Application Outsourcing Scenario

Application Development, Integration & Web Services Summit

Partha Iyengar

16–17 June 2004 Sydney Convention & Exhibition Centre Sydney, Australia

These materials can be reproduced only with Gartner’s written approval. Such approvals must be requested via e-mail — [email protected].

Application Outsourcing Scenario

Applications Outsourcing — Stay Tuned! More Changes to Come ... Visibility Key: Time to Plateau

Application Outsourcing BPO IT Utility

Less than two years Two to five years Web Services Implementation

Five to 10 years

Offshore Services

IT Outsourcing ERP Implementation Hosting Application Service Providers (ASP)/ Generic Service Providers As of June 2003

Technology Trigger

Peak of Inflated Expectations

Trough of Disillusionment

Maturity

Slope of Enlightenment

Plateau of Productivity

Application outsourcing’s placement on the Gartner Hype Cycle reveals that it is approaching the “peak of inflated expectations” and has approximately two to five years to plateau. Over the past decade (pre-2000) and up until today, the steps to advance AO in its pure form (legacy and ERP/packaged AO) have been steady and gradual; other applications-related services--Y2K, ASP, and hosting, for example--have been disruptive and moved quickly through the hype cycle. From an historic perspective, legacy applications outsourcing, one of the earliest targets for AO, has been employed to rationalise complex, proprietary applications and give more-strategic applications work to internal IT staffs. Over time, customer organisations adopted a more-holistic view of AO, seeking to better align their application investments with business objectives, demanding a more-integrated view of the maintainability of all applications. In particular, achieving Y2K compliance heightened the awareness for the need to have an overall approach and process for application management and raised the visibility of AO at the senior-executive level. Accessing key technical skills for ERP and other e-business functionality became a driver to outsource applications in the late 1990s and continues today. The off-shore services phenomena has directly accelerated the attention in applications, driving not only project-based applications work to a Global Delivery Model, but also the long-term applications outsourcing opportunities. Application services is being targeted with the same intent as the ITO market, to gain cost savings via outsourcing. Action Item: Enterprises must be aware of changing AO market dynamics to ensure they take advantage of the ESP offerings, delivery models and cost benefits to make informed outsourcing decisions. © 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 1

Application Outsourcing Scenario

Key Issues What are the most-critical trends and business drivers that will shape your applications outsourcing strategy and requirements? What are the practical considerations in vendor selection and contracting models for outsourcing applications? What are some real-life examples of successful application outsourcing engagements, and how were the business value and desired outcomes achieved?

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 2

Application Outsourcing Scenario Strategic Planning Assumption: Through 2007, application management services will represent the largest portion of all AO deals; a mature offering, this market will grow at a compound annual growth rate of 11.6 percent and will exceed growth in the markets for application development (4.3 percent) and deployment (4.6 percent) (0.8 probability).

Applications Outsourcing Defined A multiyear contract/relationship involving the purchase of ongoing application services from an external services provider (ESP) that supplies the people, processes, tools and methodologies for managing, enhancing, maintaining, and supporting custom and packaged software applications, including network-delivered applications. In addition to application management, AO isolates those services specifically delivered in a longer-term contract in support of the life cycle of applications, such as application development, integration, deployment and support services, as well as consulting/advisory services. •B2B — B2C — B2E •Business intelligence •CRM — HRMS — SCM/logistics •Customer contact centre •Desktop/office (e.g., e-mail) •ERP (e.g., SAP, Oracle, PS) •Financials •Knowledge management •Legacy applications •Procurement •Sales force automation

Design

Configure Life Cycle of Application Services and Support

Upgrade/ Retire/ Replace

Improve/ Optimise

Deploy

Manage/Operate

Key Issue: What are the most-critical trends and business drivers shaping enterprises' application outsourcing strategies and requirements? Applications are the life blood of organisations. From legacy custom applications to the new web-based applications, enterprises are turning to ESPs for application services and support to align their technology and business strategies. AO has evolved from supporting vast, customised legacy mainframe applications to include client/server and ERP packaged applications, and now Web-based applications that enable ebusiness connectivity. Vendors are expanding their portfolio of AO offerings to include specific outsourcing expertise for business applications, such as CRM, HRMS, SCM/logistics, financials and business intelligence (BI). Application management has been and continues to be the cornerstone of AO. However, AO is increasingly a means to pull in services to support the entire life-cycle of applications, from the upfront design via consulting services, to configuration and deployment, management, optimisation, and strategies to support the end-of-life phasing-out of applications. Because their clients are showing greater willingness to turn to ESPs for a broader array of services, vendors are building competencies to offer endto-end AO solutions. The service delivery life cycle for new systems extends from assistance in conceptualising new business models and designing more-effective customer-facing processes, through analysing and deploying appropriate technology solutions, to managing those processes and applications. This “build-operate-manage” concept for applications is an important outsourcing value proposition today as enterprises seek optimum efficiency and cost savings. © 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 3

Application Outsourcing Scenario Tactical Guideline: All sourcing decisions should be aligned with broader business objectives. Gartner consistently advises enterprises that cost savings alone should never be the sole reason to outsource.

Understanding the Dynamics of the Market: Is Applications Outsourcing for You? Dynamic Vendor Landscape

Evolving Supply Side

Changing Demand Side

New Enterprise Buying Behaviours

COST FOCUS

New Global Delivery Models

Changing ESP Value Proposition

Key Issue: What are the most-critical trends and business drivers shaping enterprises' application outsourcing strategies and requirements? The application outsourcing (AO) market has grown and changed considerably, but new enterprise buying behaviours, a dynamic competitive landscape, and changing vendor value propositions will cause even-bigger changes through year-end 2004. Additionally, cost focus has resulted in new dynamics in the outsourcing marketplace as a whole. This “cost is king” mentality has also filtered into AO and spurred enterprises’ interest in AO, particularly the use of low-cost offshore external services providers (ESPs). These supply-side changes in turn influence enterprises’ buying behaviours, which create an interlocking cycle of changing demand- and supply-side requirements. Other key trends influencing the AO market that will be explored throughout this presentation include: • Offshore becomes “mainstream” (particularly for the Fortune 500) • Growing scope of application services delivered through AO contracts • Aggressive new offshore competition • Evolving demand for standardised solutions • Growth and changes in packaged support and delivery • Evolution of global delivery models and established set of best practices

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 4

Application Outsourcing Scenario Strategic Imperative: An enterprise’s evolving business needs and changing strategic initiatives must be considered in any outsourcing decision. To ensure that AO strategies align with desired business outcomes, different constituents in the enterprise must be considered to assess the potential benefits.

Changing Demand Side: What Are the Drivers to Outsource Applications? CEO

CFO

CIO

BU

Reduce costs Improve service levels to end users Focus on core business Scalability/flexibility of application resources/capacity Upgrade application quality, processes, methodologies Access to critical technical skills/resources Optimise performance of applications staff Reduce applications staff/headcount Move from customised to standardised platform Access to industry or process skills Improve speed to market Enhance e-business applications Technology transformation (re-host, re-platform) Take advantage of offshore delivery models Source: Gartner 2003 AO User Research (preliminary) (n=106)

Key Issue: What are the most-critical trends and business drivers shaping enterprises' application outsourcing strategies and requirements? In Gartner’s 2003 AO user study, respondents were asked to identify which drivers were most influential in their decision to outsource applications. Preliminary data analysis shows that cost reduction is the foremost driver to outsource applications, followed by improved service levels to end users and a focus on core business. This data indicates that buyer behaviour has changed dramatically in the past two years. The fact that cost savings is at the top of the list is unprecedented; in past outsourcing surveys, users consistently indicated that access to technical skills was the top driver, with cost savings generally falling lower in priority. Other data corroborates the importance of cost savings today. Against the prioritised list of drivers, we have plotted the potential for business benefit to the key enterprise roles and their fulfillment of business objectives: CEO, CFO, CIO and the business unit. Some variation may occur by enterprise type, but generally speaking, this graphic depicts “why” each executive leader should care about AO.

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 5

Application Outsourcing Scenario Strategic Planning Assumptions: Through 2007, the AO market share leaders will be the current full-service global outsourcers that deliver application services as part of comprehensive IT outsourcing engagements or as focused AO contracts (0.8 probability). By 2005, a select number of ESPs from India will become dominant IT service providers on a global scale (0.7 probability).

Evolving Supply Side: What Vendor Will You Choose and Why? Full-Service Accenture Global & CGE&Y Multiregional/ACS Geographic Perot Systems Consultants/ AMS Integrators, Focused

EDS

CGI

HCL

SAIC

SBS Ciber

Infosys

EPAM

Syntel

BlueStar

Kanbay

Exigen

Intelligroup

Mphasis

Softtek

Appshop

Deloitte

CTG

I-Flex

Mastek

NorthropGrumman

SchlulmbergerSema

Covansys

Satyam

IBM Global Services

Lockheed Martin

Cognizant

Luxsoft

ASPs

HP

Fujitsu

BearingPoint

Birlasoft Offshore Providers

CSC

Focused Expertise

Hexaware

“Low-Cost” Alternative

Wipro Usi

LoudCloud NetLedger Trizetto Salesforce.com

Keane

Reksoft

TCS Corio

Unisys

iGate

Patni

End-toEnd

Enterprise ASP, Net-Native or Vertical

Upshot

PeopleSoft ISVs

Oracle

“Software as Service”

SAP NOTE: Not a comprehensive list.

Key Issue: What are the most-critical trends and business drivers shaping enterprises' application outsourcing strategies and requirements? Vendors see AO as a strong growth opportunity. New, aggressive competition has resulted. Full-service global and multiregional/geographic services companies: Most have their roots in IT outsourcing or large-scale projects, and are developing conventional outsourcing offerings to include AO. Consultants/integrators, focused AO: Most have evolved from predominantly consultative-led, projectbased application engagements or staff augmentation into longer-term AO engagement opportunities. Offshore providers: Their primary value proposition is to offer quality application services skills at a lower cost; today, Indian-based providers dominate, but providers in other countries are emerging. Enterprise application outsourcers: "Next-generation" ASPs are perfecting the network-based value proposition/delivery models for AO, with greater focus (vertical/market) and operational efficiencies. ISVs: Software companies recognise the importance of an AO offering to ensure continued client satisfaction and license sales; “software as services” has become synonymous with their AO approaches. Action Item: In implementing their sourcing strategies, enterprises must carefully review the benefits and drawbacks of the different types of vendors and their AO strategies.

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 6

Application Outsourcing Scenario Strategic Planning Assumptions: Through 2004, the majority of U.S.-based ESPs will establish or expand their capabilities offshore either directly or through partners to compete effectively on cost (0.8 probability). By 2005, 30 percent of Global 2000 enterprises will have a sourcing strategy that encompasses “nearshore” or offshore solutions (0.8 probability).

New Global Delivery Models: Will Offshore Shape Your AO Strategy? „ Offshore is mainstream with Fortune 500 – Estimated 40 percent use offshore today

„ Less adopted by Global 2000 – Estimated 20 percent use offshore today

Client Interface

Indirect

Offshore Nearshore Off-site On-site

Direct

n te Po

s Co l tia

Physical Proximity to Client

Security, Privacy Issues Cultural Fit Quality Issues Language Barriers Unrealised Cost Savings HR Backlash Potential Benefits of Offshore Delivery

gs in v a tS

Cost Savings Access to IT Skills Quality of Services Access to Industry Skills

Client

Near

Potential Drawbacks of Offshore Delivery

Remote

Source: 2003 AO User Data Rank order of importance

Key Issue: What are the most-critical trends and business drivers shaping enterprises' application outsourcing strategies and requirements? On-site services are delivered at a client's site. Typical services include project management, customer interface and business analysis, delivered by the ESP’s staff, which may include offshore personnel. Off-site services are delivered remotely through a centre of excellence, shared service centre or development centre located in the same country as the client. ESPs use these centres to remotely support one or more clients with a pool of shared resources. Examples of off-site services include system integration and testing for software created offshore or for shared development centres that specialise in a particular technology (for example, SAP). Nearshore services are delivered from an adjacent or nearby country. Nearshore countries will likely speak the same language and be culturally similar, and typically will provide some cost advantages. Offshore services are delivered from centres in countries remote from the client's location. Action Items: Enterprises should assess whether an ESP’s AO delivery model will enable the desired result — an optimum combination of skilled labour, low cost /high-quality service and minimal risk. Enterprises must evaluate whether an ESP brings processes, methodologies and experience in project management of globally sourced AO engagements.

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 7

Application Outsourcing Scenario

Key Issues What are the most-critical trends and business drivers that will shape your applications outsourcing strategy and requirements? What are the practical considerations in vendor selection and contracting models for outsourcing applications? What are some real-life examples of successful application outsourcing engagements, and how were the business value and desired outcomes achieved?

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 8

Application Outsourcing Scenario Tactical Guideline: Most of the time, an enterprise’s initial decision to outsource applications will be driven by corporate cost-reduction initiatives or a major technical transformation (such as adoption of a new computing platform or new technology-enabled process); over time, business change and new enterprise initiatives will become a critical factor in ensuring the relevance of the contract.

Cost Focus: Front and Centre for All AO Decisions AO Cost Savings: Expectations and Realities % of Respondents Expecting Cost Savings

Median Cost Reduction Goal (% of total cost)

% of Contracts Achieved Goal

% of Contracts on Track

70%

27.4%

15%

62%

How “cost of service” influences AO decisions Two Years Ago Today

73%

27%

% of Contracts Falling Short

8%

% of Contracts Exceeding Goal

8%

. . . nevertheless, enterprises view their AO decisions as “strategic” Tactical Approach 30%

90% 10% Strategic Approach 70%

Important or extremely important Not important or neutral Source: Gartner 2003 AO User Research

Key Issue: What are the most-critical trends and business drivers shaping enterprises' application outsourcing strategies and requirements? The majority of enterprises outsourcing their applications have one common characteristic—they will be looking to outsourcing as a means to reduce costs. Our 2003 AO research reveals that two years ago, 73 percent of enterprises considered “cost of service” an important or extremely important influence in their AO decisions. Today, this number rises to 90 percent. Cost savings from AO is expected by 70 percent of enterprises currently outsourcing, with the expected cost savings being 27.4 percent (median percentage of cost savings). Although enterprises acknowledge that cost is a key driver for their decisions, they view their AO decisions as being “strategic” (long-term outcomes and payback) as opposed to “tactical” (immediate results to solve a business problem or achieve benefits) in nature. As such, we must deduce that the cost-focused initiatives are part of a bigger picture; other user data supports that all things being equal, cost will not be the sole factor in their outsourcing decisions. Action Item: Despite the significant pressures in all organisations to reduce/control costs, enterprises should have reasonable expectations for cost reduction in their AO engagements; the risk of making outsourcing decisions strictly on cost may result in a poor or less-than-optimum choice of providers and service quality issues. Remember, “you get what you pay for.”

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 9

Application Outsourcing Scenario Key Issue: What are the practical considerations in vendor selection and contracting models for outsourcing applications?

Creating Your AO Strategy — Know Why, What and How Business Outcomes

Optimisation

Consulting Integration

ERP and COTS B2B, B2E, B2C Sales Force Automation CRM, BI,SCM, etc.

Development

Enterprise Environment

Legacy Applications Outsourcing

ASP ISV-'Software as Service' Enterprise ASPs Net Native Delivery

IT Outsourcing (Data Centre, Desktop) Network, Telecom Help Desk Outsourcing Transaction Processing

One-to-One Predictability, UtilisationBased Pricing

One-to-Many, Many-to-Many Business Transaction

Value

One-to-One Pay for Performance

Creation

Shared Environment

Application Hosting

One-to-Many Rental Approach

IT Efficiency

Management

Access

Mapping various application types to our Four Worlds of IT Services/Sourcing model reveals many choices available to enterprises, in terms of the desired value (IT efficiency or business outcomes) or delivery method (customised to an enterprise environment or accessed in a shared, or standardised model). Management: Enterprises’ foremost concern is to optimise the value or cost-effectiveness of their capital investments in applications via applying resources and processes to ensure a maximised return on these assets. Legacy applications, highly customised to the enterprise, would typically be here. Access: Enterprises don't want to own technology/assets or build up large IS staffs, but procure functionality to maximise operating income; technology platforms to host the applications are involved. Optimisation: Enterprises are focused on competitiveness, how to most effectively take advantage of the best sources to maximise market share or competitive advantage through applying best-in-class expertise. Included are COTS applications and business solutions (KM, BI, SCM, CRM) unique to an enterprise. Creation: Enterprises are seeking the benefits of Internet connectivity, "net-native" application solutions and connecting their business applications with partners, customers and other stakeholders (internal and external). Action Item: Enterprise AO strategies must be continuously under surveillance to uncover when business objectives are in transition or imminently changing; a sourcing strategy must require a migration plan.

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 10

Application Outsourcing Scenario Strategic Imperative: Enterprises thinking about outsourcing applications for the first time should consider outsourcing application services in the midlife or maturity phases of the services life cycle to minimise risk and ensure best practices and processes; similarly, first steps in off-shore applications outsourcing should emphasise mature and stable applications.

Understanding AO in the Context of the Services Maturity Life Cycle Infancy

High

Adolescence

Midlife

Price for Value Delivered ERP, COTS EAI

Business Value

Service Performance „ Immature

offering investment „ “Bleeding-edge” technology/solution „ Two options: “one size fits all” or overly customised „ ESP

Apps. Migration, Re-hosting

Strategy & Consulting ABAP Programming Development & Apps. Mgt./Mtc. Integration

ASP

Low

Maturity

Application Hosting

Legacy Applications Outsourcing

Time „ Competition/price

pressure „ Competition begins accelerates, more price „ Next round of ESP pressures „ Economies of scale investment „ Methodologies, „ Technology, processes automation, tools emerge and methodologies „ Standards begin differentiate

„ Best

practices and standardisation „ Serious price competition „ Lower margins „ Commoditisation „ Retool or exit market

Key Issue: What are the practical considerations in vendor selection and contracting models for outsourcing applications? Plotting various application products and services to be outsourced on our Services Maturity Life Cycle helps enterprises understand what to expect from their application outsourcer. Application products, services and delivery methods in the infancy and adolescent phases are generally less stable and more costly, but early adopters will trade off stability for competitive advantage. In the midlife phase, as services mature, methodologies and standard procedures emerge that can be tested and refined, bringing greater reliability and higher performance; measurement tools also evolve to verify benefits. Typically, competition accelerates and price pressures result. Once application products, services and delivery have been perfected to the point of reliable, repeatable processes, the market reaches the stage of maturity; performance and costs stabilise further and generally service margins (for ESPs) drop. As more ESPs enter a market and perfect best practices, application services become “commoditised,” and costs decrease further. Tactical Guideline: Understanding the relative maturity of application types and application services available in the market enables enterprises to establish reasonable expectations for the price and quality of services to be delivered.

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 11

Application Outsourcing Scenario Strategic Imperative: Vendor evaluation activities are not linear — they are focused on and expressed as business outcomes, incorporating multiple assessments and validation points.

Selecting Your Application Outsourcer: What Matters Most? What Matters Most in the Pre-Contracting Phase

How You Will Learn About AO Providers „ „ „ „ „ „

Recommendations from industry peers Past direct relationship Industry analysts Presence at industry conferences Advertising or press coverage Referrals from incumbent outsourcer

Final Vendor Selection — What Matters Most? * 3.2

Relationship

2.7

Trust Cost Quality

2.2 1.9

„ „ „ „ „ „

Responsiveness to RFI/RFP Technical expertise displayed Level of honesty and trust displayed Overall staff quality/professionalism Clarity of presentation materials Effectiveness of sales representatives

Most Valued Relationship Attributes * Proactive Support Flexibility Trustworthiness Project Management Communication Responsiveness

4.3 4.2 3.7 3.6 2.7 2.5

* Rank Order of Importance, Mean Provided Source: 2003 AO User Research

Key Issue: What are the practical considerations in vendor selection and contracting models for outsourcing applications? Vendor selection is a critical phase for any outsourcing engagement. Enterprise behaviour in AO decisions underlines the importance of vendor reputation and past performance/referenceability in the market. Although every enterprise will behave differently, some patterns are evident. Most enterprises rely on their own past experience with a vendor and recommendations from trusted sources to initially learn about their options for AO providers. In the pre-contracting phase, enterprises pay closest attention to responsiveness and evidence of technical competency. They also pay attention to relationship attributes —trustworthiness, quality and professionalism. When comparing vendors of equal technical skills and their ability to deliver AO services, their decisions are most influenced (in order of importance) by relationship, trust, cost and quality. In terms of relationship attribute,s once enterprises have engaged an AO provider, proactive support tops the list, followed closely by “flexibility.” Action Item: Before entering into an AO agreement, create evaluation criteria that incorporate the technical capabilities and relationship-based attributes that matter most to your enterprise and weight accordingly.

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 12

Application Outsourcing Scenario Strategic Planning Assumption: Through 2004, almost 50 percent of all AO contracts will be renegotiated, but of those renegotiations, 75 percent will result in the incumbent outsourcer being retained (0.7 probability).

Contracting for AO: Terms, Pricing, Renegotiations How AO Contracts Will Be Priced Fixed Price 32% Time and Materials 22% Fee for Service 17% Fixed Capacity On Demand 8%

57%

Less than 10%: Cost plus/with incentives; On demand; Use-based; Shared risk

AO Contract Negotiation

Have Renegotiated

36 Months

54%

Have Not Renegotiated

Average Month Renegotiations Occurred: Month 20

Reasons for Renegotiation * „

Average Length of AO Contracts

46%

„ „ „ „ „ „

Price of service Business change within enterprise Contract issues/problems Service-level performance/adjustments Performance issues Change in staffing of outsourcer Relationship issues/problems

Source: Gartner 2003 AO User Research

* Rank order

Key Issue: What are the practical considerations in vendor selection and contracting models for outsourcing applications? Enterprises will need to determine the optimum contract length and pricing model for their AO engagements. User research shows that the average contract term for AO engagements is three years, based on preliminary research. Not surprisingly, most enterprises favor fixed-price contracts for their AO engagements; services are provided based on a predetermined fee structure. Enterprises tend to favor this option when the desire for predictable pricing over the term is paramount and the willingness to take on risk is low. Most likely, fixed-fee contracts will be used for AO engagements with well-defined services and service levels. The problem with fixed-price contracts is that renegotiation often occurs prematurely, and without incentives, there is little motivation for improvements. Renegotiation in outsourcing engagements is not unusual, occurring 46 percent of the time. In AO engagements, renegotiation most often occurs at the 20-month point. The reasons for renegotiation are varied, but surprisingly, performance issues are low on the list. Users report that pricing and business change in their enterprise were the most common factors in renegotiation. Action Item: Enterprises should consider incentive-based alternatives in their AO contracts; fixed price or cost-based contracts with incentives ensure the alignment of goals and outcomes, as well as balance the risks for both parties.

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 13

Application Outsourcing Scenario Key Issue: What are some real-life examples of successful application outsourcing engagements, and how were the business value and desired outcomes achieved? Tactical Guideline: Similar to traditional AO arrangements, enterprises must not overlook the management of their ASP/ASP relationship; the ASP and the enterprise should assign single, primary points of contact to manage the ongoing relationship. AO Case Study: Speed, Scale, Focus via

“Software as Service” Empirix — Oracle Business Challenge — Outsourcing Objectives

•Retail sector: spin-off and launch business in shortened time frame •No IT infrastructure, so needed to implement ERP system quickly, cost-effectively •Integrated, scalable solution Vendor Selection Criteria

•Expertise in the Oracle platform, hosted solution, commitment to on-time/on-budget •Fully integrated and scalable software, realistic appraisal, customer satisfaction priority Contract - Application Services Delivered

•Annual, renewable contract, hosted Oracle e-business suite applications •Oracle Financials-Order Mgt.-Inventory-Purchasing Criteria for Success

•On-time/on-budget launch, deployment of Oracle •Estimated time savings of 75 percent and more than $200K in implementation costs •24x7 care and support, global view of business

In Gartner’s definition, Application Service Providers (ASPs) “offer enterprises delivery of preconfigured template software from a remote location over an Internet Protocol (IP) network via a subscription-based outsourcing contract. They provide standard software applications, common to many users, as a service.” In the scheme of AO, the ASP model is a change agent — an alternative to highly customised alternatives.In today’s tough economy and demand for cost savings, enterprise willingness to forego customisation and turn to “standardised”offerings makes the ASP model very attractive, as these case studies show. In this case study of Empirix outsourcing to Oracle, we see a successful example of a new enterprise client achieving its primary goal--speed, scale, and flexibility — via an ASP/”software as service” model. It had pressing, time-sensitive goals, that made this “standardised” (vs. customised) AO option attractive. The benefits are not only in the upfront move to an outsourced environment, namely, on-time/on-budget deployment; Oracle also delivered ongoing customer satisfaction by maintaining and constantly upgrading applications, as well as significant cost savings. Action Item: Enterprises must continue to build contingencies into ASP contracts. Clauses built around migration assistance, license ownership and SLAs built around relevant business metrics will be necessary to ensure a consistent outsourcing experience.

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 14

Application Outsourcing Scenario Strategic Imperative: Enterprises must ensure that their AO relationships are flexible so that over time, as business goals will inevitably change, their AO deal will also change.

AO Case Study: Global Delivery via Near-shore and Offshore Alternatives Allmerica — Keane Business Challenge — Outsourcing Objectives

•Responsive to changes in Insurance sector; partner relationship, employee commitment •Cost savings, flexibility/variability in staffing/labour, alternative global delivery options Vendor Selection Criteria

•Local provider, business partner relationship and a ‘win/win’ approach, •Flexible relationship in good/bad times, shared knowledge and best practices in AO •Near-shore/offshore capabilities, process experts, employee commitment/transition Contract — Application Services Delivered

•5-year contract, $21M annually for App. Mgt. - front/back-office (COTS and custom) •Global sourcing: U.S., Canada/Halifax, India Criteria for Success

•Initially, filled skills/capacity gap, overtime aligned internal staff with core competencies •Annual cost savings=$10m/year; consistent performance against SLAs •Variable staffing; offshore labour options

Key Issue: What are some real-life examples of successful application outsourcing engagements, and how were the business value and desired outcomes achieved? This case study is, first and foremost, an example of how outsourcing relationships that are ‘built to last’ will change and possibly transform to accommodate changes in the client’s business. Keane and Allmerica formed a strong, business-focused relationship from the start, and that relationship continues. It also points out how important the ongoing relationship management and governance of the outsourcing relationship to ensure that the outsourcer and client are fully aligned in supporting the client’s business goals. Increasingly enterprises are being presented with, or actively seeking, an applications outsourcer able to provide a seamless global delivery service model. However, in this case study, Allmerica initially turned to Keane for AO to address a fairly classic problem in the e-business era of the late 1990s — access to critical applications resources that it could not hire quickly enough. It was only over time that Allmerica tapped into Keane’s near-shore (Halifax, Canada) centre and India centre to achieve cost savings and broader access to IT skills. Through applications process optimisation and leveraging a global delivery model, Allmerica has achieved annual cost savings in $10 million/year.

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 15

Application Outsourcing Scenario Decision Framework: Although most application outsourcers are building competencies and attempting to satisfy enterprise demands for vertical expertise and full-service solutions (such as ITO and AO), the most-complete solutions still exist within the walls of the established, global Tier 1 ESPs.

AO Case Study: Industry Expertise in Full-Service, Strategic Outsourcing Caixa Catalunya — Accenture Business Challenge — Outsourcing Objectives

•Volatile Financial Services market (Spain); enhance competitiveness as a Savings Bank •Ensure speed to market, flexibility, quality, control rising IT costs, access new technology •Gain access to industry expertise in order to focus on core banking business Vendor Selection Criteria

•Past successful/trusted business relationship; technical, industry skills •Domain expertise, ALNOVA solution •Relationship flexibility, business transformation, and willingness to form a JV Contract — Application Services Delivered

•7 year contract: $180M for App. Mgt. for entire suite of front/back office applications •New App. Dev., help desk, plus IT infrastructure •Formed JV company (ITC) to deliver services Criteria for Success

•Cost reduction in operations (15-20%); Bank’s ability to focus on core business/products •Speed to market with new products •Access to technical/industry skill sets

Key Issue: What are some real-life examples of successful application outsourcing engagements, and how were the business value and desired outcomes achieved? Large enterprises, focused on gaining competitive differentiation in their outsourcing strategies, have adopted an approach to include both IT infrastructure and applications outsourcing in a single engagement. In some cases, two or more vendors are used to deliver the full array of services; in other cases, a single vendor strategy is employed. Regardless, in these larger more complex outsourcing engagements, where AO is one aspect of the deal, we see high levels of business partnership, and what we would characterise as strategic versus tactical outsourced relationships. In this case study, Caixa Catalunya was facing escalating IT costs and the realisation that it was still not at the leading edge of technology to support its ever-changing business. It recognised the importance of a trusted relationship, and a vendor who could bring industry insights to enhance its competitiveness; the bank was experiencing a highly competitive and rapidly changing financial services market. Through outsourcing its applications and IT to Accenture, Caixa Catalunya reversed the escalating IT costs yet achieved considerable competitive advantage and the ability to focus on its core business. Action Item: For those enterprises seeking to consolidate their applications services with a “primary” applications outsourcer, evaluate ESPs based on: the extent to which they know/understand your business, if they proven track records, and if they are willing to form more trusted business partnerships.

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 16

Application Outsourcing Scenario Tactical Guideline: Enterprises undertaking larger and more-complex AO engagements will typically seek vendors with vertical industry expertise; this is driven by their desire for competitive differentiation and an outsourced relationship in which the vendor fully understands the particular business challenges and problems.

AO Case Studies: AO in Full-Service, Strategic Outsourcing Ontario Power Generation — CGE&Y Business Challenge — Outsourcing Objectives

•Undergoing a major deregulation/downsizing in Canadian Energy/utility business •Focus on core business, facilitate culture change; reduce/vary costs, leverage/scale IT Vendor Selection Criteria

•Long-standing relationship, trusted partner who understood business •Core business expertise in ITO/AO, global presence, industry experience •Understand unionised labour environment, JV experience Contract - Application Services Delivered

•10 year contract, $1B (Can. $); gain sharing; formed JV (New Horizons Systems Solutions) •App. Mgt. for ERP (SAP, Passport (PS), 300+ custom applications, e-business, plus IT outsourcing Criteria for Success

•Early buy-out of the transitional JV; cost savings, SLAs achieved, service delivery •Successful employee transition (two unions), management focus on business-not IT •Cultural change

Key Issue: What are some real-life examples of successful application outsourcing engagements, and how were the business value and desired outcomes achieved? Truly successful AO relationships begin with a clear sourcing strategy, consensus opinion among the executive leadership of the merits of outsourcing, and ultimately the commitment to execute a deal based on achieving business goals. The Canada-based Ontario Power Generation (OPG) was committed to outsourcing as a critical element in its ability to succeed in a major change in its business. It faced a government-mandated deregulation, whereby it needed to significantly reduce its ownership of power generation capacity in Ontario over a 10year period and compete in an open marketplace. It was seeking an outsourcing provider who could support over 300 applications and also support its IT infrastructure during this time of tremendous change while it focused on its business. Among other things, it was seeking an outsourcer capable of supporting/enabling the significant cultural change that deregulation entailed. OPG had successfully worked with CGE&Y in the past on specific applications projects and industry consulting engagements; this was a key factor in the vendor selection process. While many elements have come into play to make this a successful relationship, this case study reveals how critical it is for both parties to be committed to success, and to form a relationship based on open communication, trust, and mutual success.

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 17

Application Outsourcing Scenario

Recommendations Develop an AO Strategy Rigor and due diligence are required in all phases of AO strategy development

Find a Champion . . . Set a Clear Course Ensure senior executive “buy-in” and management commitment

Make Sure You’ve Got a “Win/Win” Strategy Cost savings are important — but don’t squeeze every nickel out of the deal

Prepare Your Organisation for Change Don’t underestimate the level of change and cultural impact

Keep Energy and Momentum High AO deals are not self-managing — There are no short cuts to a “good” AO deal

AO engagements are driven by the unique business challenges/situations of the individual client — there is no “one size fits all” approach in the market. Business issues invariably reflect the needs for enhanced competitiveness, whether launching a new start-up, ensuring the ongoing effectiveness of business applications, or supporting business fluctuation and needs for variable cost structures. As these AO case studies reveal, the vendor evaluation and selection phase begins after a strategy has been developed. The strategy phase lays the foundation for all of the phases that follow, and helps the enterprise to better qualify vendors — based on the desired business and technical outcomes.

© 2004 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

Partha Iyengar 12C, APIN10A

Page 18

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