What are the typical market characteristics that make an service/product a commoditiy? If we look at the economic theory one would try and understand the following constituents to answer it.
A. Price elasticity
B. Demand Supply curve
C. Marginal Value of service/product to customer
D. Nature & behaviour of stakeholders/participants/Seller-buyer
E. Sensitivities of the above to extraneous factors: Substitutes/complements, exchange rates, wage-inflation, change in resources/capabilities brought to bear for service/productetc.
If we reflect the current outsourcing market in terms of the above factors we may probably agree to it. What do you think?
If the outsourcing market has indeed become a commodity, what is the means by which big organizations can command profitable growth? Is it through one or combination of the following:
1. Mergers & Acquisition - Inorganic
2. Innovation in Service offering - Organic
3. Innovation in resources (people, infrastructure, application, information) - Organic & Inorganic
4. Innovation in capabilities (Knowledge, organization, management, processes) - Organic & Inorganic
5. Others
Any thoughts. Feel free to share.
Saturday, May 31, 2008
Friday, May 30, 2008
Transition gratis
Recently, news feed reported that a leading Indian pure-play vendor is offering transition service free to accelerate closure of an outsourcing deal. Considering that transition is a capital invested by client for an outsourcing deal, there is a elaborate justification required from the clients board (especially for large outsourcing deals) to pass a decision. In uncertain (read difficult) economic conditions the board is often cautious on approving any capital decisions. It seems the pure play vendor is playing smart by removing the need for any board approval, by offerring to partake in the capital cost. Usually, such freebies are generally not good to the industry as it sets a precedent and all outsourcing service providers will be expected to reciprocate similarly. Now, that the precedent has been set what should one do about transition cost?
A. Also, offer transition for free
B. Run initiatives to cut transition cost
C. Do nothing and wait for the time to pass so the clients will forget that transition can be a free service.
A. Also, offer transition for free
B. Run initiatives to cut transition cost
C. Do nothing and wait for the time to pass so the clients will forget that transition can be a free service.
Friday, May 23, 2008
Typical IT/ITES Business Transformation Initiative
Objective
Launch transformation engagement in large IT/ITES projects with team size >=25 and reduce the y-o-y cost of service by 25-30%.
Key challenges
o Ability to maintaining cost competitiveness amidst rupee appreciation and wage increase
o Paradox of resource constraints for new engagements while having resource utilization issues
Benefits to IT/ITES engagements
o Increasing the revenue potential (to be benchmarked or baselined for improvement goal)
o Reduced cost of service for the engagement in the range of 25-30%
o Productivity improvement on the engagement by minimum 30%
o Better utilization of resources within engagement (>90%)
o Better management & control of the engagement (appropriate improvement in realized risks metric)
Key business levers
o Process improvements
o Skill development
o Workforce scheduling & allocation
o Ideal team sizing
o Onshore-Offshore management
o Pyramid management
o Demand-Supply management
Frameworks or technologies
o Work distribution and allocation modelling
o Server & Queue modelling
o Value stream mapping
o Concurrent enginnering
Required support to run the initiative
o Initiative sponsorship by top management and a team of 2-3 people
o Leadership time
o 5% of management time to evangelize the initiative
o 5% of management time to review progress of the initiative
o Management time: Dedication of 20-30% of Project managers time to run the initiative
o Access to systems and metrics to enable running the initiative successfully
Wednesday, May 21, 2008
Why is Transition so important for Outsourcing deals?
Introduction
Transition is a critical program run to setup and mobilize for an Outsourcing engagement. The transition program lays the stage for successful service delivery. Considering the criticality nature of transition, significant time is spent on making sure the transition value is architected, solution is shaped and planned well upstream in the deal cycle. This often acts as a differentiator to win or loose an outsourcing deal. Even after the deal transition execution determines how prepared the new organization/supplier is to begin their service delivery to client.
In this article we will try and understand the reasons why transition assumes so much significance for outsourcing deals. The significance of transition can be best appreciated by looking at the considerations in these three areas:
1. Financial consideration
2. Legal/Regulatory consideration
3. Operational Considerations
In this article, we will try and appreciate these considerations that make the transition program important for outsourcing deals.
Financial Consideration
The transition cost is a one-time cost for outsourcing deal for which specific accounting treatments can be administered. Considering it is a one-time cost to the client; as in any capital purchase decision, the client wants to look at opportunities to reduce it through negotiations. It then helps one to understand what the transition cost comprises of and why the client would want to look at this cost separately based on the following 2 criteria:
1. Transition cost/Investment
2. Special Accounting Treatments
Transition Cost/Investment
Transition is a period where the client has to pay for the new service providers’ learning curve, while continuing to pay for the existing team providing the support. This is often an added expense (or investment) for the client in the year when transition is performed. The expense (or investment) for transition often pays itself when one considers the outsourcing deal economics, thereby leaving plenty of cash on the table for the client to use this more effectively for other initiatives of value. Hence, it helps to understand the typical transition cost elements and cost drivers:
The primary transition cost drivers are broadly categorized into the following heads:
1. Core Group
a. Subject Matter experts
b. Knowledge recipients
c. Service delivery or management team
2. Management Group
a. Transition management
b. Over sight group
3. Support Group
a. Internal support groups: HR, Legal, CIO groups, etc
b. External Service providers such as network vendor, actuarial agencies, legal agencies
4. Infrastructure
a. Tools
b. Property and Equipment
An illustrative list of cost heads/ cost elements is briefly identified here:
1. Payroll Cost
a. For the Knowledge Recipients
b. For the Transition Management team
2. Non-Payroll costs for Knowledge recipients and Transition cost
a. Travel & Boarding Cost
b. Transition and Service delivery Tools Cost
c. Connectivity setup cost
d. Temporary Work-equipment costs
e. Communication cost
f. Event cost
g. Incentive cost
h. Other Administrative cost
3. Service Providers cost. This is often the cost paid for several service providers to setup the environment such as the network service providers, data center service providers, etc.
4. Special people related Cost items
a. Hiring cost
b. Rebadging cost
c. Redundancy fees
d. Benefit equalization cost
e. Pension actuarial cost
f. Other Administrative costs
5. Special Asset related cost items
Since most of these costs pass through a Service provider books, there is a certain contingency and margins built into it before priced to the client. The client often desires to minimize the transition cost and there are several hot-buttons to press to reduce cost. These are beyond the scope of this article and we’ll discuss this separately in another article.
Special Accounting Treatments
The general nature of accounting for transition costs signifies its importance. Transition is usually run for outsourcing deals that spans several years of service delivery say 3/5/7/10 years, resulting in annuity business for service providers. However, the initial setup of resources (people, infrastructure, assets, etc.) by the service provider requires an upfront investment that bears fruit over the duration of the deal. Hence, the initial investment is often capitalized and amortized/depreciated over the duration of the deal. This allows the client better management of their expenses. The cost heads that are usually capitalized are:
1. Payroll expenses for the Knowledge recipient (assuming that the team serves the engagement for a long duration)
2. Some assets that are procured such as the servers, connectivity equipments, etc. solely for the purpose of providing the services, and
3. One time service charges for setup of the environment (typically the charges associated with paying fees to the service providers, etc.)
Often every client can set criteria on the total expense amount that qualifies for such capitalization and amortization over the duration of the deal.
Again special consideration is rendered when the transition is paid for by the client. At the beginning of the transition, end of transition or end of the 1st year and so on. These payment milestone impacts the accounting treatment it gets at the service provider and client end if they intervenes with the reporting period (quarterly or yearly, etc.).
There are also some below the line items concerning people transfer that require special accounting treatment such as:
1. Redundancy fee paid to the employees
2. Redeployment costs
3. One-time incentives to people who are transferred
Legal/Regulatory consideration
The legal and regulatory considerations are the next critical item that makes the transition program significant to manage. The legal and regulatory constraints kick in whenever the deal has the following complexity dimensions:
1. People transfer
2. Asset transfer
3. Third-Party Contract transfer
People Transfer
The people transfer often becomes complex especially if the deal is executed in a highly regulated markets such as Europe. For example in UK the Transfer of Undertaking (Protection of Employment) 2006 popularly TUPE 2006 regulates how the people providing the services at client/incumbent supplier have to be treated when services of a business entity is transferred to another service provider. The regulation is to ensure the outsourcing is fair to the people who are currently providing this service, and avoid unfair practices that may lead to larger systemic (economic) challenges. The constraints are often on the service provider to transfer the people who are currently providing the services into their own organization under similar employment terms, unless there is an Economic/Technical/Organizational (ETO) reasons limiting them. The similar employment terms may apply critically to the following attributes:
o Work Location
o Holidays/Vacation days/ maternity/paternity leaves
o Benefits/Payroll
There is a special European Commission directive (EC Directive) that applies with regards to people who are transferred. They are popularly known as Acquired Rights Directive (ARD ). Some of the ARD directives may have to be additionally considered.
Besides, the common TUPE/ARD considerations, one needs to also check for the local employment regulations in the country where people are transferred. These regulations often trigger off certain collective bargaining clauses when the client/incumbent vendor employees are part of Trade unions.
Asset Transfer
The asset transfer clause can further make the transition complex. Typical assets that one may need to transfer in outsourcing deals are:
1. Equipments
2. Software Licenses
3. Artifacts such as scripts, codes, documentation, etc.
When it concerns tangible assets, the transfer of ownership is easy through a sale deed. Things get complicated when it is an intangible asset (considering multiple forms in which the assets can be transferred).
This is especially applicable in case of Software licenses where the licensing agreement has to be reviewed in detail to understand the rights of transfer both for the client/Incumbent vendor as well as for the supplier organization. Besides, the right of transfer one needs to also consider the export regulations for the target countries and the associated paper work. Sometimes it is easier and quicker to buy new software licenses for service and forfeiting the old licenses rather than transferring the licenses.
Last but not the least is the artifacts such as codes, scripts, documentation, etc. To understand whether these can be transferred or not, one needs to understand the existing contractual terms between the parties involved and client. This will help the new service provider understand the ownership of such intellectual properties, the ability to transfer and the cost of transfer.
Third-Party Contracts
The third-party contracts can present transition challenges under the following circumstances:
1. Third-Party contractors/organizations
2. Third-party tool support/maintenance contracts with other vendors
When the client/Incumbent vendor has engaged third-party contractors or organizations their contracts have to be reviewed for a possibility of transfer and the challenges involving them.
The Third-Party tool support/maintenance contracts with vendors may apply for packaged/ commercially off the shelf applications. In these cases, there may be exclusive support/maintenance contracts that may have to be reviewed for transfer in detail.
Operational Consideration
The most understated (probably it is not commercial in nature) and complex considerations for transition are the operational aspects. The typical operational aspects that make the transition complex are:
1. Multi-dimensional transition
2. Complex work arrangements internally
3. Multiple teaming partners
4. High Concurrency
5. Common Transition Risks and Issues
Multi-dimensional transition
The dimensions that add complexity to the transition are:
1. Multiple countries
2. Multiple languages
3. Multiple workforces
The above dimensions would present complexity in terms of coordinating a good transition program
Complex work arrangements
Outsourcing deals that involves multiple delivery centers for service delivery from the same service provider in it may present challenges based on the work-arrangements that govern their relationships. The stakes of the different delivery centers may pave the way for vested interests that may creep in, resulting in sub-optimal transition and service delivery design for a client.
Multiple teaming partners
Having multiple teaming partners to provide service may present unique challenges based on the ownership and accountability design. All partners have to work together to provide a seamless service to the client, and this often could be a single most attribute affecting good service delivery to the client and hence needs to be designed appropriately during transition.
High Concurrency
High concurrency can pose challenges during transition when there are:
1. Lack of clear scope/boundaries for the service. There could be a mixed bag of AM , AD, Testing with overlaps and high-interconnectedness
2. Multiple releases during the transition period resulting in inability to plan appropriately for transition
3. Multiple transition occurring during the same time
The above challenge poses difficulty in shaping a transition solution and laying out an executable plan.
Common Transition risks & Issues
There are common transition risks and issues that one encounters in every engagement that may pose unique challenges to delivery. A sample is identified below:
1. Hostile transition from client/Incumbent vendor
2. Client/Incumbent vendor knowledge providers are withdrawn from the project on announcement of transition
3. Lack of incentive or commitment for a successful transition
4. Lack of documentation
5. Lack of cooperation for the transition scope, approach, plan and execution
6. Different characteristics of service for the same application such as Maintenance, Development, testing, production support, etc.
7. Providing ongoing services to the client without dropping on Key Performance Indicators (KPI) during transition
Conclusion
In this article we had briefly touched upon some of the considerations one needs to appreciate during transition of an outsourcing engagement. What one achieves appreciating the transition considerations is awareness, and enables one to give adequate attention and significance to a transition program in an outsourcing deal. The question of whether the above items requires a specialist or should fall within the portfolio of a Solution Architect or a practicing Service delivery Project manager is an altogether interesting discussion we will discuss in t
Transition is a critical program run to setup and mobilize for an Outsourcing engagement. The transition program lays the stage for successful service delivery. Considering the criticality nature of transition, significant time is spent on making sure the transition value is architected, solution is shaped and planned well upstream in the deal cycle. This often acts as a differentiator to win or loose an outsourcing deal. Even after the deal transition execution determines how prepared the new organization/supplier is to begin their service delivery to client.
In this article we will try and understand the reasons why transition assumes so much significance for outsourcing deals. The significance of transition can be best appreciated by looking at the considerations in these three areas:
1. Financial consideration
2. Legal/Regulatory consideration
3. Operational Considerations
In this article, we will try and appreciate these considerations that make the transition program important for outsourcing deals.
Financial Consideration
The transition cost is a one-time cost for outsourcing deal for which specific accounting treatments can be administered. Considering it is a one-time cost to the client; as in any capital purchase decision, the client wants to look at opportunities to reduce it through negotiations. It then helps one to understand what the transition cost comprises of and why the client would want to look at this cost separately based on the following 2 criteria:
1. Transition cost/Investment
2. Special Accounting Treatments
Transition Cost/Investment
Transition is a period where the client has to pay for the new service providers’ learning curve, while continuing to pay for the existing team providing the support. This is often an added expense (or investment) for the client in the year when transition is performed. The expense (or investment) for transition often pays itself when one considers the outsourcing deal economics, thereby leaving plenty of cash on the table for the client to use this more effectively for other initiatives of value. Hence, it helps to understand the typical transition cost elements and cost drivers:
The primary transition cost drivers are broadly categorized into the following heads:
1. Core Group
a. Subject Matter experts
b. Knowledge recipients
c. Service delivery or management team
2. Management Group
a. Transition management
b. Over sight group
3. Support Group
a. Internal support groups: HR, Legal, CIO groups, etc
b. External Service providers such as network vendor, actuarial agencies, legal agencies
4. Infrastructure
a. Tools
b. Property and Equipment
An illustrative list of cost heads/ cost elements is briefly identified here:
1. Payroll Cost
a. For the Knowledge Recipients
b. For the Transition Management team
2. Non-Payroll costs for Knowledge recipients and Transition cost
a. Travel & Boarding Cost
b. Transition and Service delivery Tools Cost
c. Connectivity setup cost
d. Temporary Work-equipment costs
e. Communication cost
f. Event cost
g. Incentive cost
h. Other Administrative cost
3. Service Providers cost. This is often the cost paid for several service providers to setup the environment such as the network service providers, data center service providers, etc.
4. Special people related Cost items
a. Hiring cost
b. Rebadging cost
c. Redundancy fees
d. Benefit equalization cost
e. Pension actuarial cost
f. Other Administrative costs
5. Special Asset related cost items
Since most of these costs pass through a Service provider books, there is a certain contingency and margins built into it before priced to the client. The client often desires to minimize the transition cost and there are several hot-buttons to press to reduce cost. These are beyond the scope of this article and we’ll discuss this separately in another article.
Special Accounting Treatments
The general nature of accounting for transition costs signifies its importance. Transition is usually run for outsourcing deals that spans several years of service delivery say 3/5/7/10 years, resulting in annuity business for service providers. However, the initial setup of resources (people, infrastructure, assets, etc.) by the service provider requires an upfront investment that bears fruit over the duration of the deal. Hence, the initial investment is often capitalized and amortized/depreciated over the duration of the deal. This allows the client better management of their expenses. The cost heads that are usually capitalized are:
1. Payroll expenses for the Knowledge recipient (assuming that the team serves the engagement for a long duration)
2. Some assets that are procured such as the servers, connectivity equipments, etc. solely for the purpose of providing the services, and
3. One time service charges for setup of the environment (typically the charges associated with paying fees to the service providers, etc.)
Often every client can set criteria on the total expense amount that qualifies for such capitalization and amortization over the duration of the deal.
Again special consideration is rendered when the transition is paid for by the client. At the beginning of the transition, end of transition or end of the 1st year and so on. These payment milestone impacts the accounting treatment it gets at the service provider and client end if they intervenes with the reporting period (quarterly or yearly, etc.).
There are also some below the line items concerning people transfer that require special accounting treatment such as:
1. Redundancy fee paid to the employees
2. Redeployment costs
3. One-time incentives to people who are transferred
Legal/Regulatory consideration
The legal and regulatory considerations are the next critical item that makes the transition program significant to manage. The legal and regulatory constraints kick in whenever the deal has the following complexity dimensions:
1. People transfer
2. Asset transfer
3. Third-Party Contract transfer
People Transfer
The people transfer often becomes complex especially if the deal is executed in a highly regulated markets such as Europe. For example in UK the Transfer of Undertaking (Protection of Employment) 2006 popularly TUPE 2006 regulates how the people providing the services at client/incumbent supplier have to be treated when services of a business entity is transferred to another service provider. The regulation is to ensure the outsourcing is fair to the people who are currently providing this service, and avoid unfair practices that may lead to larger systemic (economic) challenges. The constraints are often on the service provider to transfer the people who are currently providing the services into their own organization under similar employment terms, unless there is an Economic/Technical/Organizational (ETO) reasons limiting them. The similar employment terms may apply critically to the following attributes:
o Work Location
o Holidays/Vacation days/ maternity/paternity leaves
o Benefits/Payroll
There is a special European Commission directive (EC Directive) that applies with regards to people who are transferred. They are popularly known as Acquired Rights Directive (ARD ). Some of the ARD directives may have to be additionally considered.
Besides, the common TUPE/ARD considerations, one needs to also check for the local employment regulations in the country where people are transferred. These regulations often trigger off certain collective bargaining clauses when the client/incumbent vendor employees are part of Trade unions.
Asset Transfer
The asset transfer clause can further make the transition complex. Typical assets that one may need to transfer in outsourcing deals are:
1. Equipments
2. Software Licenses
3. Artifacts such as scripts, codes, documentation, etc.
When it concerns tangible assets, the transfer of ownership is easy through a sale deed. Things get complicated when it is an intangible asset (considering multiple forms in which the assets can be transferred).
This is especially applicable in case of Software licenses where the licensing agreement has to be reviewed in detail to understand the rights of transfer both for the client/Incumbent vendor as well as for the supplier organization. Besides, the right of transfer one needs to also consider the export regulations for the target countries and the associated paper work. Sometimes it is easier and quicker to buy new software licenses for service and forfeiting the old licenses rather than transferring the licenses.
Last but not the least is the artifacts such as codes, scripts, documentation, etc. To understand whether these can be transferred or not, one needs to understand the existing contractual terms between the parties involved and client. This will help the new service provider understand the ownership of such intellectual properties, the ability to transfer and the cost of transfer.
Third-Party Contracts
The third-party contracts can present transition challenges under the following circumstances:
1. Third-Party contractors/organizations
2. Third-party tool support/maintenance contracts with other vendors
When the client/Incumbent vendor has engaged third-party contractors or organizations their contracts have to be reviewed for a possibility of transfer and the challenges involving them.
The Third-Party tool support/maintenance contracts with vendors may apply for packaged/ commercially off the shelf applications. In these cases, there may be exclusive support/maintenance contracts that may have to be reviewed for transfer in detail.
Operational Consideration
The most understated (probably it is not commercial in nature) and complex considerations for transition are the operational aspects. The typical operational aspects that make the transition complex are:
1. Multi-dimensional transition
2. Complex work arrangements internally
3. Multiple teaming partners
4. High Concurrency
5. Common Transition Risks and Issues
Multi-dimensional transition
The dimensions that add complexity to the transition are:
1. Multiple countries
2. Multiple languages
3. Multiple workforces
The above dimensions would present complexity in terms of coordinating a good transition program
Complex work arrangements
Outsourcing deals that involves multiple delivery centers for service delivery from the same service provider in it may present challenges based on the work-arrangements that govern their relationships. The stakes of the different delivery centers may pave the way for vested interests that may creep in, resulting in sub-optimal transition and service delivery design for a client.
Multiple teaming partners
Having multiple teaming partners to provide service may present unique challenges based on the ownership and accountability design. All partners have to work together to provide a seamless service to the client, and this often could be a single most attribute affecting good service delivery to the client and hence needs to be designed appropriately during transition.
High Concurrency
High concurrency can pose challenges during transition when there are:
1. Lack of clear scope/boundaries for the service. There could be a mixed bag of AM , AD, Testing with overlaps and high-interconnectedness
2. Multiple releases during the transition period resulting in inability to plan appropriately for transition
3. Multiple transition occurring during the same time
The above challenge poses difficulty in shaping a transition solution and laying out an executable plan.
Common Transition risks & Issues
There are common transition risks and issues that one encounters in every engagement that may pose unique challenges to delivery. A sample is identified below:
1. Hostile transition from client/Incumbent vendor
2. Client/Incumbent vendor knowledge providers are withdrawn from the project on announcement of transition
3. Lack of incentive or commitment for a successful transition
4. Lack of documentation
5. Lack of cooperation for the transition scope, approach, plan and execution
6. Different characteristics of service for the same application such as Maintenance, Development, testing, production support, etc.
7. Providing ongoing services to the client without dropping on Key Performance Indicators (KPI) during transition
Conclusion
In this article we had briefly touched upon some of the considerations one needs to appreciate during transition of an outsourcing engagement. What one achieves appreciating the transition considerations is awareness, and enables one to give adequate attention and significance to a transition program in an outsourcing deal. The question of whether the above items requires a specialist or should fall within the portfolio of a Solution Architect or a practicing Service delivery Project manager is an altogether interesting discussion we will discuss in t
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