Jean-Pierre Le Treut is Strategy & Marketing Director for Bull France’s outsourcing division
Jean-Pierre joined Bull France’s outsourcing division in 1994 where he fulfils several roles: Director of Outsourcing Projects, Customer Director, Director of Pre-Sales, and finally Director of Strategy, Marketing and Partnerships for the Bull Outsourcing Services division (1,000 staff). A graduate of Ecole Centrale in Paris, Jean-Pierre began his career in Schlumberger Industries’ research laboratories.
As new challenges start to emerge, cutting costs is no longer always seen as a priority when setting up an outsourcing contract. And yet, there are still plenty of savings that can be made, including some potentially significant ones. Achieving those savings requires a rigorous, global approach to the financial aspects of the project, particularly taking into account the inherent value in the relationship between the customer and the service provider.
A few years ago, when an organization decided to outsource, reducing costs was always one of its main objectives. Then ‘reducing’ costs evolved into the need to ‘control’ them. And today, the financial aspects are often not even listed among the key points. It’s true that cutting costs remains an important factor, but rather as a consequence of the main requirements: nowadays when an organization embarks on an outsourcing project, it is looking above all to safeguard its operation (thanks to state-of-the-art Data Centers, industrialized processes and formal, guaranteed levels of service), to make sure it has easy access to the expertise it needs to manage complexity within its information systems, to access technological innovations more quickly and to be in a position to respond to fast-changing business practices.
This way of approaching outsourcing is quite recent. Until around 2005, the brief customers presented to their service providers followed quite a simple formula: “do the same thing, but better, faster and at a lower cost”. At that time, outsourcing often consisted very largely of taking over existing systems. But for the past five years, IT Departments have had to face a dual, and clear-cut acceleration: within business itself on the one hand, which has led their internal customers to expect their information systems to be much more responsive; and, on the other hand, on the technological front, especially with Web technologies now reaching maturity (including those operating at back office level) and the growth in consolidation and virtualization. Today’s outsourcing contracts take this change into account and as a result they are including much more development work rather than simply operational tasks. Which is why costs no longer take center stage in the list of requirements for the contract: before doing things in a less costly way, you have to start by actually doing it in the first place!
From a necessity to a cost benchmark
Nevertheless,in a difficult economic climate, reducing costs is still fundamentally important challenge when it comes to outsourcing. This involves having certain elements available for comparison. The most obvious, and the most common, is to compare the cost of the contract itself to the direct costs. But this approach is less and
less relevant in the context we have just been describing. The type of outsourcing that does not just involve managing systems, but also develops, improves, consolidates and secures, brings benefits that go far beyond simply reducing direct costs. In addition, this kind of comparison only really applies if you also include all the indirect costs, which are usually misunderstood at the time of the transition to outsourcing.
This is why these days any serious outsourcing service starts with an in-depth economic assessment. The aim is to identify and evaluate all the costs that the contract will cover, and not just the direct IT costs: for example, the electricity bill – a major item of expenditure – is still often charged under general services, or internal telecommunications within buildings or locations, which are included in rental costs. These examples highlight not just the interest of this type of preliminary study, but also the need to assess financial benefits in a more global way, at the level of the whole enterprise, and not just as they relate directly to computing or IT. Today, outsourcing involves an advanced financial process, based on an annual fixed cost and ‘units of work’: armed with these essential items, the customer themselves can make a lot of progress in evaluating, controlling and, eventually, cutting their costs.
1. Immediate benefits
By combining resource sharing and billing-on-demand (which takes account of variabile needs), cost reductions are automatic and instantaneous. This applies in particular to the running of legacy mainframe systems. The development of virtualized environments will also engender these types of benefits. Other possible immediate benefits include: the proceeds from reselling hardware and smoothing of depreciation costs. This impact is sometimes far from negligible and demonstrates all the importance of including a solid financial basis in an overall picture of the contract, which includes not only technical, but also economic, legal and human aspects. Finally, using offshoring and nearshoring services for projects that involve significant human resources can offer some attractive advantages, although you have to take into account the transaction costs that this kind of approach involves, because of the distances and inherent risks.
2. Medium-term benefits
Advantages in the medium term come about as a result of instigating best practices. In particular, these include centralizing and consolidation (of servers, systems, data…); centralizing the support function; automating production; industrializing methods and processes; and rationalizing hardware and equipment. These initiatives are generally based on ITIL1-type repositories, and require an initial investment and a transition phase that must be taken into account when evaluating the benefits.
3. Long-term benefits
These are the benefits brought about by the progress plan, which is now systematically associated with any outsourcing contract. The customer can expect, on the one hand, an annual reduction in the cost of the service, because there is a learning curve involved, and on the other hand, the continuous improvement which is an integral part of the value offered by any outsourcing package. It is necessary to set indicators and targets to measure this improvement from the outset, and it is up to the customer and the service provider to share investments and profits. This requires maturity and transparency on the part of both parties. The outsourcing provider has to avoid the ‘black box’ effect, because the customer must absolutely understand the issues and the levers for improvement, as well as the origin of the costs involved. Improvements are often possible at every level, including the highly operational ones, but the customer must be able to recognise what falls to their responsibility and assume their share of the effort. This is why instigating a climate of mutual trust is one of the keys, if not the key, to the success of outsourcing contracts. In particular, total transparency, a formal and regular communication process, and tracking of shared indicators create the essential conditions of governance needed for a long-lasting and fruitful relationship.
Furthermore, when carrying out a global evaluation we need to include the costs inherent in the transaction and in the project itself. Above all, the costs associated with choosing the outsourcing provider (internal expenses related to drawing up a specification, selecting offerings, negotiating and drawing up the contract), which may include external costs if the customer enlists the help of a specialist consulting company. These costs can represent between 2% and 5% of the total bill for the project. Then come the transaction costs linked to the management of the contract and the outsourcing partner. Mirroring the project management service provided by the outsourcing supplier, is essential to put together a strong and competent internal team to run the contract. The cost of this dedicated structure generally accounts for 10-15 % of the total value of the outsourcing contract. Finally, the transition costs: the initial structuring of the project (moving offices, definition and deployment of the organization, processes and good practices, industrialization) can represent a further 10-15 % of the annual contract budget.
Lastly, let’s not forget the ‘invisible’ benefits: suggestions for improvements, reductions in the cost of low added-value elements, benefits of new projects entrusted to the outsourcing supplier without the hassle of a tendering process… When the contractual structure and the relationship have been established, the benefits naturally accumulate, almost imperceptibly. With this proximity and relationship of trust between the customer and the service provider, an outsourcing contract that really works well creates value. This translates, most notably, into a heightened responsiveness and pro-activity that not only responds more quickly to needs but becomes capable of anticipating them and of challenging the customer efficiently. Of course, sometimes it’s necessary to challenge the outsourcing provider to sharpen their competitiveness, but we need to guard against having benchmarks that are too rigid, which do not recognise the inherent value in the existing structure.