Today, companies are faced with dual objectives of reducing the cost of ownership and simultaneously managing the risk and increasing value/efficiency from these applications/ infrastructure through optimization. The challenge in the question is what do companies prioritize first? Should they lower the cost of ownership through offshoring and self-fund application/ infrastructure portfolio optimization or should application/ infrastructure portfolio be optimized and followed up with cost efficiencies? Are outsourcing and portfolio optimization sequential options? Which should be done first? Which option works better in the long term?

This was an expert panel consisting of Peter Schofield, the infrastructure and operations director, Carphone Warehouse, UK, a 4 million Pound Sterling company with nearly 1500 branches in the UK, and Europe; Dudley Bromley the offshore transition manager for Cummins Engine Co, global manufacturers of diesel engines. Now because they were manufacturing in India too, they were one of the first companies to outsource from India! They are joined by Neale Chinery, group IT director, Dixon's Storegroup, a 91/2 billion pounds Sterling group and the largest specialist electrical retailer in Europe and Aaron Wies, the CIO of Sensata Technologies a recent spin off of Texas Instruments and Sid Pai, the Managing Partner of TPI, the pioneer and today, the largest sourcing advisor in the world!

Abstract

A very interesting topic and a matchingly interesting and informative discussion! The discussion explores the reality behind question of optimizing versus outsourcing and the aspirations and constraints related to it. It also focuses on the strategies and methodologies considered by the organizations for outsourcing or optimizing their business processes..The panelists conclude that companies look for at outsourcing as a crucial way to optimize along with the other benefits of offshoring and this outsourcing-led optimization sets a pathway towards transformation.

Discussion

Swapan Johri: Let me take a shot now at introducing the topic to you. There are essentially three parts as I look at it, to the discussion that we are going to have. One is to look at prevalent industry thoughts-there are a lot of them, the most apt is don't outsource and go for a mess for less kind of an approach or clean up before you outsource. Those are some prevalent industry thoughts relevant to this discussion. Are they relevant today? There's been a change of paradigms in sourcing, global sourcing is center stage. In this changed paradigm, are these industry thoughts relevant or not, have they become myths or are they ones that will still go by? That's one part of the discussion, the next part is to look at it from an aspiration versus constraints point of view- you may want to take one particular direction but then there are certain constraints that one has, whether it is outsource first or optimize first. The third is there would be strategies and methodology- to get to where you want to get and it could be either of the two situations or some mid path in between.

Dudley Bromley: I would like to start by saying that one of the purposes of outsourcing is to optimize. The question is whether you do it before or after. In the late nineties we outsourced our application maintenance and development to an Indian company and that was very successful. So in our case we did not consider optimizing until after we moved the work and that was because of our corporate direction.

Neale Chinery: I am in the spaces along with Dudley which says that probably outsourcing solution is to optimize. Within optimize I mean transform as well so my view is that you need to do both and really it's just what we are looking at and why we shouldn't do either or, so it is my view around - that's to optimize. But do you have the skills to do the optimizing? And in both of those cases working with an outsourced partner can help so you get the cost benefits from the outsource which could help fund some of the optimization and transformation and they would bring with them skills to optimize- then you may as well do that with your outsourcing partner. So my view is you have to get into a decision where you are looking at optimization at the time you are outsourcing and you need a plan in place which allows you to do both.

Pete Schofield: I guess the question "do you outsource or do you optimize, and which order do you do it in", from my perspective, is really quite straightforward. It's almost not really a question because you will need to do both. You need to find a clever way to do both. Part of my job is to make sure that I run reasonably efficient operations and if not optimizing already, I'm really not doing my job. Can I be optimizing without outsourcing, I suppose I can but I really don't think that's the right answer, I need to do both. Why would you outsource and what kind of outsource you go for whilst you are optimizing really depends on what your business objectives are and therefore they should be the objectives of outsourcing. So do you outsource first or do you optimize first- my opinion is no you don't. You need to find a way to bring the two together and the chances are your outsourcing partners are probably more experts at optimizing than maybe all of your in house capabilities. So you probably already made the decision optimizing and improving, getting productivity efficiencies and becoming more responsive is what you need to achieve. I think the challenge is how do you do both together.

Aaron Weis: I think coming to the point that you made, you're clearly going to do both. If you are outsourcing you are going to optimize. The real question becomes can you do them at the same time and is that possible? The key to making the transformation to an outsourcing world is to minimize change during the transformation and when we went through our outsourcing effort we summed it up with a mantra which was called "like for like". Whatever you had on one side of the journey was exactly what you are going to have on the other side of the journey. So in terms of do you have to optimize first- no but if you optimize on the path to understanding it then I think that's part of the journey. At Sensata, our core competency as a company has been able to move a process from one place to another and we have that ingrained in us, so that's sort of a like for like mentality. I would come down on the side of you have to optimize because optimizing carries with it again an insinuation that you understand what it is you are about to move.

Sid Pai: What I've seen in our experience is that at the end of the day there is a lot more lip service paid to optimization than there is any actual optimization going on, and the reason is that at the end of the day the primary thing that informs what that decision is comes down to cost. There is very little incentive for the service provider to provide optimization services post facto. Think about it- If I as service provider were to take over client operations and if I make x dollars today, by optimizing I may actually end up having to spend less time and effort on doing this work which means less revenue for me. Why would a service provider do that again? So until and unless clients are also willing to come out with something that is a gain sharing mechanism that makes sense from an economic perspective for the service provider, most of the optimization will not happen. It would continue to be mess for less- the promise of offshore. Until we get new contracting mechanisms and new partnering mechanisms rather than just arms length contracts that are based on time and materials, it is going to be more hype than reality.

Question: In this optimization leading to transformation, if that is the way it goes have you set goals metrics, any of you, for the person you are outsourcing to and how quickly if you did, did you achieve those goals.

Pete Schofiled: Yes, we have a good deal of metrics and targets associated with those - indeed it might even be my opinion that we are buried in them and hope we got too many, how many have we then asked our service provider to meet and deliver upon, we are yet to figure out because it's a fairly new relationship. It's a fairly straightforward thing with some kind of contractual agreement like OLAs or SLAs in that particular area and the measures that you would get out of all the IT-reliant disciplines.

Question (Pete Schofield): You were talking about targets working with your provider on measures aligned with CMM- whether a service provider has to meet those?

Audience: Yes, we do but there is a lot of variability also in the code, and variability in the adaptation of that code to customization. So we have to look at it within those parameters, but we do look at our upper and lower control limits and where exactly those productivity measures are within those and over a period of time we will change the upper and lower control limits.

Neale Chinery: I can answer from the project perspective. At the time we outsourced with HCL we were in the process of a major business project which was consolidating at distribution centers in the UK from 17 down to 2. We looked at the cost of the transformation and what was in terms of ongoing costs and looked at how we could work with HCL in terms of actually delivering those. We did some things like gain shares around purchasing and other incentives we could give like reward on those projects which gave an incentive to enable HCL to deliver for us. So we put the metrics in place for the projects.

Dudley Bromley: Cummins was the one of the first companies to outsource the infrastructure operations and because it was such a new concept, we wanted to minimize risks as much as possible and that is why we transitioned everything as is. Now that we are through that transition, we are looking at implementing IT. We have also consolidated our data centers and HCL is helping us manage those data centers.

Question (Swapan Johri): Neale, many things went on in the Dixons when outsourcing was done, how did it work out in terms of risks involved.

Neale Chinery: I think it was actually change forced upon us to some of the transformational opportunities and ensuring that we got the right governance in place around those transformational projects carried by us. We were already demanding that we get more for less and not the same for less. The business understood the risk involved in the data center project and managed that.

Aaron WeisOn the optimization covering risks the offerings of a good point that it is covered mainly through good governance and as a part of our transformation effort we had to put in place project governance and the PMO (Project Management Objective), but post transformation, we have kept those things alive and expanded into the business. As we move from outsourcing to optimization, on one side there is business governance organization which will go a long way in helping minimize risks and the other side is the strong reliance on metrics.

Question (Swapan Johri): You could have come across a large number of organizations and you have seen them on various stages in this path. Would you feel the same way about risk being managed through strong governance?

Sid Pai: Governances is probably the most important part in any relationship - whether you are trying to transform what you are doing, or whether you are doing what you are just doing, or continue to do what you are doing with the service provider, is extremely important. The problem is that most of the metrics that are in place today end up being something that can be fungible from the definition perspective. We mix up optimization and transformation. They are two different things. You can measure one, you can't measure the other so easily.

(Swapan Johri):I guess that is because the dividing line is thin and optimization is probably the first step towards transformation or vice versa it could be that if you do a piece-meal optimization, you would really miss out on the big ticket transformation and it may make it undoable.

Panelist (Sid Pai): I don't think optimization is the first step towards transformation. You might not need to transform your business. Your business might be an excellent model that is running extremely well from a front-end perspective, everything you do is cost oriented. That's optimization and not transformation. Transformation is when there is huge change in your business. When your competition comes up with something that is significantly different from what you are doing today, then you need to transform.

Panelist (Sid Pai): If you are changing the way you run your IT, it is optimizing your back office support function. The other side of this which we haven't brought out is that there is difference between outsourcing and offshoring. Offshoring as a business is no where near as mature as outsourcing is. Outsourcing has been around for a while. We did a study in the offshore space and we found that people who had a lot of experience in doing it had significantly more realistic expectations of what cost savings were, what productivity was and so on. The second thing is actually in one third of the cases of people who had more than 5 years of experience doing offshore regardless of whether they used a service provider or did it themselves, they came back saying that the productivity they had was nearly half. If you stop and think about it, if one third of the people are saying that it takes twice as many people offshore, then how are you really optimizing what you are doing?

Panelist (Aaron Weis): In transformation your challenge is, can you move to a like for like environment, let alone optimizing, you are going to change your internal functional processes, the way you run your IT, and you are going to do it in a completely different way. Your challenge is, can you still provide the platform for the business, can you optimize? That's great, but first you have got to be able to maintain.

Question: Could you explain in detail about the process and I am looking more for the emotional side that happened with inside of the workforce, that happened inside of Cummins when you went through the process of that announcement coming down and how that transition happened.

Dudley Bromley: Cummins had already outsourced the infrastructure. As I mentioned earlier Lockheed Martin had that responsibility, so in our case moving the work to HCL was essentially replacing one supplier with another supplier, we did not impact any Cummins employees in transition. So the difficulty there was maintaining the Lockheed people long enough to be able to get through the transition and we were fortunate and did not have to face the HR nightmare that many companies do when they move work offshore.

Neale Chinery: There was going to be the people impact and a redundancy program was going to happen as part of that. We set up a whole change stream around that program and activity and the communication plan went with that. The one thing that gets neglected in the process is that you are concentrating so much on the people who are leaving, you forget about the people who are staying within your organization in the management, who were going to be part of the management and part of the transition team.

Question (HCL): While getting involved in several large deals in discussing with the customers, the reasons that they cite before the optimizing process is to get the head count reduced so that they don't have to make so many employees redundant. What's the panel's view on that and that would also mean investing a lot in the optimizing process? When it comes to outsourcing, people are very conservative and they want to know whether they can optimize while engaging with the vendor and then have less of an issue of reduction.

Panelist ( Sid Pai):I am not sure I understand. I think that is a bit of a circular logic to be honest, we will optimize and cut heads first, and then we will bring in an outsourcer, we will cut more heads. Is that what you are trying to say?

Question (HCL): What they are saying is that they will first optimize in-house so that they don't see jobs going to India and then they will offshore and they will have to offshore less.

Panelist (Neale Chinery): All you can do is like for like, then you optimize first in making it as small as possible, like for like is as small as possible when you transition.

Panelist (Aaron Weis): You should never undergo optimization just because you want to be nice about or because of a warm fuzzy feeling about people. Anytime outsourcing and offshoring is in the equation, the people issue is the tough topic that you have to face and you have to face it with honesty with the people that are working for you and that trust in you. You should only optimize to improve your cost basis at the end of the day.

Question (Chandru Narain): We have just offshored a lot of our engineering functions to HCL, some of the engineering functions, and what we talking here about optimization, outsourcing and offshoring. Some of the stuff can get tangled in semantics, with really no value being added to the discussion. The thing that I have noticed is that when you are wanting to have a company in India come and take over a part of your business process, you have to first do something about that process and there is no way you can just transfer that process. So to a certain extent if that's what you call optimization, that has to be done and it's amazing how many companies don't think about that. Any experience from the panel about that.

Pete Schofield: It's an interesting point and we were wrestling with it in Carphones. Engineering specifically may be an area where optimization is needed. That's not one that right now we would be looking to either partner, outsource or offshore, but we can see that there would be a time when we give a special touch to the build or execution path of the engineering discipline as opposed to the design or architectural part. Would you optimize or would you outsource first or what order you are doing it in, you really need to do both together. Engineering in Carphones is one of the disciplines that is the least mature, we want to move it, but we are quite nervous about putting that in a different organization, in a different model when it's currently in that condition. So we are going to optimize first and then see what we do.

Audience (Chandru Narain): We have to honestly think about the business process first and make sure that your business processes are well defined and stable before you can have an offshore company come and help you. Otherwise, I am not sure there is going to be any dollar savings initially anyway, it's going to be very hard to accomplish.

Question: Isn't it possible that the offshoring company helps you do that baseline and define your process or any outsourcing company for that matter?

Audience (Chandru Narain): For one thing you may not find enough skills locally to be able to do the job, you may not be able to hire enough people to manage projects and so on.

Question (Godfrey Pinto): In the most general way, work wise, what was your experience in your partner investing in your business?

Dudley Bromley: HCL has invested not money but resources into our business, they have done that by providing additional people, more than we paid for - this helps in a number of ways; when people leave they have got somebody waiting to assume that responsibility and it's worked out quite well for us and I think that's a substantial investment on their part.

Question (Swapan Johri): Do you think that determining what competency, what skill exists in your own organization is an important part of the whole and is that the important start point and if yes, then how do you get to doing the right assessment?

Neale Chinery: Let me just come back to the process that we went through in deciding to outsource. We looked at our own skills and resources and the biggest challenge was looking at where we wanted to go looking forward and how we wanted to transition the internal skills together. For an outsourced partner, you need to look at what skills they need to have in place to support you today, and what skills do they need to have to support you in future and can they prove if they can work in both of those counts.

Pete Schofield: On the right skills in the right places in your own organization, we have taken a number of SMEs that are highly respected individuals within the team and lifted these guys and made them part of the change team that's working on the program that's trying to deliver our outsourcing model. The idea behind that was that if these guys are part of the future solution, they can then help us bring the rest of the team with us, and concentrating on those that are staying and not just those who are leaving - this is seen as leadership initiative that is being done to the rest of the team since it is being built by the team themselves. I am working with HCL to try and achieve that and we think that has worked quite well. The SMEs are not only bringing the rest of the team with them but are also able to tell HCL ,our partner, that what is the nature of the business that we are running here within IT and how does that work for Carphone because these guys are experts and they know it thoroughly.

Aaron Weis: One of the keys to success is getting the ownership and initiative down in the organization so that technical leaders feel they own the outcome of this, which is really the key for success and also the key for retaining them. There is another aspect that would be the cultural fit gap analysis they have to do in deciding what is it going to take culturally between your partner and you to be successful.

Question (Chris Jones): One aspect which has not come out yet is the natural competitive tendering process. We need to address questions in terms of how much investment there is from a supplier into business, how much transformation. A lot of that is around the nature of competitive process and there are many companies who either do not allow enough competition in the process or do not ask for enough transformation. I would ask the panel the benefit of hindsight for those of you that have just gone down a single tender process at least at the end when it is in the negotiating phase, with the benefits of hindsight would you have taken a decision differently and allowed yourself an extra three months to focus on the transformational aspects?

Panelist (Aaron Weis): I guess in my case I would have to say we wouldn't be able to do it differently because we were time boxed. So the emphasis was on speed versus some of the other factors that go into this decision. Definitely it was a formalized RFP process and of a bidding process, but in our case we did not have the luxury of an additional 3 months.

Dudley Bromley: The same in my case, we had a deadline to meet. We did do, in a contract we got some very strict SLAs in place, which is one of things we recommend when people ask us the lessons learned - they have those SLAs and contract.

Panelist (Pete Schofield): The question was with the hindsight would we do differently - no is the sure answer and the reason for this is that we did do a tender which I believe was competitive enough -5:2:1. Was price our main goal? No, it was not. Was it the second one? Yes it was. That had to be delivered with right cultural fit for our organization and we believe we found the one that has the best cultural fit for our organization.

Audience (Chris Jones): It is quite clear the supplier teams are challenged in a competitive basis to come up with a far more innovative solutions because if you are a single tender you don't have to give them marginally and the impact overall can be very significant on the cost. A lot of customers don't understand that difference when they are looking at the alternatives.

Sid Pai: If you are talking about a longer term type of contract where you are getting into relationships which are going to last for a few years, several things can change. In the last few years several companies have got into a nine and ten years agreement with one service provider, they have basically locked everybody else out, they are now the incumbent and are charged usurious rates. In those instances just injecting the threat of competition is enough. The service provider also knows that the cost of switching is very high. So incumbency is one part of it and the other part of it is how you set up a contract to start off with. Once the incumbency is set in, one of the things you need to accept is that changes in the environment are not because you didn't go through the competitive process. So in some instances, you just have to accept that the competitive process will give you what you need for the next few years and other instances based on the type of work you can empanel a set of values and keep the competition alive.

Question (Swapan Johri): At the beginning of the conversation you mentioned about economic collaboration with the service provider and that being key to making optimization really happen, I'm sure you are not meaning that that's the only collaboration that needs to be done. From your experience what else do you think are the key collaborative things that need to be done to make optimization work?

Sid Pai: Operational collaboration is also extremely important, at the end of the day the service provider needs to know your business for them to be able to help to optimize. So the collaboration is way beyond just the dollars. The collaboration needs to be working in a teaming environment with the service provider if you truly want optimization, if you truly want transformation depending on how we define it, but if you truly want change, that's the only way to make it happen. If you are in fact expecting your partner to take on the majority of this responsibility, then it stands to reason that you could collaborate with them upfront in order to make that happen.

Concluding remarks from the panel (outsource versus optimize)

Dudley Bromley: One of the purposes of outsourcing is to optimize and whether you do it before or after you move work offshore is dependant on the business priorities and in my case it was "what does management want". Management wanted the work moved and now we are optimizing and problem management in the ideal senses are very key aspects of that optimization.

Neale Chinery: Don't close any doors. So whichever way you choose to go down, just make sure you are within the contracts, the frameworks in place for transformation. Don't close any doors.

Pete Schofiled: As I said earlier, it's not one or the other or one first or the other later, you need to do both. I don't think anyone is going to thank you if you say I just spent couple of years outsourcing or may be partnering, but nothing is really optimized - everyone's going to say, so what and thanks very much. You need to find a way to do both.

Aaron Weis: You do find a way to do both but the key is not to confuse the two- they are two very separate processes that you go through. It takes a defined process to be successful in outsourcing and a very different process to be successful in optimizing.

Sid Pai: Put your money where your mouth is regardless of whether you are a client or a service provider. If in fact you have business transformation capabilities as a service provider, show how you can invest in the client's business, if as a client you want transformation or optimization show the service provider how they stand to benefit if they were to help optimize your process for you.