Emerging Deal Constructs – Why, How and What?

Sourcing relationships are evolving and taking new shape. What are the new deal constructs – outcome based relationships, shared services monetization/commercialization, business volume based partnering et al? Are we achieving the benefits of standardized solutions, while managing the complexity of new service delivery models? What are the new risks and deal factors in play?

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Proprietary and Confidential. No part of this document may be reproduced in any form or by any electronic or mechanical means,
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Dinesh Goel & Kapil Puri
08 Oct 2014
SIC 2014
Emerging Deal Constructs – Why, How and
What?

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Content
Emerging Deal Constructs – Why, How and What?
1.Deal characteristics witnessing emerging constructs
2.“Established” Deal Constructs
3. “Emerging” Deal Constructs
4.Rationale behind Emerging Constructs
5.Critical Success Factors
6.Evolution in Near Future
7.Implications for
►Clients
►Service Providers
►Sourcing Advisors
8.Case Studies

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Emerging Constructs

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Changing Customer Expectations
Rather than prescribing the service delivery parameters and benchmarks, Clients have
started expecting the Service Providers to propose avenues and mechanisms for value
creation.

Deliver to the
specifications
… Plus, Bring Ideas … Plus, Innovate
… Plus, Deliver
Business Impact
First Generation Second Generation Third Generation Emerging Expectations
Customer Expectations

Time
Reduce Operating Costs
Improve Productivity
Transform Business Operations
Redefine the Enterprise
True Strategic
Partnership
The Broader Domain
of Innovation
2014 2005 1990

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Emerging Deal Constructs – Evolving Key Elements
Key elements of sourcing deals are evolving to next maturity level in an increasingly
dynamic sourcing industry.
Desired pricing and commercial models
Commitment to Service delivery
Risk management
Contract and
Commercial
Construct
Solution and Services sourced
Span of control for Service Provider
Desired end to end accountability
Scope of Work
Process methodology
Descriptiveness/Level of detail
Speed of execution
Key stakeholders
Transaction
Process

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Price
Access to talent
Driven by Service Provider economics
Service levels – measures for direct “in
scope” work
Contractual constructs
Control
Flexibility
Governance
‘Established’ Deal Constructs
Established Constructs’ of these characteristics have been around for years.
Established
Contract and
Commercial
Construct
Typically non-core and frequently fragmented
Natural candidates - economies of scale/non customer facing
Relatively low-value (bottom of the value pyramid)
Scope of Work
Prescriptive and tactical (RFP driven)
Cost and compliance focused
Individual function driven (IT, Procurement, Finance, etc.)
Time consuming
Transaction
Process

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Evolving Pricing Models
Output and Outcome based
Measurable Business Outcomes

Sourcing Maturity
Selective Outcome Based
Largely input based with selective outcome
based pricing
Pricing linked to input with some outcome
based incentives
Higher risk/tighter governance
Extended team models
E.g.: R&D outsourcing

Outcome Based
Bundled Scope (Infra, Apps, BPO)
Transformation led
Business Outcome Linked Fees
Gain Sharing (Revenue / Cost Savings)
E.g. Reduced customer churn rate (Telco)


Input Based
Piece meal and flexible
Resourcing / Staffing centric
Headcount linked Fees
Client Managed
E.g. No. of FTEs by skills, Resource Rate Cards


Output Based
Modular or Bundled scope
Managed Services
SLA linked fees
Service Credits/Earn backs
E.g. Server Downtime, Support TAT, FPs, Test
Cases

Low High
Low

High

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‘Emerging’ Deal Constructs
Emerging constructs to the key deal attributes are slowly but surely gaining ground
Emerging
Price
Driven by potential for value creation
Promote
Innovation
Agility (capacity and tech shift)
Leveraging capability (provider/market solutions/expertise)
Complex construct
Investments expected (exit more complex)
Contract and
Commercial
Construct
Scope of Work
Transaction
Process
•Pricing model linked with Business Projections
•Truly scalable model with least minimum commitment – supplier carries the risk and rewards
of low and high volumes respectively
•Supplier measured/rewarded on supporting
•Business growth or de-growth
•Scope/function Transformation
•Resource Units not linked to underlying infrastructure or technology units (consumption of IT
resources or efficiency not the driver)
•Ability to assume exposure
•Rebadged staff
•Novated vendor contracts/solutions
•Significant investments
•Unpredictability of business volumes/revenue

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‘Emerging’ Deal Constructs
Emerging constructs to the key deal attributes are slowly but surely gaining ground
Emerging
Price
Driven by potential for value creation
Promote
Innovation
Agility (capacity and tech shift)
Leveraging capability (provider/market solutions/expertise)
Complex construct
Investments expected (exit more complex)
Contract and
Commercial
Construct
Not always non-core
Not always just high-volume (blend of work for better control)
Moving up the value pyramid
Scope of Work
Transaction
Process
•Entire function or process
•Complex R&D / Engineering
•Analytics (DW/BI/new age tools)
•Cloud based migrations/solutions
•Industry specific solutions
•Service Integration (SIAM)

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‘Emerging’ Deal Constructs
Emerging constructs to the key deal attributes are slowly but surely gaining ground
Emerging
Price
Driven by potential for value creation
Promote
Innovation
Agility (capacity and tech shift)
Leveraging capability (provider/market solutions/expertise)
Complex construct
Investments expected (exit more complex)
Contract and
Commercial
Construct
Not always non-core
Not always just high-volume (blend of work for better control)
Moving up the value pyramid
Scope of Work
Objectives and not specs driven
Strategic as opposed to tactical (Significant CEOs involvement)
Solution and capability focused, not just the lowest cost and max compliant
Allows solution diversity showcase
Partners cultural and ethos match of greater relevance (CEO to CEO handshake must)
Transaction
Process
Request for Solutions approach to align the objective of finding the partner with
the best solution and capability that fits the cultural ethos

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‘Established’ vs ‘Emerging’
Slow but sure shift occurring with the next gen of sourcing.
Established Emerging
•Price
•Access to talent
•Driven by Service Provider economics
•Service levels – measures for direct
“in scope” work
•Contractual constructs
•Control
•Flexibility
•Governance
•Price
•Driven by potential for value creation
•Promote
•Innovation
•Agility (capacity and tech shift)
•Leveraging capability (provider/market
solutions/expertise)
•Complex construct
•Investments expected (exit more complex)
Contract and
Commercial
Construct

•Not always non-core
•Not always just high-volume (blend of work for better
control)
•Moving up the value pyramid
•Typically non-core and frequently fragmented
•Natural candidates - economies of scale/non
customer facing
•Relatively low-value (bottom of the value
pyramid))

Scope of Work

•Prescriptive and tactical (RFP driven)
•Cost and compliance focused
•Individual function driven (IT, Procurement,
Finance, etc.)
•Time consuming
•Objectives and not specs driven
•Strategic as opposed to tactical (Significant CEO
involvement)
•Solution and capability focused, not just the lowest
cost and max compliant
•Allows solution diversity showcase
•Partners cultural and ethos match of greater
relevance (CEO to CEO handshake must)
Transaction
Process

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Drivers and Critical Success Factors

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Rationale for ‘Emerging Constructs’
Dynamic business environment, rapid pace of change in technology and supplier
capabilities apart from industry maturity amongst key drivers.
►Enhanced supplier capabilities – domain and tech
►Fueled by M&A/Alliances
►Much greater competitive intensity to win
Supplier
Capabilities
►Helping re-define the new ways of sourcing:
Cloud
Mobility
Analytics
Technology
evolution
►New markets
►Faster time to market
►Uncertainty
New Business
Imperatives
►Higher level of maturity to move the dial forward
►Greater willingness to try new constructs
Industry
Maturity
►Potential for significant impact leveraging suppliers –more than ever
►Increasing dependence on suppliers as Partners for business success
Supplier
Dependence

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Critical Success Factors
Relatively easy to define but difficult to sustain these relationships without the
attention to following critical success factors.
►High level of trust in relationship
►Transparency - Pro-active sharing of information
►Joint discussion/ownership of issues/change
Utmost Trust &
Transparency
►Strong Governance structure that allows
Focus on innovation
Measurement of progress/value creation
Direction and decisions
Enable Strong
Governance
►Ensure Service Providers have ownership and control over
Scope of work they are expected to manage to maximize value creation
Required to manage risks
Enable Control
and Ownership
►All parties must keep their focus on potential for value creation in true spirit
►Focus not on just the costs, though cost has to be reasonable
Focus on Value

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Innovation In Outsourcing: Unmet Expectations
“Innovation”
►Has been a gray concept in
most outsourced relationships
►Generally has not clearly
defined or understood by the
parties
►Has been something most
Clients believe they should
receive through the
relationship
►Has been promised by most
Service Providers as part of
the sales process
The Innovation Gap – Missed
Expectations
►Misalignment upfront

In general, outsourcing Clients have been disappointed at the level of Innovation
delivered through their relationships.


Client
Although Service Provider
proposals make claims of
Innovation and best practices,
we have not seen anything — or
benefited from anything.
We always seem to have to
force the discussion with our
Service Provider.
It seems as if we have to give
more scope to get Innovation.
It is not fair or smart to begin
gainsharing from our starting
point — it should be based on
true exceptional performance.
Service Providers
Companies say they want
Innovation, but their actions
and behaviors indicate cost
reduction, cost reduction and
cost reduction.
Our solution brought a
tremendous amount of
transformation from their
current state.
Companies do not want to pay
for Innovation; they only want
the benefits.
Companies reject all of our
ideas for Innovation.
Common Perceptions

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Approach to Achieving Innovation through Outsourcing
Business drivers, investment, organizational alignment and disciplined execution
must all exist for Innovation to occur.

New ISG Recommended Approach
Expectations
Governance
Investments
►Educate Client on Innovation in Context of
Outsourcing Service Delivery
►Innovation MVD; Executive Alignment

►Evaluation Criteria - Innovation
►Define Empirical Measures of Value; Structured
Review Process
►Innovation Team as Part of Governance
Operating Model; Jointly Funded
►Service Provider Quantifies Innovation
As Part of Solution
►When Applicable – Innovation Fund With
Spectrum of Investment Models, Transparency,
Business Case Process
►The Value Added Schedule
►Disputes whether innovation initiatives were in
the price
►Largely Oriented Towards Idea Sharing,
Networking Forums, Access To Service Provider
R&D Labs
►No Formalized Governance
►Episodic Topic Of Discussion; Highly Subjective
►Constrained To The Domain Of The Services “In
Scope” Rather Than Focused On Core Business
Operations
►Joint Venture / Go-To- Market Arrangements
With Client Platform Or Industry Expertise

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Implications for Outsourcing Community and
Look ahead

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Implications for Buyers
Here are the key implications for Buyers/Clients in this new paradigm.
►Significant on the Client side for implementing such a strategy
►Well planned and thought out measures required
Change and
Communication
►Implement structured governance and risk management processes
►CXOs representation in governance structure
►High level of trust and transparency required with the Service Provider as a partner
Governance
and Risk
Management
►Right sponsor and team members to handle the sourcing process cross functional – Finance,
IT, HR etc.
►Representation and alignment with senior business leadership
Sourcing
Process
►Ensure solid sourcing strategy vis-à-vis business objectives/plans
►Clarity on strategy and market validation required
Sourcing
Strategy

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Implications for Service Providers
Here are the key implications for Service Providers in this new paradigm.
►Track record of delivering in similar deals
►Ability to “walk the talk”
Track Record
►Matured discipline around governance structure/processes
►Ability to pro-actively develop business case/recommendations for decisions
►Manage risks actively as a true partner
Governance
and Risk
Management
►Pick your battles – avoid “everything to everyone”
►Solution and capability focused
►Willingness to assume risk with reasonable reward
Selection of
deals
►Nuances of Sourcing process are different
►Re-align teams and skills to succeed in winning deals
Sourcing
Process
►True to end to end capabilities in select areas
Engineering Services
Services

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Implications for Sourcing Advisors
Here are the key implications from our vantage point…
Bring greater level of domain (industry and function) expertise to bear while advising Clients. 1
Ability to help establish link between business outcomes, metrics and capabilities/solutions –
develop strong IP in this area that can be leveraged.
2
Ability to construct appropriate risk-reward pricing models considering multiple alternatives
and “what if” scenarios.
3
Craft governance models sophisticated enough and suitable for such true partnerships than
traditional sourcing deals.
4
Much more interactive, iterative and collaborative approach to the sourcing process. 5
Work towards the expectation of crashing timeframes in the contracting process, without
postponing critical issues to post deal governance.
6

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‘Emerging Constructs’ – Crystal Ball
We expect this trend to gather steam in the coming 24-36 months.
Increased Prevalence of RFS
Approach


►Collaboration in developing
mutually acceptable end state,
will continue to rise. Expect an
increase in trend for RFS
►More and more Clients will look
to shorten their sourcing
timelines
Service Integration, End-End
Sourcing


►Need for Service Integration
and Governance services will
grow significantly
►Greater sourcing of end-to-end
scope with the partners
►Technology led innovation will
become increasingly important
►Contract constructs and metrics
for new age deals will mature

Transformation led
Sourcing Deals


►Transformation led sourcing
deals will show growth
(especially in new age
industries/business models)
►Greater reliance on partner(s)
for implementing
contemporary IT solutions and
providing agility
►Businesses with hyper growth
potential or rapid technology
shift more amenable
Next 24-36 months

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Case Studies discussion

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Thank you!

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