This document discusses the outsourcing business and whether it is right for a company. It defines outsourcing as a contractual relationship between two parties for ongoing management of infrastructure or business processes. There are different types of outsourcing like applications outsourcing and business process outsourcing. The document outlines pros and cons from the customer and vendor perspectives. Key considerations for evaluating whether outsourcing is right include whether the business can be profitable, deliver on service levels, manage risks, and fit with company strategy. Product management may also need to shift from a software to service model.

1. The Outsourcing Business
Is it Right for You?
SVPMA
Wednesday, October 6, 2004
Sridhar Ramanathan
Pacifica Group
Pacifica Group © 2004

2. Agenda
Outsourcing definition
Types of outsourcing
Customer/Vendor perspectives
Business Considerations
Product Management Implications
Resources

3. Defining Outsourcing
“Outsourcing, a contractual relationship
between two or more parties for the
ongoing management (and in many
cases the improvement) of
infrastructure or business processes”
--ITSMA
Source: ITSMA paper “Buyer Views on Outsourcing and Offshoring”

4. Types of Outsourcing
Type Example
Applications Outsourcing ERP Outsourcing (e.g. mySAP)
Business Process Outsourcing EDS’ HR Services (payroll, benefits)
Infrastructure Outsourcing HP Desktop Management Services
Application Service Providers Salesforce.com, CRM on Demand
IT Utility Services Critical Path’s Managed Messaging
Internet Service Providers Savvis hosting services
Note: onshore/offshore is a separate decision from insource/outsource

6. Why Outsource?
Access to expertise; focus on core
competency
gain time-to-market
increase operational efficiency
Manage risk/change over time
Reduce/contain cost

7. Pros– The Customer Perspective
More reasons...
Competition is doing it
Move big ticket asset purchases off the
balance sheet to expense
Scale; grow the business without
scaling costs commensurately

8. Cons-The Customer Perspective
Cost savings may not meet
expectations; expensive change orders
arising from service levels can account
for a huge fraction of the bill
Service levels might not meet
expectations
Switching outsourcers is painful;
divorces can be ugly

9. Pros- The Vendor Perspective
Recurring/predictable revenue and reduced
selling costs due to 2-10 year contract terms
Add more value to customers and command
a bigger share of your customer’s wallet
Keep competition at bay
High switching costs could yield higher
margins

10. Cons- The Vendor Perspective
Can become a big diversion from current
business model
Balancing operational efficiency with
customer relationship can be tough; most
software businesses emphasize volume not
maximizing customer value
Potentially large capital and human
resources to build up capability
Exiting bad business is painful

11. Vendor Example – Toolwire

12. Evaluation Criteria
1. Can we make money?
2. Can we deliver?
3. Is the risk/reward acceptable?
4. Does it fit with our strategy?

13. 1. Can we make money?
Leading IT outsourcers make over 40%
gross margin on multi-year contracts.
Will you have operational efficiencies, cost
advantages, process maturity, and scale?
Can you drive down costs (labor, capital,
software, etc.) while delivering flawlessly
against service levels for annuity revenue?

14. 2. Can we deliver?
Emphasis on value more than volume
It’s a trusted relationship. Customers will
escalate to CEO fast if something breaks.
How well can your team can deliver against
tightly specified service level agreements.
Do you have enough instrumentation to
proactively avoid disasters?

15. 3. Is the risk/reward acceptable?
Outsourcing relationships are all about
managing risk. Leaders quantify risk and
pricing it into the contract directly.
For example, are you getting paid enough
to deliver five 9’s availability globally?
Has your legal team reviewed the liabilities?
Do you have mutual responsibilities/
accountabilities built into the contract?

16. Does it fit with our strategy?
You will need new roles: sales specialists,
pursuit teams, delivery/operations, finance,
pricing analysts, contracts, and HR.
Are you willing to institute rigorous
processes and metrics to reward behaviors?
It’s a big cultural shift from maximizing
volume to maximizing value with a few.

17. Vendor Example – GlassHouse Technologies

18. Outsourcing is a deeper
relationship
Software Hosted/ Outsource
Support OnDemand Option
Service level agreement
Incident management
7x24 coverage
Updates/upgrades
Proactive ongoing change
management
Design, build and run a
specific IT/Business
Process
Transfer of assets/people

19. Pricing & Terms
Software Business Outsourcing Business
1 year 2-10 years
EULA SLA
Right-to-use license & Contracted monthly fee
support as % plus change orders
Pricing on seats Pricing on servicing #
servers, users, messages,
or CPU/storage capacity…
Customer bears all risk Shared Risk

20. Product Management Implications
Software Business Outsourcing Business
Product definition Service description
Development & launch Change management
process process
Team is Marketing, PM, Team incl HR, Legal,
Engineering & Support Finance, Pricing Analyst
Customer acquisition Customer retention/
expansion
Innovate Copy/leverage

21. Resources
CIO magazine articles (excellent one on
quantifying risk/return)
BPO-Forum
ITSMA – Buyer Views on Outsourcing
Morgan-Chambers whitepapers (dated but
good)
Whitepapers at vendor sites (e.g. CSC, EDS,
CapGemini, HP and IBM)
Gartner and Forrester research notes

22. Thank you!
Sridhar Ramanathan
Pacifica Group
(925) 371-8400
sridhar@pacifica-group.com