Managing transition is a critical part of an outsourcing relationship. There is significant cost implication in the transition as well. What is the right approach to transition - big bang or phased approach? How do the risks compare with benefits in the tow approaches? What are the best-of-breed risk migration strategies to ensure a smooth transition? What should an offshore vendor do, and what should the buyer do to mitigate the risks?

Abstract

The session explores the risk involved in the transition and the best way to mitigate the risk involved. The panelists argued that transparency and trust between the service provider and the organization are the two most important factors that can mitigate the risk involved in the transition process. Global organizations must consider business strategies, both global as well as local, internal HR issues, and their vision for future before going for either approach. Cultural issues, support from the top management, a strong project management program and human capital management play a major role in leveraging the maximum benefit in minimal time.

Discussion

Ashish Gupta: We are going to cover big bang versus phase transition to offshore. What are the risks, what are the benefits and do the risks which we undertake justify the benefits?

We have Ann T. Schumann from Hercules Inc. She looked at a transition from a much wider perspective involving business processes, HR, etc. She has very actively been involved in working in a lot of shared services function within the organization which she has worked for. And she would be able to provide a very good perspective on big bang versus phase transition approach, what works, what does not, in the context of overall business.

The second panelist is Chuck Ciali, the CIO of Teradyne. Chuck has been active with HCL over the last 2 years. He has done a major transformation program. It is about transformation first and then transition later. He is going to be able to provide a very good perspective on transformation and transition combined together.

We have Ash Banerjee from EMI Music. He is overseen over the last one year, a pretty aggressive and a very, very well-planned transition in a phase migration approach in a very big bang sort of migration approach to offshore involving HCL on infrastructure on applications.

The fourth panelist is Arno Franz from TPI. He understands the capabilities of service providers and that has a very large role to play with regards to which sort of the decision you should take, phased versus a big bang approach. He also understands the customer side. He understands that to make a big bang happen without risks, it is extremely critical to understand and to lay the ground rules of what the current organization strength is, what is the retained organization, and all the issues affecting that.

I will first invite Anne to sort of give us a perspective on transition which was big bang but from a complete organizational perspective, really transforming all the back-end engines to make the whole thing work.

Anne: Big bang has an interesting answer. Late 90s to 2000 went through significant downsizing primarily due to some extreme financial trouble we got into after taking on too much debt to pursue an acquisition. So if you looked at the business support functions fairly lean, lean but not scalable and not very agile.

So the journey really begins in the beginning of the 2006 when the senior management took a step back and said okay we downsized, we shared our services and what is the next strategic move for us in terms of how to best support our businesses in a short term or more importantly in the long term, what makes sense for us? So we formed a multifunctional and multiregional team who was charged for 2006 to really look at that question and decide does outsourcing make sense for Hercules. After months of exploration and deliberation and due diligence, the team came back with the recommendation that offshoring makes sense in the big bang approach.

The HR support is being provided out of States and the BPO areas are India , Romania and Mexico . So we did a combination of offshoring and nearshoring. We anticipate that the most of the tracks would be live by the end of the first quarter of 2008. So let me share with you some of the pros and cons that quickly come to mind in terms of big bang Vs phased in. On the pro side when you are asking an organization to go through that much change, both in terms of scope and significance, the change almost becomes its own momentum and almost it becomes a numbness in the organization, but it is so much change that the organization does not really have a chance to fight it much. They have to get on board and that is the pro. The con is if it is not managed properly and the expectations are upset, you could easily move into chaos or you can have a significantly negative impact in your business.

Let me talk a little bit about prominent top 10 or top 8 lessons learnt. Some of these apply to big bang and some of them just apply to the offshoring in general. The first lesson is there has to be a commitment from the top down for a big bang approach. Second is open and honest communication to the worldwide employees. Third one is I would not underestimate the level of infrastructure support to implement a big bang approach. Fourth is, come up with score card. By track, what criteria have to be met before you go live with that track? The other thing I will mention is that you have to have a very great complex timeline and timetable with lots of touch points but don't be afraid to move off with that. And the other thing I had mentioned is, before you close your deals, with the statement of work, check out all the things with sales groups, operations group, your team, etc.

Ashish Gupta: In your situation with the multi-vendor strategy that takes a very different dimension, it is about the governance and the retained organization which runs this whole process of the three-tier five-city, multi big bang sort of an approach. So what were the set of issues? What was the planning which went behind the whole project management of this construct? That's I think the key issue which would have been managed very well for this to be successful in your environment.

Ann: We actually have a dedicated program management office. Their responsibility is to make sure that this works, that this happens. You have to have a timeline; you have to flexibility in timeline. You have to be willing to say we are not ready. The risks are too great. The documentation is not in line, we need more knowledge transfer, so if you going to orchestrate this and govern it, you got to have the flexibility and license from your CEO to say your time out. And the other thing I forgot to mention, don't hesitate to change the model along the way. We have done some of that midcourse.

Audience: What was to rationale that drove you to a multivendor outsourcing relationship versus intuitively what you would think, which is a single vendor strategy to help to you mitigate the complexity?

Ann: When we started this journey, we said let us find one vendor partner that can do this, everything. HR actually was the first component to be reviewed. Because we were 4000 employees there really wasn't one vendor that could do everything we need to do across the globe. We want one partner for BPO and IT and that is where we started in and then when we get into the strengths and weaknesses in and we had in-depth discussion about the risks, is a really prudent to go with one vendor and at the end of the day we decided combination of risk and strengths and weakness from the different providers that is just must made more sense, so it is a better fit.

Chuck: Teradyne is a manufacturer of automated test equipment. We are the leading supplier of system-on-a-chip test equipment with a market share of about 34% and that is particularly is a sub-market. In 2005 we just completed a consolidation of our product divisions, four product divisions into one, four engineering group into one. But IT infrastructure that was supporting the company did not change that time.

So in 2005, we realized that we are dealing with large legacy portfolio applications that had grown to support multiple product divisions, multiple engineering groups and very heterogeneous complex environment. We are a global company, 80+ sites on our networks, lots of partner relationships and network connectivity to those and the IT infrastructure was not going to support the business objectives of growth and response in this flexibility.

So we reasoned that we change our sourcing strategy to full outsourcing strategy and link the attainment of our application rationalization in the contract by year over year efficiency gains. In 2003 we continued with a phased sort of selective strategy and in 2005, we decided to pursue a full outsourcing strategy. We reasoned that bundling all of our IT services into a single contract with a single provider who had the scale and capability that we needed to do the application portfolio work, we would probably be able to do that reason at a lower overall cost and in a shorter time frame. So we were really driven by this need to rationalize application portfolio and we really wanted a single vendor approach.

Our early strategy around outsourcing the phased sort of selective approach gave us experience in governing outsourcing relationships. We were using a minimal risk approach and it took in a longer time in those cases to transition especially if you are dealing with multiple vendors, so on upside there was risk avoidance and gaining experience. On the downside, the organization was waiting for the next shoe to drop, prolonged worries about outsourcing; another downside is more governance and vendor integration issues.

We had vendor to vendor transition which even though we had transition assistance clauses in our contracts with previous vendors, you really needed to do that quickly because vendor co-operation time is limited.

In 2006 we are communicating to employees about the next outsourcing decision, even during the bidding process, attrition has spiked. So in order to ensure the knowledge transfer, we had to move quickly, because we are losing people. So what were the results? We successfully transitioned all of the infrastructure towers in four months including global helpdesk. We transitioned our entire application portfolio in about 6 months; one application area lasted another month.

So what did we learn? What are some of the critical success factors if you are thinking of doing this? The first thing is pay utmost attention to human capital management. We had a series of employee transitions. We had a series of retained employees and we had employees being rebadged and all of those employee groups get treated differently when we going through this. For transitioned employees we had stay incentives and we learned quickly that the stay incentives are probably not enough and for key roles we had to have multiple contingencies identified and we even had to increase the incentives during transition processes in some cases. So another critical success factor is project program management. We realized really on that to be successful we have to put as much into the program management as HCL did. A third critical success factor was communication to the internal organization. Your customer group is critical because as you go through this much change there is bound to be impacts. We did mass communication. We had involvement in the business in the selection process with our business liaisons but I come away saying if you are going to do this, communicate, communicate and communicate, because it is critical to success.

The fourth thing is, have a good contract. In our case we had a good contract with detailed transition timelines and detailed transition costs and we look outsourcing as a partnership and with HCL we have very open transparent partnership.

Audience: What about the people that had to leave? Redundancies?

Ann: I forgot to mention the importance of retention in our whole scenario and one fact that we had that actually worked in our favor that I really mentioned in the description of Hercules that we had very long service employees and that is both of in a positive and negative. We have a quite lot of emotional issues because it was family that we were changing. But the plus side of it was we had individuals who had to leave that had fairly healthy severance packages because of their longstanding service but we supplemented the severance packages with retention bonuses and every single employee involved in the knowledge transfer whether they were staying or going, whether they had large or small severance, independent of that whole equation, they had a retention bonus that was designed in line with the criticality of the role they would play in the knowledge transfer. So the combination of the severance in the retention program really worked to our advantage, in fact it worked better than we thought. As Chuck mentioned when you do the big bang and you consolidated into a specific period of time, you are now drawing it out.

Audience: Can you help us understand what was your return on the offshore or the outsourcing model when you consider in all of the cost that you had to go through?

Ann: There was a favorable return; otherwise we won't have done it. But as I said there was a favorable return but that return in itself was not enough to make us to do this. It has to go back to fundamentally why are you changing the cost aside? Why you are changing the way you choose to support your businesses, whether it is IT or finance or customer service, so the return itself from a business case had built into it all the severance, all transition cost and it was very positive and very favorable but if you weigh that against all the change and the risk, so that is why cost savings alone is not enough.

Ashish Gupta: EMI Music is going through major transformation as the media industry itself is changing and you are driving a lot of that transformation, you are driving a lot of the big bang approaches to change within the organization. If we can have your perspective please?

Ash: Couple of additional principles that you can follow while you are transitioning and I am going to specifically talk about human dimension on this and communication which I think is really crucial. So if you have a program which I have had before whether is significant enough scope or scale whether the benefits and the costs and the risks aim the attention of the top management, getting transition right is essential. It is essential because firstly of cost. The transitional process itself carries a cost bubble. There are parallel costs that you incur during transition. At the same time, you got to be able to optimize that cost; you got high risk of knowledge loss because you have people who are affected by it and do not wish to continue within the company, feeling emotionally, reacting emotionally or whatever and high risk of vendor reaction if you have got the vendor to achieve transitioning. So there is a significant amount of risk of knowledge loss and vendor transition and of course you have to able to achieve benefits. I think little bit more than just cost of the program but other strategic benefits make it worthwhile, and finally you have got make sure from the benefits and cost point of view that while you are transitioning, in order to achieve success you have to slow down the demand pipe. And really slow down the level of development activity that is taking place and the change activities taking place within the company for the business, and whole of that all the things related to cost risks leads to a focus on speed and a perfect execution. You need to able to execute faster, focus the teams and execution beyond the point where they have reacted emotionally to the initial comments and then minimize the period of disruption during the transition.

Commitment from top management is a must and by top management I mean the very top management of a company. That person should be announcing what is going to be happening and what is being done. Part of the challenge before the transition execution is to make sure that top technology management team poses to have an initiative of the program. The very important point is to bring the team that is going to execute the transition on board together with you, have a common objective, understand the goals that you are going to achieve and understand how you are going to do it and that is very important from the perspective of execution of transition and from the perspective of solidarity toward the rest of the team and toward the business who are going to suffer some change during the transition period.

First point is to deal with winning the hearts and minds. And second is, plan, plan; plan and do more plan. Plan as early as possible; do very detailed due diligence program before you begin anything and make sure that you have understood where all the skeleton are hidden, where all the stuff is not documented properly and so you understand the risks before executing.

Assign your best program manager to execute the plan. Horizontal work streams in each track for transition whether you have infrastructure in application, helpdesk and whatever. There are HCL and other suppliers who have come up with detailed transitional plans. In addition to this detailed transitional plans, we need to have horizontal plans to make sure that whole plans get executed consistently. Horizontal plans are main things like for HR, it should be a specific track of work or how you handle HR issues for the people who are staying, leaving and the design of the organizations or whatever. Communication is absolutely crucial to makes this happen.

One more point - infrastructure enablement is important to horizontal track. Create a specific and clear governance model. Each communication to each individual has to be specific and tailored to that individual; once you know what you are going to do and communicate upfront be honest, be courageous, upfront about what you are going to do. We have lot of debate around communication and in my experiences you must communicate. Because there would be reaction against it, initial emotional reaction but afterwards people will execute on your behalf. Three other things I think worth pointing out. When you think in term of HR, design your retained organization; design how your retained organization is going to function, who is going to remain and who are not going to remain.

But people who are not going to remain i.e. the leavers make sure that we have a long notice period. For those people you are going to need those people to transition effectively. Those people have to give everything to transition what they know before leaving and the other knowledgeable people. So giving a long notice period and giving certainty with a date that when that notice period ends. And with that notice period if you required them to stay beyond - it is a dead discussion. And thirdly establish incentive plans for retention based around specific goals and targets that are reviewed the end of the period.

Audience: Do you have any thoughts from external transition issues? I am thinking particularly of existing suppliers where you may be terminating a relationship, but he will therefore going to be less than pleased but whose cooperation you would nevertheless need. Do you have any thoughts on how to take all things along if you like and protect yourselves when you make the necessary announcement you get any cooperation that you need.

Chuck: You really have to rely on what kind of relationship you have with that supplier. You should bring your suppliers into and evaluate are they are going to cooperate not based our past relationships. In our case, we had very good cooperation with the offshore partner and moderate cooperation with domestic partner which is a different thing that we had expected. Both have contractual commitments they met but that give you just the bottom line. At the end, understanding your relationship with that partner early in the process and then planning mitigation for that along the way is the key.

Ash: You have to understand what kind of relationship we have. What kind of dependence they have on you in terms of revenue stream when you changing. If you are number one to them, they are likely to react in a different way than if you are number 2 or 150. Once you understand that if you are at the end of the scale which is that, you think that they are not going to supportive or cooperative. Then you take an approach which is like a hostile acquisition. You have to make the decision and that decision like hostile acquisition and hostile transition. Don't leave it somewhere in the middle.

Ashish: I would like invite Arno to talk about both the challenges and the issues which is seen in typical phased or big bang transition approaches at the customer end. Also what are the characteristic, what are the set of issues which he sees working well? What is being in your experience? What are the key learnings which you can share with us?

Arno:I have observed two types of behaviors with service providers who have been in a incumbent position but have then lost that work or part of work as a result to another vendor transitioning in. In one instance that I recall when the vendor actually lifted their capability in terms of disengagement almost to the point where it became an issue of pride for them to ensure that they did over perform even though they are actually losing part of business. And anther one there was an ongoing relationship even though they have lost a very visible part of that business and there were opportunities to actually grow what they still had left inside the customer environment. They were reluctantantly pride in terms of contributing to effectiveness of the new incumbent service provider and to the point where top management had to intervene, had to get involved, had to intervene, had to persuade, had to motivate in terms of not getting more work but still the behavior didn't change. It is dependent on the relationship but in some instances you have to certainly treat them as hostile witness. You really have to go down to the particular path; but it is very hard someone to predict what the behavior will be.

But again I think if you take the approach that my colleagues are taken here with the transition is about open communications that at least ensures that you as a client in charge of overall process has done your utmost in order to ensure a reasonable outcome. If they can't respond then what course of action will they intake, so I think it comes back to using some sort of first principles.

We might have a shot as trying to do some of the attributes but either approach carries a set of risks and either approach could be as risky and one could be more riskier than the other, relative to the business objectives, relative to what you are trying to achieve within the organization. So I think deciding whether to do with the phased to the big bang, first start with how it reconciles itself with the business objectives and therefore what are the risks associated with their approach. In some instances you may not even be able to do the big bang. The sheer volume of the work in changeover is insurmountable and in other words is just physically not possible.

Now I didn't have an option in terms of big bang. The time lag to replace the whole of the application, do a parallel testing was just politically unacceptable in order to achieve the business objective of that organization. The other thing I would mention is all of the speakers touched this in a great deal of depth was all the issues around the communication, employee and stakeholder engagement. Now it will be acceptable to the individual or won't be the individual - that is fine. You know what your boundaries are and what you find acceptable in terms of meeting your business objectives.

What I also found really intriguing, particularly with major transitions whether they are big bang or phased is the amount of filtering that goes on in organizations in terms of this is working or is this not. But I have also observed is a lot of filtering in multi-layered organizations. To construct the governance structure in order to ensure through program management office, issue escalation, etc., but there is level of filtering which particularly occurring in multi-vendor environment. It is the level of finger pointing that sometimes goes on, etc., and there are mechanisms that need to be put into the place in order to be able to understand when the filtering occurs and what the substance of the filtering is. So the leadership, who is committed and driven from the top, are getting the right information which it needs to make the decisions. And I do see this is a constant thing that occurs is that there is a level of filtering within the client, within the service provider and with the multi-service provider environment that becomes inhibitor to success and that is to be watched. And the final one is the 'governance'. Governance of particularly about multiple stakeholders and I just don't mean the client and a single service provider but particularly where there are multiple service providers and external market conditions that need to be taken to account of. That is quite important as well. Other issues we have to address is something on the infrastructure. This might not quite work in this environment because of this particular issue. It was the same applications and same functions but in multiple geographic centers. So I think it was Nike: 'Just do it'. Be aware of that imperative whether you like it or not, it tends to override the best planning and consultation have in place and there is also an issue about perhaps we can consult too often in order to actually move the things forward and that consideration as well.

Ashish: How does the organization sort of sustain its momentum, sustain the enthusiasm, keeps its focus in terms of keeping running the program like that. Any examples, any comments from the audience somewhere? One of the key learnings is the fact that the initial first few phases have been used only as bedding grounds, only as a mechanism to establish how the whole interface between the supplier and the customer who has never done it before actually is really going to work.

Arno would you like to sum it up for us on in terms of what are the key messages on phased versus transition and what are the risks and what are the benefits, how do you manage them?

Arno: Commitment from the top, it is a change program. So you must have by-in from the uppermost leadership of the organization. An open and honest communication in all part of what you are doing within your change program, because that is what it is at the end of the day. I think that it is quite important in terms of lessons learnt. The planning as well as the detailed planning, they need to have the plan, but at the same time be willing and brave enough to change that plan. The important of the transition itself and of course I think execution is so key and it is the execution of a major change program and the attention to human capital management as well. So that were the some of the common things came out from the speakers; I think if we start to follow that principles and it always come back down to the first principles. Then at least you will be going to think with the level of awareness and knowledge and the capability in order to be out of plan for that particular event, whether it is phased or whether it is big bang.