From ASP to Net. Sourcing Back Offices Mary C. Lacity Visit to March 27, 2003 Copyright Lacity 2003
14 Years of Sourcing Research: Leslie Willcocks, Warwick University David Feeny, Templeton College, Oxford University Thomas Kern, Erasmus University Rudy Hirschheim, University of Houston Copyright Lacity 2003 2
Case Study Research 90+ case studies, 130 decisions in US, Europe, and Australia One-to-One Sourcing: Outsourcing: n= 98 decisions British Aerospace Du. Pont Inland Revenue Enron GM IRS Rigg’s Bank South Australia Swiss Bank Insourcing/Backsourcing: n= 18 decisions Continental Baking Brown Group Occidental Petroleum Ralston Purina Westchester County Vista Chemicals MEMC Copyright Lacity 2003 3
Case Study Research 90+ case studies, 130 decisions in US, Europe, and Australia One-to-Many Sourcing: Application Service Provision: n=10 decisions Corio EDS Host Analytics my. SAP Zland One-to-One Sourcing: Netsourcing & Business Process Outsourcing: n = 4 decisions BAE SYSTEMS Lloyd’s of London Copyright Lacity 2003 4
Survey Research CIO-level surveys of one-to-one outsourcing experiences: UK & US (1997, n=101 useable surveys) Scandinavia (1998, n = 40 useable surveys ) CIO-level survey of one-to-many outsourcing experiences & plans: 28 countries, (2001, n = 274 useable surveys) Copyright Lacity 2003 5
One-to-many Application Service Provision Copyright Lacity 2003
Application Service Provision ASP is the practice of renting or "paying as you use" access to centrally managed business applications, made available to multiple users from a shared facility over the Internet or other networks via browser-enabled devices. ASP allows customers to receive business applications as a service. ASP is a delivery channel ASP is a pricing model Copyright Lacity 2003 7
Promised Customer Value of ASP: q 30% to 50% reduction in Total Cost of Ownership q Superior cash flow q Access to best-of-breed innovations q Flexible, scalable solutions q Rapid implementation Copyright Lacity 2003 8
Wacky World of Alphabet … BSP SSP FSP ASP Netsourcing MSP VSP CSP x. SP Copyright Lacity 2003 9
The Netsourcing Service Stack Business Process Delivery Customized Applications Standard Applications Application Operating Infrastructure Hosting Infrastructure Network Services Network Connectivity Copyright Lacity 2003 10
The Netsourcing Service Stack Business Process Delivery Customized Applications Standard Applications Application Operating Infrastructure Hosting Infrastructure Network Services Network Connectivity Copyright Lacity 2003 11
Size of ASP Market: Current Projections: Dataquest: Forrester Research: $3. 6 billion $1. 9 billion Projected by 2004: Dataquest: Info. Tech Trends: International Data Corporation: $25. 0 billion $9. 1 billion $7. 8 billion Source: Parizo, E. , “ASP Crystal Balls Yield Very Different Predictions, ” Search. Asp, November 3, 2000 Copyright Lacity 2003 12
Size of ASP Customer Company by Forrester Research Copyright Lacity 2003 13
Intermediaries Supplier Application Specialists & Portfolio Assemblers Customer Supplier Customer Supplier Copyright Lacity 2003 Customer 14
Infrastructure Partners Portfolio Assembler: Customer Application Partners Customer Implementation/ Set Up Partners Customer Copyright Lacity 2003 Customer 15
Full scale suite of applications Customer Application Partners Customer Implementation/ Set Up Partners Customer Copyright Lacity 2003 Customer 16
Infrastructure Partners Full scale suite of applications Customer Customer Implementation/ Set Up Partners Customer Copyright Lacity 2003 Customer 17
Full scale suite of applications Customer Infrastructure Partners Customer Application Partners Customer Copyright Lacity 2003 Customer 18
Customers Include: Full scale suite of applications Infrastructure Partners Application Partners Implementation/ Set Up Partners Copyright Lacity 2003 19
Corio. net hosting services for other ISVs And customers Infrastructure Partners Customer Application Partners Customer Implementation/ Set Up Partners Customer Corio is trying to leverage their immense investment in expertise & Copyright Lacity 2003 ASP infrastructure. Customer 20
1998 1999 2000 2001 2002 (3 Q) Revenues: $1, 292, 000 $5, 782, 000 $43, 561, 000 $49, 580, 000 $38, 376, 000 Net Losses: $3, 201, 000 $44, 522, 000 $103, 164, 000 $66, 971, 000 $27, 212, 000 Assets: $61, 596, 000 $197, 130, 000 $113, 290, 000 $88, 851, 000 “We have a history of losses and negative cash flow, expect this to continue at least for the foreseeable future…” SEC Report Copyright Lacity 2003 21
2000 Stock Performance 52 -Week High: 21. 75 on Friday, July 21, 2000 52 -Week Low: 3 on Friday, December 01, 2000: Shares Outstanding: 48, 844, 002 Market Cap: 146. 5 Million Copyright Lacity 2003 22
52 -Week High: $7. 6875 on October 24, 2000 2001 Stock Performance 52 -Week Low: $0. 39 on September 19, 2001 October 9, 2001: $51 cents per share Copyright Lacity 2003 23
2002/03 Stock Performance 52 -Week High: $ 1. 88 on April 18, 2002 52 -Week Low: $0. 46 on July 29, 2002 Market Cap: $43. 6 million Copyright Lacity 2003 24
ASP Products by Current Customers: (percentage* of respondents currently netsourcing) 38%* Email & Communication 23% Personal Productivity 21% Finance & Accounting 21% CRM 17% HRM 17% B 2 B 11% B 2 C 9% ERP 13% Other Copyright Lacity 2003 25
Current ASP Customer Satisfaction is Good Overall (mean response = 7. 06) Copyright Lacity 2003 26
The Netsourcing Service Stack Business Process Delivery Customized Applications Standard Applications Application Operating Infrastructure Hosting Infrastructure Network Services Network Connectivity Copyright Lacity 2003 27
Business Process Outsourcing: Early Lessons, Future Directions Copyright Lacity 2003
Business Process Outsouring With BPO, the supplier owns and operates the resources, including infrastructure, applications, and people, to deliver a business process as a service to customers. Copyright Lacity 2003 29
BPO Survey: Size of Market n = 120 Size of Market: Year 2000: $119. 4 billion Year 2005: $234. 0 billion US & Europe comprise 84% of market Source: Scholl, Rebecca, “BPO at the Cross Roads”, presentation At World Outsourcing Summit, Orlando Florida, 2002. Copyright Lacity 2003 30
BPO Survey: Size of Market n = 120 Source: Scholl, Rebecca, “BPO at the Cross Roads”, presentation At World Outsourcing Summit, Copyright Lacity 2003 31 Orlando Florida, 2002.
BPO Survey: Top Drivers n = 120 Source: Scholl, Rebecca, “BPO at the Cross Roads”, presentation Copyright Lacity 2003 At World Outsourcing Summit, Orlando Florida, 2002. 32
o Prompted by M&A, fragmented, decentralized HR o Ten Year Contract o $1. 1 billion over 10 years o 700 HR employees transferred to Exult delivers: Accounts Payable Benefits Payroll Regional Staffing HR Call center HR technology o Guaranteed cost savings to Bank took equity share in Exult & will share in future profits Copyright Lacity 2003 33
Xchanging Human Resource Services (XHRS) Xchanging Procurement Services (XPS) Xchanging Insurance Services (XIS) Xchanging Claims Services (XCS) Copyright Lacity 2003 34
Transforming Back Office to Front Office: and Enterprise Partnership for Human Resource Management Mary Lacity David Feeny Leslie Willcocks Copyright Lacity 2003
Xchanging Human Resource Services (XHRS) 10 year, £ 250 million deal Promised benefits to BAE: § 15% savings on baseline HR services § Service improvement to upper quartile by end of year 5 § £ 20 million investment in technology, facilities & experts, including web-enabled e-hr § 50% share in profits from external sales Copyright Lacity 2003 36
Research Method Face-to-face interviews with 15 people including: HR Director, BAE SYSTEMS Enterprise Relationship Director, BAE SYSTEMS SBU HR Director, BAE SYSTEMS CEO of Xchanging Member, BOD, Xchanging Managing Director, XHRS 3 transferred BAE managers, now: CFO, XCS Head of Service, XCS Head of Resources, XCS 6 practice directors (Service, Process, Technology, Environment, People, Implementation) Documentations such as financial reports, practice manuals, Copyright Lacity 2003 performance assessments, annual reports, memos. 37
About Xchanging provides human resources, procurement, customer administration and accounting services to over 200 customers including BAE Systems, Lloyd's and the London Insurance Market. Xchanging employs over 1, 100 people. Xchanging takes responsibility for the entire back office, specific functions or a particular business process and transforms them into fit for purpose services. In short, Xchanging cost for profit. Founded by David Andrews in 1999 Copyright Lacity 2003 38
About BAE SYSTEMS Prime contractor and systems integrator in the air, land, sea, space, and command control market sectors. Defense, commercial, civil markets World-class capabilities in naval platforms, military aircraft, electronics, systems integration and other technologies. Eurofighter Astute Copyright Lacity 2003 Destroyer 39
About BAE SYSTEMS Copyright Lacity 2003 40
About BAE SYSTEMS Copyright Lacity 2003 41
About BAE SYSTEMS Stock Price Interim Financial Results Reported Sept 12 52 week high: £ 385. 50 on Thursday, April 11, 2002 52 week low: £ 158. 00 on Wednesday, November 13, 2002 Copyright Lacity 2003 Average Price: £ 194. 10 (50 -day) 299. 37 (200 -day) 42
About BAE SYSTEMS January 1999, British Aerospace announced merger with Marconi to create BAE SYSTEMS Investors promised £ 275 million in annual cost savings within 3 years "The proposed merger with Marconi Electronic Systems is an important step in the consolidation of the industry in Europe and creates a strong and highly capable business with significant cost benefits. " -- Sir Richard Evans, Chairman of the Board, BAE SYSTEMS Copyright Lacity 2003 43
BAE SYSTEMS’ HR In 1999, Terry Morgan, Group HR Director charged with delivering 15% to 40% cost savings on annual HR spend of £ 25 million Group HR was small, focusing on senior pay & benefits, senior level development, organizational design 700 HR professionals in SBUs at 70 sites doing transactional activities such as payroll, benefits, recruiting, training, HR procurement Shared Services as solution to cost reduction… Copyright Lacity 2003 44
FROM DECENTRALIZED: Head Office SBU SBU SBU Managing Director Managing Director SBU HR Director SBU HR Director Transactional Activity/ Professional Services TO SHARED SERVICES: SBU Group HR Transactional/ Professional Head Office SBU SBU Managing Director Managing Director SBU HR Director Copyright Lacity 2003 SBU HR Director Group HR Transactional Activity/ 45 Professional Services
Four Options for Implementing Shared Services 1. Do It Yourself Early 2000 2. Management Consultancy 3. Fee-for-service outsourcing 4. Enterprise Partnership Copyright Lacity 2003 46
Spring 2000 Enterprise Partnership David Andrews proposed that BAE SYSTEMS and Xchanging should form a fifty-fifty jointly-owned enterprise. The enterprise would be operated as a strategic business unit within Xchanging, giving Xchanging the responsibility and accountability for implementation and subsequent operations. But both BAE SYSTEMS and Xchanging would sit on the Joint Board of Directors to ensure continued customer involvement and oversight. The enterprise would initially behave as a traditional outsourcer by transferring BAE SYSTEMS HR assets and personnel to the enterprise governed by a ten-year contract. The enterprise, in turn, would implement the shared services concept and deliver HR services back to BAE SYSTEMS. But in the long run, the enterprise would further leverage the HR assets and personnel to attract external HR customers, of which profits would be shared 50/50 with BAE SYSTEMS. Copyright Lacity 2003 47
Enterprise Partnership "We soon came up with a story--and Terry really pushed this with his colleagues--about what the real risk is: 'I have got the same people tomorrow doing the job they are doing today. In addition to that, I have got all these new resources with different skill sets that are coming to help these people do it better than they did it before and I have got twenty five million dollars over a five year period to invest in technology that I have not got today. It is guaranteed, it is part of this contract. So it is the same people doing the same job. In addition to all these other resources that are going to help make it move, with some incentives to make it happen that we haven’t got today, what is the risk because if it all goes wrong and these are bad managers, then we just TUPE transfer everybody back and we take it back again, so what is the real risk? '" -- Alan Bailey, XHRS Copyright Lacity 2003 48
? Enterprise Partnership Because, against their normal practice, BAE SYSTEMS did not do a formal request for proposal, the HR team wanted to step back and invite Xchanging and another supplier to compete. At this stage in April 2000, Xchanging's team was devastated: . "When we told Xchanging that we were going to do a beauty parade with Xchanging and another BPO supplier, I have to say I have never seen David Andrews so shell-shocked. " -- Chris Dickson, Relationship Director, BAE SYSTEMS Copyright Lacity 2003 49
Letter of Intent June 2000 "When I told the CEO of the alternative bidder that they hadn't been chosen, he did say to me, 'okay, but I would like to thank you for the fairness of the way the parade went. . . it was actually a very thorough process, we had been given a fair crack of the whip. '"-- Chris Dickson, Relationship Director, BAE SYSTEMS Goal was to sign a contract by September 2000, but… Copyright Lacity 2003 50
BAE/Xchanging Negotiations June 2000 – February 2001 Scope Reduction: Eliminate North America Only 462 UK people to transfer rather than 560 "It is my perspective and obviously it is not perfect information but certainly I had a very, very strong view that there were some people in BAE SYSTEMS that had decided to de-scope the deal; who never really knew what the scope was but decided what scope they would find politically acceptable and that was it, that was the deal they wanted" - David Bauernfeind, CFO "So we ended up drawing a line in slightly the wrong place, in my view, so we still had some people in BAE SYSTEMS’ retained HR who were never going to play the strategic role as designed. " – Steve Hodgson, Head of Resources, XHRS Copyright Lacity 2003 51
BAE/Xchanging Negotiations June 2000 – February 2001 50%/50% Joint Ownership 50%/50% split in cost savings, estimated baseline £ 25 m/year: YEAR Percent 2001 2002 2003 2004 2005 10% 15% Delivered as a rebate, if £ 25 million costs transferred, Xchanging would only charge £ 22. 5 million 50%/50% split on new revenue generation from external sales Copyright Lacity 2003 52
BAE/Xchanging Negotiations June 2000 – February 2001 Services: As-is measured within 6 months By year 5, improvement to upper quartile Governance: Joint Board of Directors: CEO of Xchanging and Group HR Head BAE 3 Xchanging execs & 2 BAEs non-execs Purpose: Protect the Rights of Shareholders Service Review Board: 3 members from BAE, 3 members from Xchanging Service specifications, price approval Purpose: Service performance monitoring Technology Review Board: Joint board to ensure £ 20 million investment Copyright Lacity 2003 53
Contract in Effect in May 2001 Copyright Lacity 2003 54
How Did Xchanging Complete the Transformation? Xchanging’s management believes that the capabilities required to transform a back office to a front office requires 7 generic business competencies rather than domain specific knowledge… Copyright Lacity 2003 55
Transformation is Implemented in Four Phases Preparation Realignment Streamlining 3 -6 mths 6 -9 mths Continuous Improvement Set-Up Service People Process Technology Environment Sourcing 2 -3 mths Critical activity Preparation Copyright Lacity 2003 Operational 56
People Competency builds champion teams from transferred employees by unlocking their talent and energy, primarily through extensive training programs and direct contact with Xchanging’s senior management: -- Induction Programs to 430 transfers within 6 weeks -- Management training -- New job descriptions -- New Customer-focused culture Copyright Lacity 2003 57
People Competency Preparation Re-alignment Streamlining Continuous Improvement Mourning Forming Storming Norming Performing • Mechanisms • Deliverables • Measures • Benchmarks • Gate Copyright Lacity 2003 • Mechanisms • Deliverables • Measures • Benchmarks • Gate 58
People Competency On business as usual in short-term: "Richard Houghton was saying, it’s business as usual today guys because we don’t want to upset the service. We are not going to go around now to BAE and say, 'I’m not doing that for you any more Mr. Customer because it’s not in the service definition yet. ' We have a philosophy that says if he wants you to do something, you just do it. If there is a commercial consequence of that we will worry about it later and talk to your Line Manager but it is a yes to the customer, not a no. " -- Alan Bailey, XHRS Copyright Lacity 2003 59
People Competency On business not as usual in long-term: "We started up by saying 'these are the cost reduction commitments', I said 'we’d have to double productivity in five years', I said 'in so far as we can off-set that through third party revenues by effectively using spare capacity to deliver services to third parties we will, but that’s what we are going to do'. " -- Richard Houghton, CEO, XHRS Copyright Lacity 2003 60
People Competency On training results: "The transferred employees had seen Xchanging's management team, because we all went to these things, did Q & As, stood on the stage and answered all their questions, Richard Houghton did all of them, he was committed to doing these. The employees hadn’t seen that before. They had been in an area where they didn’t see the management very often, didn’t get access to them and then all of a sudden, this is an enthusiastic team that they are now seeing and they were part of it, they went back buzzing. " -- Alan Bailey, XHRS Copyright Lacity 2003 61
Service Competency Define the as-is service, measures service, and agrees to service targets through a disciplined methodology called Service 1 st The goal is to provide the same levels of service during transition then move to customer-negotiated service levels based on individual customer needs. Copyright Lacity 2003 62
Service Competency Service Objective Customer Type Service Class Customer Service Metrics e. g. • accuracy • cycle time • frequency • quality • volume & Standards Customer Service Item Service Specification & Reports Copyright Lacity 2003 63
Service Competency Copyright Lacity 2003 64
Service Competency XCS Service Team: As-Is Service: 400 service levels drafted Service Review Board approved in October 2001 But an extra £ 80 million a year in indirect procurement spend Was uncovered for fleet, contract labor, recruiting, stationary, And travel! HR was buying services from over 200 suppliers, All in decentralized budgets. Copyright Lacity 2003 65
Sourcing Competency Xchanging Procurement Services (XPS) Separate Enterprise Partnership signed November 2001 Worth £ 800 million over 10 years Copyright Lacity 2003 66
Sourcing Competency £ 80 million Car Fleets Non-technical contract labor Learning & Development Health Care Recruitment Renumeration & Benefits Stationary Copyright Lacity 2003 67
Sourcing Competency Category Expertise Sourcing Tools Spend Aggregation Copyright Lacity 2003 68
Sourcing Competency o. On average, 12% savings delivered on categories transferred o Margins range from 5% to 45% depending on category Copyright Lacity 2003 69
Example of ‘Un-bundling’ Key Cost Elements of Car Leasing Copyright Lacity 2003 70
Environment Competency Goal: create modern and well-branded physical spaces to build a visible front office for customers. Physical spaces also foster a front office mentality Xchanging built, bought furniture, and decorated new facility By February 2002 Occupancy held up by IT contract with CSC Copyright Lacity 2003 71
Environment Competency Preston Copyright Lacity 2003 72
Environment Competency Preston Ready! Copyright Lacity 2003 73
Preston Ready! Copyright Lacity 2003 74
Environment Competency "Space has a big impact on people's morale and the perception of their value-- Mike Margetts, Implementation Practice Director, Xchanging Copyright Lacity 2003 75
Process Competency Goal is to redesign business processes to reduce costs and to improve quality through Six Sigma quality improvement discipline. s Process Capability DPMO Defects Per Million Opportunities % Yield 6 3. 4 99. 99966% 5 233 99. 9770% 4 6, 210 99. 37% 3 66, 807 93. 3% 2 308, 000 Copyright Lacity 2003 69. 2% 76
Process Competency Process Head & Master Black Belt: Mentors Black Belts: Full Time Green Belts: Part-time Copyright Lacity 2003 77
Process Competency Redesigning Processes such as Senior Leader Peer Review Old process: 640 senior leaders did paper-based peer reviews, assisted face-to-face by HR personnel New process: e-hr online peer review "What would have happened before, thirty people would have happily expanded a task to fill three months and as it is now, eight people have been busy for a month--bang! Done. " -- Mike Margetts, Head of Implementation, Xchanging HR Services Copyright Lacity 2003 78
Technology Competency Goal: Build and implement enabling technology on component driven architecture. Goal: Build and implement e-HR within 6 months Went on a recruiting rampage on May 1, 2001 Hired 19 full time technology managers, architects & specialists People. Portal went live on October 4, 2001 Copyright Lacity 2003 79
e-HR Application Framework Portal Data and Process Integration Reference Performance HR Knowledge and Content Mgmt. Performance Control Service Management e. Forms Core DW (Time Rel) People Relationship ESS/MSS Xchanging Self Service Core Enterprise HRIS Contact Management CTR CC I Copyright Lacity 2003 80
Technology Competency "I think they were absolutely astonished that we delivered on that, I don't think they expected it for one minute. " -- Richard Houghton, CEO, Xchanging HR Services "I think the peopleportal has been the first sign from within the business that something has changed, something has actually happened. I think the first time it was used, it was used for the senior leadership population, we were doing an exercise on pay review so each senior leader within the business (650) of them had access to that peopleportal. We had a lot of very good feedback, it was very good, the technology was great, it was web based, we’ve had some very good feedback but we’ve also had people who just can’t get the hang of using the technology. " -- Kim Reid, HR Director, BAE SYSTEMS Copyright Lacity 2003 81
Technology Competency "I think technology is an expensive resource, so you’ve got to be careful with technology, as you know you can spend a lot of money and not get a lot of value. So I think technology from our perspective is very much used when it’s needed. Just because we have a service delivery platform doesn’t necessarily mean that every service we deliver has to be over the Internet, if it doesn’t make sense, we shouldn’t do it. So technology is a bit of a follower in this case, it definitely follows service, service is always first and it's rarely that we would be in there before process because I don’t want to put technology on top of a broken process. " -- Steve Bowen, Technology Practice Director, Xchanging Copyright Lacity 2003 82
Implementation Competency Goal: to orchestrate the timing and resources required for the Other six competencies. Copyright Lacity 2003 83
Implementation Competency No Set Formula: "I don't want to tell you the perfect process for implementation project management, I actually want to say that I am prepared to do anything I need to to get things done. . basically it is an anti-approach. Methods are not really important--the end result is everything. " -- Mike Margetts, seconded from his role as Practice Director of Xchanging’s Implementation competency. Copyright Lacity 2003 84
Implementation Competency Copyright Lacity 2003 85
Implementation Competency Preparation Realignment Streamlining Continuous Improvement June 2000 to May 2001 to October 2001 November 2001 to December 2002 To May 2011 Data collected on BAE finances & people Service objective & preliminary service definition Structure & people plans Cost modeling Financial reporting & control plans Technology architecture designed Constant communication with targeted transfers 430 BAE staff are New Organizational transferred & redesign oriented, & retrained Shared Services Detailed "as is" established service specification defined & approved Preston Service Regional Teams Black belts trained established and working on first set process Downsized staff improvements; recruiting process 3 more versions of redesigned & Peopleportal implemented Process People. Portal Improvements to launched more HR services Copyright Lacity 2003 Future challenges: Attract external customers to increase revenues Sustain cost cuts and service improvements Upper quartile performance in all HR service areas 86
Findings as of 2002 Prior to the Xchanging partnership, HR at BAE SYSTEMS: (a) lack of investment, (b) lack of leadership, (c) lack of employee motivation, (d) lack of customer-focused service, (e) bureaucratic and inefficient processes, and (f) outdated and non-integrated technology. Preliminary findings assess the effectiveness of using an enterprise partnership as a vehicle for transforming this low functioning back office into a commercial enterprise. Copyright Lacity 2003 87
Findings Finding 1: The Enterprise Partnership Model creates a clash of cultures, but cultural incompatibility may be just what you need. "What was obvious to me, the Xchanging people were part of a small company desperate to succeed, and that desire to succeed just didn't exist in the BAE SYSTEMS HR culture. " -- David Bauernfeind, CFO If you left work at half past six, you were having a late night at BAE. I mean, that is the BAE culture. I was in at ten to seven this morning and I'll be here at nine o'clock tonight and that is the Xchanging culture. The Xchanging guys I just could associate with very, very easily. From day one I felt much, much more comfortable. The hard thing was it was a damned sight harder work, much more disciplined environment, much more focused environment. It still took me a little while to make that leap Copyright Lacity 2003 88 – probably two or three months. "
Findings Finding 2: The Enterprise Partnership Model offers multiple short-term implementation phases that yield faster results and pose less risk than a single, large-scale project. "Innovation doesn't need to be a big idea, it can be lots of little things. . . What we like doing is introducing a bit of change every three months because it has much more immediate impact rather than building a great big filthy system. " -- David Andrews, CEO Xchanging "If you don’t do it within three to six months then you don’t do it. " -- Mike Margetts, Implementation Director, Xchanging Copyright Lacity 2003 89
Findings Finding 3: The Enterprise Partnership Model views technology not as a solution, but rather as an enabler. "People are altogether more flexible and creative and clever to fit around a system. " -- Mike Margetts, Implementation Director, Xchanging "I wanted to see what happened if you improved business processes and services without touching IT. That was just a quirk of mine which was a very lucky break because in fact what we found was that we could engineer a huge improvement and do it on the back of the old legacy system. " -- David Andrews, CEO, Xchanging. Copyright Lacity 2003 90
Findings Finding 4: When employing Fee-for-Service Outsourcing or an Enterprise Partnership Model, be sure to manage user demand. "We are seeing some evidence of increased demand with Xchanging HR Services. It's the early days yet, but demand for service before XHRS was always restricted because as an HR Director, you only have the number of people that you could get your MD to agree to, so that effectively capped it. Of course, we have taken that away now and people can demand ever more and more. " -- Steve Hodgson, Head of Resources, XHRS. Copyright Lacity 2003 91
Findings Finding 5: Both Fee-for-Service Outsourcing and The Enterprise Partnership Model uncover spend previously hidden in decentralized budgets. "The cost has increased quite substantially. We’re just having a review on that at the moment. At the moment that communication isn’t clear and it does look as if costs are going up. But in reality, we’re doing a review of it and we’re doing some investigation on it, in reality it probably isn’t going up because of Xchanging. It just means that we need to probably transfer budget over that hasn’t traditionally sat within the HR team, so that it's all as one and recharged against that, that total mass, rather than part left within the business. But it is a concern. " -- Kim Reid, HR Director, BAE SYSTEMS Copyright Lacity 2003 92
Findings Finding 6: The Enterprise Partnership Model delays due diligence until after the contract is in effect, which speeds the negotiation process and more fairly distributes the burden of newly discovered costs. "The quality of the data about the HR function in terms of not just what salaries people were on but just who was there, how many to within 10%. Really, really surprising and if anything that experience, if I ever needed drilling home about why BAE needed to do the deal, that did it. If you can’t tell how many people are in your own function within 10% to 20% what chance have you got of providing value added HR for a business? It was just shocking. " -- David Bauernfeind, CFO, XHRS Copyright Lacity 2003 93
Findings Finding 7: The Enterprise Partnership Model aligns incentives better than fee-for-service outsourcing. "So if it was a traditional customer/supplier relationship, I think it would be very much customer/supplier which perhaps may not be totally joined up in the middle. You would get the instance that the customer would blame the supplier for not delivering a service. For me, the partnership means that the accountability for delivering the service into the business is mine. I have to make sure that it delivers a seamless service so that myself and my other HR directors in this business will not say ‘the reason this went wrong was because Xchanging did this’. If something goes wrong it’s because we did it. It’s very much a partner type relationship. " -- Kim Reid, HR Director, BAE SYSTEMS Copyright Lacity 2003 94
Findings Finding 8: The Enterprise Partnership Model does not perfectly align incentives. In the past, the joint governance between customers and suppliers we studied led to a managerial schizophrenia. Because the enterprise's primary customer is also an owner, the customer has two competing goals: to maximize cost-efficient service delivery from the enterprise and to maximize the revenue of the enterprise. How can the customer do both? Furthermore, if the same executives sit on the Board of Directors of the customer company and the enterprise company, which hat should they wear? Should they be pushing for more services at a reduced cost, thereby squeezing as much as they can from the enterprise? Or should they push for generating more revenues, which distract the enterprise from their needs? Copyright Lacity 2003 95
Findings Finding 9: The Enterprise Partnership Model benefits from generic business competencies rather than domain-specific knowledge. "I always say the best HR people are people who haven’t been in the HR function all their lives. You need a different view. So the Xchanging team, although they are not HR professionals, it works probably better that they are not because if they go in understanding all the pitfalls that there may be, then they’ll never make any changes, so sometimes it is better. " -- Kim Reid, HR Director, BAE SYSTEMS Copyright Lacity 2003 96
Findings Finding 10: The Economics of the Enterprise Partnership Model need to Work for the Client and Supplier Without Over-Reliance on Third Party Revenues. "The business development in year one at this stage was almost zero because the focus was let’s get our act together in delivering this to BAE SYSTEMS first before we all turn salesmen and go out and start selling ourselves. It is always a hard decision to make because our future relies on getting third party business in but at the time it was a management team in XHRS and an agreement at the Xchanging group level that we would concentrate on delivering the operation, getting our act together to get our product out, get our people to pull together to get the service center in place. And it was probably only the beginning of quarter four last year that now started to be a bit more active in the market rather just being passive. " -- Alan Bailey, New Business Development, XHRS Copyright Lacity 2003 97
Findings "The reality if I just look at it in XHRS is we have to really work hard not to make this business work. It is pretty easy to make this business make money, the hard bit is the time scale and the growth. So you concentrate resource and you put their management in place, you remove the weak people over time and you put in good technology. You really have to work to not make that add up to a significantly better position than you were in before. " -- David Bauernfeind, CFO, XHRS Copyright Lacity 2003 98
Can Success be Replicated? Ideal Customer Profile The customer has a large back office spend of at least £ 25 million per year and at least 500 employees, making the deal large enough to attract a competent external supplier The customer's back office operations are highly decentralized, allowing the opportunity for significant savings from centralization and standardization The customer's back office operations have not received high management attention historically, allowing the opportunity for significant savings and service improvement from better management The customer's organization would resist centralizing and standardizing themselves due to internal political resistance, unwillingness of senior management to make the required upfront investment, or lack of skills and experience of back office staff to make the transformation. Copyright Lacity 2003 99
BPO Working Papers: www. templeton. ox. ac. uk “The Enterprise Partnership as Vehicle for Transforming Back Office to Front Office: The Story of BAE SYSTEMS and Xchanging's Human Resource Transformation” by Lacity, Feeny, Willcocks “Transforming Back Office to Front Office: Lloyd's of London and Xchanging's Enterprise Partnership for Insurance Claims Management, ” by Lacity, Feeny, Willcocks “Transforming Indirect Procurement Spend: The Story of BAE SYSTEMS and Xchanging's Enterprise Partnership” by Lacity, Feeny, Willcocks “Transforming the Back Office Through Enterprise Partnering: A Study of Xchanging Insurance Services in the London Market, ” Willcocks, Feeny, Lacity “Business Process Outsourcing: The Promise of the Enterprise Partnership Model, ” Feeny, Willcocks, Lacity Copyright Lacity 2003 100
Major Sourcing Publications Lacity, M. and Willcocks, L. , Global Information Technology Outsourcing: Search for Business Advantage, Wiley, Chichester, 2001. Lacity, M. , "Global Information Technology Sourcing: More Than A Decade of Learning, " IEEE Computer, Vol. 35, 8, 2002, pp. 26 -33. Kern, T. , Willcocks, L. , and Lacity, M. , "Application Service Provision: Risk Assessment and Risk Mitigation, " MIS Quarterly Executive, Vol. 1, 2, 2002, pp. 113 -126. Website: www. umsl. edu/~lacity Email: Mary. Lacity@umsl. edu Phone: 314 -516 -6127 Copyright Lacity 2003 101
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