR culture." -- David Bauernfeind, CFO
If you left work at half past six, you were having a late night at BAE. I mean, that is the BAE culture. I was in at ten to seven this morning and I'll be here at nine o'clock tonight and that is the Xchanging culture. The Xchanging guys I just could associate with very, very, very easily. From day one I felt much, much more comfortable. The hard thing was it was a damned sight harder work, much more disciplined environment, much more focused environment. It still took me a little while to make that leap – probably two or three months."
93
Findings
Finding 2: The Enterprise Partnership Model offers multiple short-term implementation phases that yield faster results and pose less risk than a single, large-scale project.
"Innovation doesn't need to be a big idea, it can be lots of little things...What we like doing is introducing a bit of change every three months because it has much more immediate impact rather than building a great big filthy system." -- David Andrews, CEO Xchanging "If you don’t do it within three to six months then you don’t do it." -- Mike Margetts, Implementation Director, Xchanging
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Findings
Finding 3: The Enterprise Partnership Model views technology not as a solution, but rather as an enabler.
"People are altogether more flexible and creative and clever to fit around a system." -- Mike Margetts, Implementation Director, Xchanging
"I wanted to see what happened if you improved business processes and services without touching IT. That was just a quirk of mine which was a very lucky break because in fact what we found was that we could engineer a huge improvement and do it on the back of the old legacy system." -- David Andrews, CEO, Xchanging.
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Findings
Finding 4: When employing Fee-for-Service Outsourcing or an Enterprise Partnership Model, be sure to manage user demand.
"We are seeing some evidence of increased demand with Xchanging HR Services. It's the early days yet, but demand for service before XHRS was always restricted because as an HR Director, you only have the number of people that you could get your MD to agree to, so that effectively capped it. Of course, we have taken that away now and people can demand ever more and more." -- Steve Hodgson, Head of Resources, XHRS.
96
Findings
Finding 5: Both Fee-for-Service Outsourcing and The Enterprise Partnership Model uncover spend previously hidden in decentralized budgets.
"The cost has increased quite substantially. We’re just having a review on that at the moment. At the moment that communication isn’t clear and it does look as if costs are going up. But in reality, we’re doing a review of it and we’re doing some investigation on it, in reality it probably isn’t going up because of Xchanging. It just means that we need to probably transfer budget over that hasn’t traditionally sat within the HR team, so that it's all as one and recharged against that, that total mass, rather than part left within the business. But it is a concern." -- Kim Reid, HR Director, BAE SYSTEMS
97
Findings
Finding 6: The Enterprise Partnership Model delays due diligence until after the contract is in effect, which speeds the negotiation process and more fairly distributes the burden of newly discovered costs.
"The quality of the data about the HR function in terms of not just what salaries people were on but just who was there, how many to within 10%. Really, really surprising and if anything that experience, if I ever needed drilling home about why BAE needed to do the deal, that did it. If you can’t tell how many people are in your own function within 10% to 20% what chance have you got of providing value added HR for a business? It was just shocking." -- David Bauernfeind, CFO, XHRS
98
Findings
Finding 7: The Enterprise Partnership Model aligns incentives better than fee-for-service outsourcing.
"So if it was a traditional customer/supplier relationship, I think it would be very much customer/supplier which perhaps may not be totally joined up in the middle. You would get the instance that the customer would blame the supplier for not delivering a service. For me, the partnership means that the accountability for delivering the service into the business is mine. I have to make sure that it delivers a seamless service so that myself and my other HR directors in this business will not say ‘the reason this went wrong was because Xchanging did this’. If something goes wrong it’s because we did it. It’s very much a partner type relationship." -- Kim Reid, HR Director, BAE SYSTEMS
99
Findings
Finding 8: The Enterprise Partnership Model does not perfectly align incentives.
In the past, the joint governance between customers and suppliers we studied led to a managerial schizophrenia. Because the enterprise's primary customer is also an owner, the customer has two competing goals: to maximize cost-efficient service delivery from the enterprise and to maximize the revenue of the enterprise. How can the customer do both? Furthermore, if the same executives sit on the Board of Directors of the customer company and the enterprise company, which hat should they wear? Should they be pushing for more services at a reduced cost, thereby squeezing as much as they can from the enterprise? Or should they push for generating more revenues, which distract the enterprise from their needs?
100
Findings
Finding 9: The Enterprise Partnership Model benefits from generic business competencies rather than domain-specific knowledge.
"I always say the best HR people are people who haven’t been in the HR function all their lives. You need a different view. So the Xchanging team, although they are not HR professionals, it works probably better that they are not because if they go in understanding all the pitfalls that there may be, then they’ll never make any changes, so sometimes it is better." -- Kim Reid, HR Director, BAE SYSTEMS
101
Findings
Finding 10: The Economics of the Enterprise Partnership Model need to Work for the Client and Supplier Without Over-Reliance on Third Party Revenues.
"The business development in year one at this stage was almost zero because the focus was let’s get our act together in delivering this to BAE SYSTEMS first before we all turn salesmen and go out and start selling ourselves. It is always a hard decision to make because our future relies on getting third party business in but at the time it was a management team in XHRS and an agreement at the Xchanging group level that we would concentrate on delivering the operation, getting our act together to get our product out, get our people to pull together to get the service center in place. And it was probably only the beginning of quarter four last year that now started to be a bit more active in the market rather just being passive." -- Alan Bailey, New Business Development, XHRS
102
Findings
"The reality if I just look at it in XHRS is we have to really work hard not to make this business work. It is pretty easy to make this business make money, the hard bit is the time scale and the growth. So you concentrate resource and you put their management in place, you remove the weak people over time and you put in good technology. You really have to work to not make that add up to a significantly better position than you were in before." -- David Bauernfeind, CFO, XHRS
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Can Success be Replicated?Ideal Customer Profile
The customer has a large back office spend of at least £25 million per year and at least 500 employees, making the deal large enough to attract a competent external supplier The customer's back office operations are highly decentralized, allowing the opportunity for significant savings from centralization and standardization The customer's back office operations have not received high management attention historically, allowing the opportunity for significant savings and service improvement from better management The customer's organization would resist centralizing and standardizing themselves due to internal political resistance, unwillingness of senior management to make the required upfront investment, or lack of skills and experience of back office staff to make the transformation.