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2008 Outsourcing World Summit theme is “Built for Change: Reconceptualizing the Corporation in an Era of Outsourcing, Offshoring, and Globalization”.  We have asked some of the leading practitioners to contribute their thoughts on the topic for the newsletter.  This is first in this series.  We would love to hear about your experiences, best practices observed and lessons learned.  Please contact me if you are interested in sharing your views and experiences in future issues.

Jag Dalal, Managing Director, Thought Leadership

Outsourcing and Change Impact - a view from Applied Materials

The term post outsourced environment, will mean different things to different audiences. In its most basic form, outsourcing may represent little more than a staff augmentation methodology while at the opposite end of the spectrum it may encompass an enterprise-wide strategy spanning large segments of IT, business and engineering/manufacturing processes. No matter where an organization falls along this continuum, their adoption of outsourcing represents an attempt to address specific business problems and each variation carries with it the requirement for ensuring that the organization is prepared for and accepting of the changes outsourcing will bring. While this requirement is universal to all forms of outsourcing, it becomes exponentially more critical to the outcome and more difficult to achieve as the scope and complexity of your outsourcing model increases.   

For organizations whose vision is to reach the apex of this outsourcing food chain, the organizational change requirement amounts to nothing less than enterprise transformation. Yet, the majority of organizations focus 90% of their time and energy on the tactical components of their outsourcing initiative (vendor selection, contract negotiations, SOW’s, SLA’s, T’s and C’s, transition and stabilization) and only 10% of their effort on organizational readiness (communication, collaboration, participation, and ownership). Imagine their surprise in having managed the heavy lifting so skillfully, only to discover widespread confusion around the new processes, strong resistance to changes in roles and responsibilities and a concomitant decline in employee engagement and customer satisfaction. These lessons are painful reminders that organizational readiness is a critical success factor for ensuring the viability of any outsourcing initiative.

Outsourcing strategies are most effective when they adopt a life cycle approach to this new strategic relationship. This cradle to grave mentality must not only account for the engagement, ramp-up, and sustaining of the relationship but also the eventual separation. Throughout this life cycle, it is the quality of the relationship with your strategic service providers that will ultimately dictate the quality of your service delivery and the level of separation risk that you experience.

Again, organizational design and change management in support of the new model play an important role in establishing the proper partnership.  While there are many elements that have a lasting effect on the retained organization (governance,  career path, development, and treatment of exiting employees) none will have more impact on the success of the strategic relationship than ownership and that sense of owner-operator pride. This ownership spirit must come from all levels in the organization.  It is built upon a sound business justification for the outsourcing decision but won as a result of relentless communication and employee engagement.

At Applied Materials, we faced many of the same pressures that lead other organizations to consider alternative sourcing strategies. Among these:

· Lack of flexibility in responding to changes in demand

· Wrong mix of core versus context competencies

· Need to improve process maturity, metrics and tool sets

· Localization of resources in high cost geographies

· 90% of IT spend devoted to sustaining “keeping the lights on”

· Only 10% of IT spend on  business enabling change initiatives

· High cost to support captive expansion into new markets/geographies

· Heavy use of staff augmentation as a sourcing strategy

· IT contracts spread across more than 20 service providers

Our decision to pursue an enterprise managed service methodology was the right decision, not only for our IT organization but for the larger enterprise. It would provide a framework for addressing these pressures through an integrated strategic model encompassing not only ITO, but BPO and EPO components as well. How we arrived at this decision, our choice of outsourcing strategies, vendor selection, contract negotiation and service transitioning are all topics worthy of their own treatment. For the purpose of this article, however, we will focus on the organization and how it has changed after these outsourcing events.

One of the most notable changes post implementation is in the customer supplier relationship. Gone was the attitude that suppliers were necessary evils, that their engagement was based on an adversarial relationship, and that the job of internal managers was to beat them over the head until they delivered the promised value at the lowest possible cost. Instead, pre-negotiated cost at prescribed SLA’s allowed the relationship to focus on mutual objectives, collaboration and support. Employees at all levels in the organization had accepted a new mandate to take ownership of insuring the success of these strategic service partners. The focus had shifted from consequences and remedies to rapid recovery and continuous improvement of service delivery which worked to everyone’s advantage.

The second major difference post implementation was in the nature of the work performed by internal staff. With virtually all contextual activities (desktop support, DB, sys admin, helpdesk, etc.) having transitioned to our managed service partners, internal resources were able to focus on those critical core competencies:

· Managed services management

· Project, program, and portfolio management

· Cost management

· Enterprise architecture

· Information security and risk management

· IT marketing and communication

· Demand management

· Strategic planning

· Business process optimization

· Technology innovation

Aligned with these new core competencies were clearly defined job families and career paths ensuring visible opportunity for all employees under this new structure. Professional standards, certification and qualification criteria and a training curriculum to support internal staff in achieving the required levels of competency were important elements in ensuring buy-in to the new model and professionalization of these new disciplines.

Worthy of special mention among these new core competencies is the requirement to establish a management competency center for the strategic services relationship. With enterprise managed services spanning virtually every functional area within the enterprise, it is essential that there is a single focal point for managing the relationship (contractual, escalation, compliance, performance, etc.) with our managed service partners. Nothing will unravel an enterprise solution faster than multiple lines of supplier engagement, negotiation, escalation and relationship management. This management function must be tied to a governance model that is representative of all enterprise stakeholders but empowered to act on their behalf as the single point of contact for the enterprise managed services relationship. At Applied Materials this function is performed by the Enterprise Managed Services group which operates within the following governance model:

In addition to the establishment of an Enterprise Managed Services office with the required competencies and acting as the single point of contact with the suppliers, a Business Support office, such as the one depicted below, is also needed to manage the significant volume of administrative activities associated with this new strategic model.

While the vision for Applied Materials’ Enterprise Managed Services model was championed by its CIO, we did not rely solely upon our own internal expertise or experience in developing our enterprise strategy or the plan to operationalize it. We recognized the value of partnering with a world class organization whose primary focus was helping companies like ours develop such a strategy. We found that partner in NeoIT, who supported us with benchmarking, strategic consulting, as well as in development and execution of our overall plan. We have maintained that relationship through transition and stabilization as we fine tune our model, the relationship with our strategic managed service partners and the ongoing change management challenges in our own organization.

A nice story you say, but what about the results? Well, in the span of less than four months from concept to transitioned services, Applied’s Enterprise Managed Services program has allowed the consolidation of more than 20 IT suppliers under a new dual vendor strategic model. We have shifted our IT spend ratio between run and build from 90/10 to 60/40. This new sourcing strategy resulted in cost savings that enabled funding the entire cost of our IT Transformation while still reducing our charge back allocation and overall run rate in the same year in which we executed. There has been no appreciable dip in service levels even though we proactively raised our SLA commitments across many service areas prior to initiating transition activities. Our ability to move context activities to managed services has allowed us to refocus our internal resources on new value added core competencies that provide real competitive advantage. While the business process outsourcing and engineering process outsourcing components of our enterprise managed services model have lagged our ITO implementation and benefits, we are now beginning to make progress in moving context activities from these functional areas under our enterprise solution.

This kind of performance is only possible through the combined efforts of a truly world class IT leadership team. Our ability to attract the best and the brightest from some of the highest performing organizations in the world has been a key success factor in our ability to deliver a successful transformation. These leaders and the IT organization they have built will continue to drive optimization of Applied’s return on their IT investment and in so doing raise both the perception and awareness of its true potential as a strategic weapon of choice.

But as important as top leadership talent is, the results they achieve will always be dependant on the quality of the IT community they must rely upon for success. An outsourcing model that does not take into account the hopes, fears and needs of its constituent workforce is doomed to failure. In any transformation, tough decisions will need to be made. While these decisions support changes that will ultimately strengthen the organization and improve the work environment for all employees, they also have the potential to negatively impact some percentage of the current workforce. Success will depend on two factors; your ability to engage the IT organization in the new vision for the future and your treatment of those employees who may be unable or unwilling to make that journey. Strike that balance as we did at Applied Materials and you will have secured your number one success factor for successful outsourcing, a unified and engaged workforce of change leaders.

Published 9/18/07

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