Six Keys to Success in a Multi-Sourced Ecosystem: Right Sourcing 101 & 102 by guest bloggers Randy Vetter and Beth Anderson

Embarking on a new sourcing relationship is a more complex endeavor than ever before. Multi-sourcing, hybrid in-sourcing and shared service structures all make for a diverse and highly interactive environment that demands operational alignment among stakeholders, collaboration and innovation. There was once a time when cost savings was the singular focus of a sourcing strategy. However, today’s sourcing strategies are focused on innovation and agility, access to specialized skills and an ability to focus company resources on core strategic priorities such as superior business alignment and areas of competitive differentiation. The focus today is on “Right Sourcing.”

This new focus on right sourcing brings added intricacy to the nature and breadth of organizational change and transition planning that is required for enduring sourcing relationships in a multi-sourcing eco-system. No longer are the right scope, right business case, right provider(s), and right contract sufficient for success.  Now it is the right operating structure, vendor management framework and contract simplification that are drivers of sourcing effectiveness.

In Alsbridge’s experience, many clients are surprised by the amount of internal organizational change management, transition planning and execution needed to make the multi-sourcing strategy both productive from the start and sustainable into the future. It takes active and focused preparation in six key areas to achieve a successful initial transition and a viable relationship that achieves planned business case benefits, including:

• 1 - Transition Management
• 2 - Communications Management
• 3 - Organization Redesign
• 4 - Vendor Management
• 5 - Operational Alignment
• 6 - Service Management

There is a lot to consider when right-sourcing functions and resources. Your organization will need to be able to ask and answer several interrelated questions that will be paramount to your future success. This two-part series from Alsbridge addresses each of the following questions in order to help set you on the right path:

1. What should our plan to transition and transform functions, knowledge, tools, people, projects and processes to our new hybrid sourcing model look like?
2. How do we prepare our people for the change and the opportunity the change represents?
3. When and how do we communicate what these changes mean for our organization to individual team members?
4. What operational components should we retain for non-sourced functions?
5. How should the retained organization be structured?
6. How do we select and prepare members for their changing roles?
7. How do we align our new organization and its established processes with the internal shared services functions, insourced functions and outsourced processes to achieve the desired outcomes for the business?
8. How do we manage and optimize the new multi-provider relationships to achieve the promised results, incentivize cooperation among providers and to support the business strategy?
9. How will multi-sourcing change the process of engaging with our business customers?
10. What should we do to improve the provisioning of services and to better align IT services with business
    objectives?

Organizations contemplating an right sourcing decision, a transition to a new provider, or an hybrid sourcing situation, are faced with a need for transition and internal change planning and execution to begin (or end) the relationship on sound footing. Some may not have either the capability (know-how, discipline, skill set, deep experience), or the capacity (cycles, time beyond managing their day job), to effectively design and execute the necessary detailed plans. 

The experience of an external advisory firm can better ensure that multi-faceted plans are comprehensive and, because of the advisor’s intellectual property, are put in place more quickly and cost-effectively. However, whether you seek the assistance of an experienced third party sourcing advisor, or decide to ‘DIY’ (do it yourself), the preparation described in this two-part series needs to be done, and done thoroughly, to reduce transition risk and lead to successful sourcing relationships.

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Randy Vetter, Director, Alsbridge and Beth Anderson, Managing Consultant, Alsbridge

Six Keys to Success in a Multi-Sourced Ecosystem: Right Sourcing 101
Six Keys to Success in a Multi-Sourced Ecosystem: Right Sourcing 102

Examining the Top 5 Misconceptions Surrounding the Gainshare Commercial Model in Procurement Outsourcing: Part 2 by guest blogger Simon Woodcock

In Part I of my analysis of the top misconceptions around the gainshare model in procurement outsourcing, I discussed the stereotype that gainshare agreements are high risk and don’t deliver significant, in-depth savings.  Both of those statements were shown to be misconceived.  In this post, I’ll look at the misconceptions related to alleged high fees, collaboration and contract length.
Assumption 3: Providers can “get lucky”: If the provider implements large savings on a very easy project, the customer ends up paying a disproportionately large sum of money as fees

Facts: With a fee-for-service model, the reverse of this is true. An organization can pay for a project the delivers low savings and end up paying a disproportionately large relative fee. The key here is to ensure robust SLAs are in place. This discussion relates only to project-based consumption. With a managed services model, the provider will take the rough with the smooth; some projects will deliver more value to the customer and provider, and some will deliver less. Over the course of a three-to-five year contract managing all spend across all categories, those peaks and troughs will level out.

Assumption 4: Gainshare restricts collaboration: Successful results come from collaboration and this will be minimized if both parties are constantly ascribing a ‘who did what and when? ‘ or ‘whose idea was that?’ mentality.

Facts: This would appear to be an argument more in favor of the gainshare model. With a fee-for-service model there is risk that the provider charges for an artificially high amount of effort or that scope-creep occurs if the statement of work turns out to be less than comprehensive. The beauty of a gainshare arrangement is the collaboration it fosters. Standard SLAs require a provider address the majority of spend and a road map of projects to achieve that will be created mutually within a governance structure. From then on in, both parties have a vested interest in successful delivery.

Assumption 5: Gainshare encourages ‘short-termism’: Organizations require long-term and sustainable strategic guidance but gainshare encourages first year savings in lieu of long-term service.

Facts: This first half of this point is certainly correct; organizations need a long-term and strategic approach but the misconception occurs in the second half because gainshare can absolutely be fundamental to a long-term strategy. Gainshare is best used as part of a managed service model that ensures every category is addressed more than once in a deliberate, planned and phased manner so that it can bring in long-term behavioral changes in the management of each category. The ad hoc, ‘point-and-shoot’ approach of a fee-for-service model is more likely to lack a long-term or holistic outlook. Any fully managed service proposal should plan to address 100% of spend at least once over a three-year contract, which is anything but ‘short-termist ‘.

To conclude, there is no ‘right’ or ‘wrong’ commercial model in procurement outsourcing. Different circumstances require different solutions and gainshare is clearly an option with merit.  When implemented correctly, gainshare can bear many benefits for customer and provider as risk, reward, and the incentive to create value are mutual.

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Simon Woodcock, Sales and Solution Manager at Xchanging Procurement Services

Examining the Top 5 Misconceptions Surrounding the Gainshare Commercial Model in Procurement Outsourcing: Part 1 by guest blogger Simon Woodcock

Within the realm of sourcing and procurement services, there are contrasting schools of thought regarding effective commercial models, with gainshare and fee-for-service sitting at either end of the spectrum. Gainshare is a model in which the provider receives payment as a proportion of, and upon successful delivery of, savings to the customer. A fee-for-service model, sees customers pay a fixed fee for a pre-defined piece of work or on a time and expenses basis.

Pure gainsharing in procurement services contracts is still quite rare. Analyst firm Everest Group analyzed 254 contracts for its 2012 research report on the topic and found that only 4% of 254 contracts uphold the model. Proponents of the model feel quite passionate about it but with its’ limited implementation so far, procurement professionals may still not fully understand the benefits it offers.

Both models, gainshare and fee-for-service, have their merits and, depending on the circumstances, each might be the ideal model to implement as part of a sourcing and procurement outsourcing initiative. Everest Group found that gainsharing works well in cases where the desired outcome and accountability can be clearly defined and captured contractually (Gainsharing in Procurement Outsourcing 2012). Using that thinking as our guiding principle, I’d like to analyze common industry assumptions regarding gainshare and the truth behind them, as the gainshare model proves to be an increasingly viable choice in the evolving BPO landscape.

Asssumption 1: Gainshare agreements are high risk: Gainshare agreements foster a culture of high risk and high stakes which may not lead to good or sustainable results for the organization.

Facts: This point focuses on the risk of the provider squeezing suppliers to the point that they are unable to adequately provide the services to which they are contracted, thus creating a business continuity risk. Well what about the risk of contracting with and paying a provider on a fee-basis without any incentive for them to actually deliver true value? In reality, both are extreme hypothetical situations engineered to discredit the other model and the key in both instances is to implement robust SLAs that will ensure risk mitigation. Some of the longest procurement outsourcing contracts in the market are based on a gainshare model – up to fifteen years – quite sustainable in our eyes.

Assumption 2: Quick saving vs. complex projects: Gainshare agreements incentivize the provider to deliver quick and easy savings, not large and complex savings.

Facts: Assume that both the quick and easy project and the lengthy and complex project deliver the same amount of savings but the time and complexity adds cost to deliver for the provider, which, in the case of fee-for-service, will be passed on to the customer. When paying a third-party to manage projects, gainshare will be relatively more expensive than fee-for-service for quick projects and relatively less expensive for complex projects. So if you are addressing both projects then it makes little difference what the commercial model is. If you are allowing the provider to pick from a choice of the two then, theoretically, the gainshare provider is incentivized to deliver the quick projects and the fee-for-service provider to deliver the complex projects. But there is one more factor to consider and that is the time value of money. There is a financial impact of delaying savings, which is why, no matter what commercial agreement is in place, ‘quick and easy ‘ projects should always be pursued first.

In Part II, we’ll examine more misconceptions surrounding the gainshare model and make a fact-based case in favor of the model.

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Simon Woodcock, Sales and Solution Manager at Xchanging Procurement Services

2013 State of Price Benchmarking - report courtesy of Alsbridge

With the global economy still in recovery, today’s business leaders remain challenged to “do more with less” by seeking ways to streamline operations, cut costs and become more efficient. More than 80% of companies engage in outsourcing to reduce expenses, gain access to variable resources, increase time-to-market, and focus on core competencies. As the global economic recovery continues, IT and business process budgets continue to grow, but slowly.

The total 2013 global outsourcing market is nearly one trillion dollars with approximately two-thirds in Information Technology Outsourcing (ITO) and one-third in Business Process Outsourcing (BPO). The magnitude of outsourcing spend is enormous and vitally important to companies as part of their overall management strategy. With this much at stake, Alsbridge polled its subscriber base comprised of sourcing buyers, providers, and consultants from global companies to determine the current state of price benchmarking in the IT and business process market.

The full 2013 State of Price Benchmarking report provides insight into the current state of information technology and business process price benchmarking on a global basis. The report, based on 662 survey respondents, takes and in-depth look at:

• The history of price benchmarking 
• The need for benchmarking 
• Different types of benchmarks
• Best practices for benchmarking
• Key takeaways
• The benefits of benchmarking 
• Major study findings

Ten major findings emerged from the 2013 study. These findings most often speak to the distinctions between the various benchmarking types and the results that can be achieved from each. Alsbridge’s evaluation highlights key findings for each topic.

Major findings include:

• Finding 1: “Do It Yourself (DYI) Benchmarks are Still Common 
• Finding 2: Smaller Contracts are Benchmarked More Frequently
• Finding 3: IT-Related Scope Benchmarked More Frequently than Others 
• Finding 4: General Price Checking Drives Benchmarking 
• Finding 5: Benchmarking Delivers Results in Less Than 90 Days 
• Finding 6: Slightly Less Effort Needed for In-House Benchmarks 
• Finding 7: Greater Savings are Identified by using Independent Benchmarks 
• Finding 8: Independent Benchmarks Deliver More on the Savings Promise 
• Finding 9: In-House Benchmarks Produce Less Value 
• Finding 10: Buyers Most Often Renegotiate or Re-Compete Their Contract 

Summary:

• Benchmarking can work and help deliver lower contract prices.
• Decide the approach you will employ and the level of granularity you need based on your benchmark’s purpose and objectives.
• Benchmarks can be conducted in a fairly short timeframe thus leading to a potential savings opportunity for those who may be renegotiating an end-of-term contract.
• Given the general success and ROI achieved by benchmarking, ensure you stay in-line with market prices by benchmarking on a regular basis.
• Benchmarks are most often conducted to position the buyer for renegotiating, re-competing, repatriating and adding more services to a contact.
• There is significant value (greater achieved savings, greater ROI, defendability with providers) in having an independent benchmark.

For your next benchmark, you may want to reflect on whether your company has the capability (know-how, discipline, skill-set, experience, current market database, analytics) and capacity (cycles, time beyond managing their day job) to properly develop your benchmarking strategy and execute a benchmark project.

Don't Build Fences, Build Bridges by guest blogger Atul Vashistha, Chairman, Neo Group

As we struggle in America to figure out how to stimulate the economy, we are seeing a rising sentiment against outsourcing.  So, I wanted to take this opportunity to share my thoughts, though others have made many of these points in the last ten years. I did write a similar article five years ago too.

Globalization of services is making significant positive contributions to global economies and to the buying power of the USA, India, China, Mexico, Brazil and other countries.  Still, outsourcing is seen as an alarming issue for many government officials, media, corporations and individuals.  As a participant in the industry, I feel it is important to provide a balanced view to the debate over the globalization of services.

It is always unfortunate when an individual loses their job.  It is even more of a concern when the job loss occurs in a down or slowly recovering economy.  The reality is that this trend is real, irreversible and another step in the globalization of the American and global economy.  In the short term, it will continue to present challenges to industry, government and individual employees.  Yet, it is also important to note that clients are not sending all jobs offshore.  They are carefully evaluating what jobs are best suited for each global location.  As companies go through this difficult decision, they are also creating programs to minimize the short-term pain for their employees.  They are offering their employees reeducation programs, severance packages and outplacement services.  As an advisor to these companies, I see companies looking at innovative solutions to help manage this difficult personal and corporate change.

 While this will continue to be a controversial and emotional debate, it is important to keep in mind that the re-distribution of resources to efficient global locations results in freeing up of capital, lowered costs for consumers and new opportunities for investments.  Protectionism hampers innovation and cripples growth, which in turn can lead to higher unemployment.  The failure to innovate is to cede technological leadership and, ultimately, economic strength.

Globalization is a structural evolution of the American and global economy.   America is part of a global economy and American companies will flourish by staying competitive.  This requires them to leverage resources and opportunities globally.  This is helping American companies stay competitive and thus enhance shareholder value and stay healthy.  This enables them to not only save jobs but also create new jobs by expansion and new service/product introduction.  Many companies that do not leverage this globalization strategy have filed bankruptcy and as a result lost even more jobs.  These are companies that may never have the opportunity to create new jobs or provide a return to their shareholders.

As the US population ages, there will be a shortage of resources.  In fact it is projected that are current productivity levels, we will face a shortage of almost 15 million workers in the year 2015.  Also, over the next decade, more jobs will be lost to productivity and technology rather than globalization.  The following was written by Heritage Foundation, “Chinese manufacturing employment peaked in 1996 at 126 million workers. The privatization of inefficient state-owned enterprises and the adoption of productivity-increasing technology eliminated tens of millions of Chinese manufacturing jobs between 1996 and 2002. Chinese manufacturing employment partially recovered to 113 million by 2006, but was still well below its 1996 level.The same factors that have eliminated American manufacturing jobs have also eliminated millions of manufacturing jobs in China. Congress cannot bring back manufacturing positions eliminated by technology by restricting foreign trade.”

What can we do to create new jobs or keep jobs?

•     Expand the R&D Tax Credit.  Since first introduced more than twenty years ago, the R&D tax credit has helped stimulate innovation and kept high-skill, high-wage jobs in the United States.  Lets expand the R&D tax credit to reward further the risk-taking and innovation that keep our economy growing.

•     Increase Federal Spending on Research.  Federal research funding in the physical sciences and engineering as a percentage of GDP has declined since 1985 by nearly one-third.  Let’s reverse this trend and dramatically increase federal spending on basic research.  The money we spend will come back to us many times over in the creation of new jobs in new industries making products yet to be invented. Let’s have a Manhattan kind of project along with a stable revenue model for clean energy.

•     Deal with Rising Health Expenses. Offer small employer tax credits, funding for employer-based group purchasing pools, increased funding for high-risk pools, build on Medicaid and the State Children’s Health Insurance Program, and permit a Medicare buy-in for the near-elderly.

•     Enforce Trade Agreements.  Keeping markets open and opening new markets for U.S. goods and services will also help increase employment in America.  Push for better enforcement of our existing trade agreements, and for negotiating trade agreements with countries that offer lucrative markets where U.S. companies could increase their sales.

•     Support Lifelong Education.  Education provides the skills necessary to unleash Americans’ creativity and helps prepare them for the jobs of the future.  Improve, consolidate, and expand education tax incentives; to increase scholarships for engineering students; to fund the No Child Left Behind Act fully; and to support community colleges.

•     Trade Adjustment Assistance.  TAA has helped thousands of manufacturing workers get retraining, keep their health insurance, and make a new start.  Improve TAA and expand it to cover service workers who lose their jobs to offshoring.  People should get retraining whether they work in services or manufacturing.  Workers, employers, and the American economy all benefit when we equip our workers with the skills they need to fill jobs in growing industries.

•     Visa Program. Expand the H1B and other such visa program for technical and advanced degrees. Limiting visas for technical workers will only make the skills gap and dearth of talent more acute for American employers.

Many of the ideas above have been championed by Senator Baucus but we also need the outsourcing industry and professionals to rally to support the above. Let's go IAOP!

Atul Vashistha is the Chairman of Neo Group, a leading Supply Analytics and Monitoring, Governance Support and Sourcing Advisory services serving global clients since 1999.

A Case Study: Procter & Gamble’s Five Rules for Transformative Outsourcing by guest blogger Joe Stolarski

Transformation is on every CEO’s mind these days. And, to effect change, many companies are beginning to outsource an increasingly larger set of non-core activities. Few have managed the outsourced relationship as effectively—and unconventionally—as Procter & Gamble (P&G). The global manufacturer uses a “five rules” approach that illustrates the principles of “Vested®”, a hybrid business model for hyper-collaborative relationships, as identified in research conducted by the University of Tennessee’s Center for Executive Education.

As P&G’s real estate services provider since 2003, JLL has been privileged to experience this powerful approach first-hand. Here is how it works:

• Rule 1: Focus on outcomes, not transactions. Our compensation is linked to our success in achieving specific outcomes established in collaboration with P&G – not on property commissions. This structure ensures that both parties share a vested interest in bringing new ideas to the work and for achieving our shared goals. 
• Rule 2: Focus on the what, not the how. Rather than defining service minutia in the contract, P&G delegated these details to us. For example, at the outset, approximately 550 P&G employees were transferred to our company. Most had never worked for any company other than P&G, but we were trusted to affect the change in mindset and motivate the new employees.
• Rule 3: Establish clear and measurable desired outcomes. We worked with P&G to define big-picture metrics rather than measuring the program against individual task performance. For example, in 2005 we focused on the successful integration of P&G’s Gillette and Wella acquisitions. An annual review and yearly goal-setting keeps our program aligned with business strategy.
• Rule 4: Create a pricing model with incentives. Multi-tiered incentives align P&G and service provider goals. The contract features cost pass-throughs in which P&G retains responsibility for bills; a management fee-at-risk structure in which a portion of our fees are withheld until results are achieved; pre-structured compensation for above-scope work; and shared savings incentives.
• Rule 5: Provide insight balanced with oversight. We incorporated a proactive governance structure into our contract to ensure an ongoing “win-win” relationship, establishing both companies as co-owners of the corporate real estate function, with shared goals and aligned processes.

Most critically, P&G expected us to take charge of its facilities, not just take care of them, to achieve cost efficiency while exceeding customer satisfaction targets. It’s a profound difference in mindset that continues to inspire our work.

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Joe Stolarski, International Director at Jones Lang LaSalle

Your Provider Hates Your Outsourcing Contract Too by guest blogger Ben Trowbridge

Outsourcing agreements are typically multi-year contracts ranging from three to five years in length. As the client environment changes over time, a client may determine that it is in the company's best interest to pursue an early renegotiation of the outsourcing contract in order to achieve different business results.

Are you too nervous to approach your provider about renegotiating your outsourcing contract? Are you afraid that the mere mention of the "R" word will lead to degradation of services and of the relationship? Don't worry – chances are, your provider hates your outsourcing contract too. It has been found that providers, once they have a chance to absorb the message, are willing partners in the outsourcing contract renegotiation process.

Four of the most prevalent reasons for renegotiating an outsourcing contract from the provider's point of view are described below.

• 1. The Ability to Extend the Contract Term - You may be concerned about the impact of requesting price reductions as part of the renegotiation process. While the provider may not initially like this (why would they?), they understand that market forces are driving IT support costs down and will be open to lower run-rate pricing in return for extending the contract term by a couple of years so that they can maintain (or even improve) their overall total contract value (TCV). As long as the contract is structured to allow you to realize the benefit of future cost reductions and improvements, this is an acceptable trade-off that results in a win-win for everyone.
• 2. The Ability to Realign Prices with Their Internal Costs - As technology, support structures, and the outsourcing market evolve, the pricing mechanisms currently included in your contract may no longer be relevant for either you or your provider. For example, perhaps you currently have an Additional Resource Charge (ARC) for adding a server to your environment, but the rate seems too high in the current market. For the sake of this example, assume you currently do not differentiate between server instances and physical servers - they are all treated the same. During the contact renegotiation process your provider will probably concur that the current rates are too high and come back with a different price structure that can be used in return for reducing the overall server support rate. So, perhaps you devise a pricing mechanism for "server instances" at a much lower rate, and you develop a higher rate for "physical servers." Net/net, your overall server support costs go down, but the provider is protected because their real cost driver (in this case the addition of a new physical server) is still covered. This is only one example - there could be many variations of this theme across each of your towers.
• 3. The Ability to "Re-Transform" the Environment - When your original outsourcing agreement was implemented, there was probably an assumption of the "new" or "transformed" technical environment that would be implemented and supported by the provider. Chances are, things didn't go quite according to plan, and even if they did, the environment in place today probably doesn't represent the best-in-class environment that would provide the highest performance and availability at the lowest support cost. Through a renegotiation, the provider may be able to propose some one-time transformation activities that implement tools, technologies, and architectures which allow them to better support the environment at a lower cost to you. Typical transformation activities can include things like applications rationalization, server consolidation, remote infrastructure support, and service oriented architecture. By carefully considering these types of transformation options, it is possible for you to improve the performance and flexibility of your IT environment while also making it easier and less costly for the provider to support.
• 4. The Ability to Restructure Service Delivery - In order to achieve your desired price reduction while also aligning their services to their standardized offerings, the provider may want to move more support offshore, standardize server platforms, and implement or increase the use of remote infrastructure support. Assuming they can address any concerns you may have regarding service delivery, your provider should be able to reduce their support costs by standardizing operations and using low cost labor, while maintaining (or possibly even improving) service delivery to you. Depending on your current contract, it is possible that the provider can technically do some of this work now, but the reality is that a certain amount of equilibrium usually sets in, and it usually takes a significant event such as a renegotiation to truly make these kinds of changes.

It is possible to have positive, productive discussions with your provider regarding outsourcing contract renegotiations. In addition to satisfying your requirements while maintaining overall revenue and/or profit, the provider can use contract renegotiation to improve their long-term ability to support you while realizing additional standardization and cost efficiencies. 

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Ben Trowbridge, Founder & CEO, Alsbridge, Inc.

BPO Governance- Are You Still Following The Pied Piper? by guest blogger Ben Trowbridge

In the past few years there's been a great deal written about governance; yet, it's still a misunderstood subject. In most cases, it's an afterthought only considered once the "transaction" is complete and the provider is selected. Unfortunately, this practice relegates governance to no more than a box to be checked off on the path to program implementation. In order for governance to have a chance to realize the business case for which it was created, it must be more than this. 

Considering the governance structures of providers, as well as most advisors, one sees that there is a blending together as though all are dancing to the same "sheet of music." Each has their organizational alignment charts, communication plans and list tasks that need to be accomplished. But, if this is the silver bullet to program success, then why is there such a high failure rate and common dissatisfaction among most buyers? Has the reliance on the "same sheet of music" turned everyone into following the Pied Piper? Or, perhaps it has led to the kind of pack mentality that caused the lemmings to run off of the proverbial cliff.

BPO Governance

The importance of having a good governance structure should never be underestimated and planning for it should begin the first day, i.e. the day you begin the feasibility study and not the day you sign the contract! As Stephen Covey noted, you must "begin with the end in mind." Don't just look at the numbers, but at the organization itself and ask:

• Can the organization make the transition?

• Is there sufficient process documentation and metrics?

• Are the right people in the organization to make it happen?

• Is there adequate executive commitment and oversight?

If the answer to any of these questions is 'no', then fix it immediately!

Planning for the retained organization and Program Management Organization (PMO), must be holistic in nature and take into account the larger imperative for change. It is crucial to understand the key drivers: people, process and performance. Each driver must be coordinated by the PMO to work together. The retained organization and the provider's staff (people) must understand the process and the KPI's (performance) by which they will be measured. The metrics must be realistic, measurable and repeatable. From this basis, continuous improvement can be imbedded throughout the delivery model.

Outsourcing is a long, multi-year journey and you must realize that you are picking a strategic partner and not a vendor. Yes, you want a fair price, but in the end you'll get what you pay for. Driving for rock bottom prices will deliver you a provider that looks for every excuse not to improve the process, thereby giving you sub-standard results. This too must be planned for up front; you have to define the financial targets that must be achieved to meet the business plan. Then, when reached, back off and focus on the relationship.

In Conclusion

What is the lesson here? Ask yourself the following:

• Is my company just following the Outsourcing mantra to reduce cost without an overarching plan or strategic alignment?

• Is there a central PMO set up to coordinate and standardize outsourcing efforts?

• Are there effective change controls in place?

• Does my company know how to measure performance and program success?

• Is my program floundering and about to derail?"

If you don't have warm fuzzies after reviewing these questions, then you have a governance issue. And just like in the ERP days, it fundamentally comes down to effective program management, change management and performance measurement - all of which adds up to governance.

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Ben Trowbridge, Founder & CEO, Alsbridge, Inc.

Will Bionic Hill Turn Kyiv into Eastern European Bangalore? by guest blogger Viktor Bogdanov

In the mid-1980s the Indian government launched an ambitious “Software Technology Parks of India” program that envisioned tax-free use of land for construction of high-tech parks and freeing all IT companies from income tax and VAT. That is how one of the world's poorest countries managed to build a powerful high-tech industry - now the key driver of the whole Indian economy.

Ukraine has started realizing its own IT potential only recently and is yet to fully realize it in the years to come. Last year's hot topic on the Ukrainian IT arena was construction of the first Live-Work-Learn-Play Technology Park in the outskirts of Kyiv, the capital city and biggest IT hub of the country. Bionic Hill – that is how the project was called – had been initiated back in 2011 by UDP, one of Ukraine's leading investment companies and supported by the Kyiv municipal administration. In August 2012 the state-funded “Technopolis” project that aims to foster innovative IT infrastructure development within the country included Bionic Hill in its agenda. In November – December 2012 the project went on road show and was presented at Stanford University (California), Washington, Chicago and Toronto. The Bionic Hill project team spent some time in the Silicon Valley to borrow best practices of the tech parks' construction, functioning and management.

The Bionic Hill will be similar to any other innovation park and will include a huge business center to host both domestic and foreign IT companies, business incubators and tech labs, venture funds, banks and other service providers, and own “University”. The latter is said to be a joint effort of Bionic Hill, Kyiv Mohila Academy (one of the oldest and most respected higher education institutions in Ukraine) and leading IT companies. I wouldn't really call it so pretentiously as it's only going to be an IT training center for JAVA specialists, testers, cloud, iOS and other technologies as well as client service management and foreign languages. That said, the “University” will supposedly fill in the gaps that currently exist between technical education and real-life business needs.

The project promises significant benefits for the national economy such as 35,000 new workplaces, $900 million in annual revenue from the resident companies, over $600 million in value-added software products export, more direct investments, access to cutting edge technologies, stimulation of innovation clusters in industries other than IT (e.g., energy, biotechnology, etc.) and regular cash inflows into the state and local budgets. Sounds like a true dream town, doesn't it? If we believe the promises, of course...

Some Ukrainian IT leaders and C-level execs are very optimistic about the project outcomes and view Bionic Hill as a panacea for today's issues facing IT industry actors in Ukraine. Roman Khmil, COO of Ciklum, a Danish based company with operations in Ukraine, believes that even though Bionic Hill won't be able to fully solve the brain drain problem, it will provide a next-gen level of comfort for Ukrainian IT geeks. “IT industry has grown immensely in the last 10 years,” says Khmil. “When I returned to Ukraine [from US] in 2002, the average salary was $500, now it's $2,500. IT specialists' wellbeing is a way better than the average national rate. However, there're very few good business centers downtown with a good price – quality ratio. Freelance model works well for small projects only. Big project teams of 30 people and more should be stationed together and managed properly. Now only big and experienced outsourcing companies can afford to host such teams. Therefore, outsourcing to freelancers accounts for no more than 5% of the market. ” In his opinion, Bionic Hill will be able to provide excellent conditions for work, leisure and learning.

Igor Fedulov, CEO of Intersog, a global provider of mobile apps and games development services with 3 development centers in Ukraine, is less optimistic about the project. “My opinion is that techno-parks are a myth and they don't work. Most other attempts to start a high-tech park in Russia, Belarus or Kazakhstan didn't produce any marginal success. If you're modeling against Silicon Valley or MIT or Cambridge you need to have one major recipe for success. One. It's called government spending on actual innovation that happens in those parks. I'm talking about major government spending, close to 80% of entire park revenue. Without this any attempt to realize synergies from the fact that the commercial firms will have direct access to the talent which is taught at the same location is a pipe dream.”

Construction of Bionic Hill is set to start in Q2 2013. Phase 1 including a business center, residential real estate and social infrastructure objects is planned to be commissioned in Q1 2015, while the ultimate completion of Bionic Hill is expected in 2020.

I personally think Ukraine has already lost its chance to benefit from high-tech parks. We'll never reach the level of Silicon Valley or India. We don't have any conditions for creating high quality techno-parks due to several obvious reasons. Firstly, we can't physically build them around the tech universities (parks like Silicon Valley have grown organically around the biggest universities) or as modern oases amidst ubiquitous poverty (like in India's case). Secondly, in Ukraine IT business isn't consolidated at all, IT companies are disseminated across the major IT locations such as Kyiv, Lviv, Odessa and Kharkiv and it makes no sense to bring them under the same roof. Instead of investing in such mythical parks and creating new ways of money laundry, we'd rather improve our foreign investment climate and IT education...IMHO.

(Roman Khmil's quote in Russian is available here.)
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Viktor Bogdanov, PR Manager, INTERSOG (global provider of mobile apps and games development solutions), twitter @Intersog, link to profile - http://ua.linkedin.com/in/viktorbogdanov/

Global Sourcing Sprawl: Monitoring and Managing Global Sourcing & Services Risks

Global Sourcing Sprawl: Monitoring and Managing Global Sourcing & Services Risks

Author:  Atul Vashistha, Chairman & Alan Hanson, SVP, Neo Group Inc.

The globalization of services has become a mainstay of corporations. This dynamic has a huge impact on the competitiveness of global corporations. Yet, global sourcing is not what it was even a few years ago. Its complexity has risen manifold. It embraces multiple locations and multiple processes as companies seek, presumably, to optimize the gains from outsourcing and offshoring. But it also has raised risks and brought on newer, and varied, risks, many of which are not fully assessed by management.

Over the past year, in particular, many of these risks have been brought to light by global events.  In April 2011, it was a geo-political situation in Egypt that led to an unprecedented nine-day Internet shutdown.  In July 2012, we saw a massive blackout affecting 670 million people in India, the single largest market for services outsourcing.   In between, there were economic meltdowns in Southern Europe, Japan’s Tsunami and another deadly season of hurricanes, floods and tornadoes across the US (reminders that even developed and onshore locations carry risk).  

Far from seeing the glass as half empty, there is no reason for companies to turn the clock back on globalization or give up on further gains. The need of the hour, instead, is a proactive, and effective, opportunity and risk-monitoring mechanism and strategy to manage the new levels of risk and complexity.

To imagine this complexity, think of a corporation’s global operations as a giant jigsaw puzzle whose pieces are being ordered from different parts of the world, to be finally assembled, perhaps, at its headquarters. Each piece of the puzzle is important, and has to be ordered to precise specifications; and all the pieces then need to come back in good time, and to exact standards, for managers to put the puzzle together. In this situation, what would happen if one piece is lost because of a typhoon in Manila? Or another is delayed by a flood in Mumbai? Or another is caught up by expiring tax incentives in Brazil? Or suddenly one piece costs far more to produce than budgeted as a result of wage inflation in Bogota or a policy U-turn in Russia?  And, worse, what happens when multiple things go wrong at the same time? Would one be able to address these better if they had a fair warning?

The unity and diversity of risks

Even given the complexity of modern corporations, and their sourcing processes, it must seem puzzling to comprehend why globalization risks have grown dramatically. The simple answer is: geography and scale. It is the unity that binds globalization risks, while the diversity of the risks comes from the unique vulnerabilities of each location and the scale at which it is being performed. When companies first started outsourcing, most of the work was discrete and project based. Now, a significant majority of the work is management of ongoing projects and processes.

A decade ago, there were far fewer countries to which corporations farmed out any work. Giant nations such as China and India were the choice, themselves leaning heavily on outsourcing to create jobs and to drive domestic growth.

Today, Latin America, for example, is a large emerging outsourcing hub whose proximity to developed North American markets has proved a recent boon. Similarly, Eastern European countries, especially after the financial re-alignment following the 2008 financial crisis, have the twin advantage of lower costs and affinity to developed European markets.

These ‘me-too’ regions, coupled with global corporations’ insatiable appetite to support their needs in lower cost locations have succeeded beyond the most optimistic estimates. As a consequence, sourcing has a global footprint that is far and wide, with over 50 countries providing some kind of services. This geographic sprawl along with scale is responsible for the higher risks.

Geographic risks, of course, don’t mean only natural disasters. They mean much more – geopolitics, regional politics, regional financial policy, local (city- or region-specific) culture and politics and several others. It might be useful to categorize the risks, along with the most relevant examples, as follows:

Risk type	Example
Natural disasters	Japan tsunami-earthquake
Seasonal (and predictable) natural disasters	Monsoon floods in Mumbai, typhoon season in Manila
Terror attacks	Unpredictable but several countries could be vulnerable, with India and Pakistan near the top
Industry inflation	Wage inflation in India, Brazil and Czech Republic
City- or region-specific risks	Hyderabad because of agitation for separate statehood for Telengana
Financial risks	China for its currency risks; Greece for its bankrupt economy; Europe overall because of the euro’s vulnerability.
Legal/policy risks	Almost all emerging markets and some developed ones, too, on account of opposition to immigration and outsourcing
Vendor Risks	India’s fraud-hit Satyam Computers is the most egregious example. But almost every vendor has a level of risk that needs to be assessed

Likely, none of these specific events could have been predicted with any accuracy. However, many of these could have been anticipated. Consider an example.

Egypt has been a dictatorship for decades, and the Egyptian Movement for Change, the fountainhead of protest against the Hosni Mubarak regime, was started in 2003. Besides, Egypt’s geographical location –situated in a region of harsh, Islamic dictatorships with Israel as neighbor – brought more than average risks.  It is conceivable, therefore, that companies that sourcing to such region should have been not only aware of the risks but also pro-actively monitored those closely to pick up early warning signals, and even set up appropriate redundancies.

The fact is: the worst of risks can be fully assessed well ahead of time, avoiding service disruptions, financial losses and potentially brand dilution.

To start with, we propose that risks be broadly, categorized as

·       Country Risks

·       City Risks

·       Supplier Risks

And at each level there are certain risk categories. For any particular city, by example, it is possible to create a risk model, using parameters that uniquely contribute to the strengths and weaknesses of the cities. Some criteria are:

§  - City budget deficit

§  - Rental rates

§  - Space availability

§  - Local taxes

§  - Lodging costs

§  - Industry size

§  - Attrition

§  - Pool of graduates

§  - Existing and planned SEZs

§  - Educational institutes

§  - Attrition rates

§  - Wage inflation

In our own  model for example, data is continuously collected across the various parameters at the Country, City and Supplier levels and analyzed using an analytical  engine to help inform critical decision-making.

We don’t advocate our model exclusively, but over the past two years clients have used it in the real world with encouraging results. In one case, this model helped pick up early warning signals on a policy decision in India - termination of the Software Technology Parks of India (STPI) scheme, which offered tax breaks. Based on the recommendations one of our clients, a leading semiconductor company proactively renegotiated, a deal with a partner to locate in a SEZ, ahead of the policy announcement. Call it “operational arbitrage” if you like, but it helped the client realize annual savings of approximately eleven percent

In another case, the model picked up signs of likely escalating attrition levels in the subsequent two quarters in Shanghai, which helped clients begin “proactive” employee retention strategies with its suppliers, mitigating potential quality of service issues common to higher attrition. .

Conclusion

For global minded companies, the point is that the world has changed, becoming abundantly more complex, and the tools we use to manage it should therefore change too. 

Some people are startled to learn that the first electric vehicles, EV’s as they were known,  graced the road more than 100 years ago (they retailed between $1000- $2000 - without any government tax incentives, thank you.)  But these EVs would be incompatible with the driving conditions presented by the modern highway, and, frankly, blown-away by the basic model Honda Prius too. They had a top speed of around 15 miles per hour, and could only go about 18 miles on a charge.  Talk about range-anxiety.

Firms leveraging global services can help avoid a different kind of anxiety by adapting a risk management approach and system to ensure the stability of operations and avoid significant disruptions.

Managing the global services sprawl all but requires it.

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Atul Vashistha is the Chairman and Alan Hanson is SVP, of Neo Group Inc., a leading Global Advisory and Supply Analytics firm, which provides Global Supply Risk Monitoring as a service for dynamically monitoring, managing and predicting country, city and supplier risks.  

Atul is a recognized leader in the global services industry with numerous industry recognitions, such as ‘Top 25 Most Influential Consultants’, ‘Nearshore Power 50’, ‘HRO Superstar’, ‘FAO Superstar and Global Sourcing Leader’. You can get in touch with him on – atul@neogroup.com. Please visit www.GlobalSupplyRiskMonitor.com for more details on GSRM^SM.