April 2002 WHITE PAPER

Outsourcing: A Decision of trust

HSS CONFIDENTIAL

w w w.hssworld.com
Outsourcing: A Decision of trust

© 2002 Hughes Software Systems Ltd. All rights reserved. No part of

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1.1 Introduction 1.2 Outsourcing: To do or not to do 1.2.1 Identifying
Agency Needs 1.2.2 Quantitative Considerations 1.2.2.1 Hard Costs
1.2.2.2 Soft Costs 1.3 Moving Outsourcing Relationships up the value
chain 1.3.1 Selecting the Vendor 1.3.2 Establishing Contract
Measurements 1.3.3 Managing and Evaluating Contracts 1.3.4 Designing
and Managing the Management Mechanism 1.4 HSS: A Proven and Mature
Outsources

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Outsourcing: A Decision of trust

1.1 Introduction
Outsourcing is becoming an accepted way of functioning for
organizations the world over, however companies remain pensive when it
comes to entrusting external agencies with critical application and
company information. Outsourcing can be a viable option when executed
with adequate safeguards. This white paper examines steps that need to
be taken while deciding whether to outsource or not. Outsourcing can
encompass a wide range of services, from a particular project to a
technical domain to all activities. Each situation requires a different
understanding of the priorities, measures, costs, and the benefits
involved. The paper is not intended to encourage or discourage
outsourcing. The purpose of the paper is to stress that outsourcing
decisions should be based on a solid business case analysis of
alternatives. The business case is always unique to the project under
consideration and to the organization. The paper also enumerates the
basic elements that need to be considered to move outsourcing
agreements beyond transaction based relationships to value-added
strategic partnerships. This white paper further contains certain
exhibits generated by HSS as tools for analyzing vendors. This
checklist does not assume any responsibility for errors that might
result owing to its application.

1.2 Outsourcing: To Do or Not To Do

A successful outsourcing project is only possible if the outsourcing
decision has taken into consideration all known costs and benefits
associated with the project. It also important that the contract be
effectively negotiated and managed. It is not possible to provide a
simple criteria template for an outsourcing versus insourcing cost-
benefit analysis. Each organization must determine its priorities,
criteria, and weight for each project depending on its individual
capabilities. Though an option might seem quantifiably more expensive,
it could be the most effective choice for meeting the company's needs.
A successful project would require constant information, true cost and
benefit estimates and should also have specific goals to achieve.

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1.2.1 Identifying Agency Needs first step in the decision-making
process is to identify the organizations' needs. These needs The
lay the framework for projects and activities. - Address the strategic
interests and goals of the company - The strategic plan, the
information sources and the company's performance measures should all
be taken into consideration while identifying the company's needs. The
goals of the company serve as a basis for determining a project's
success. Core competencies, by and large, should not be outsourced.
However, this might change if it is found viable that resources or
knowledge from an external source could supplement the available in-
house resources. - Specify the service to be provided and identify the
rationale behind offshore outsourcing. The needs could include cutting
costs, enhancing service levels, moving to a different technology
platform, increasing technical know-how and skills within the
organization.

1.2.2 Quantitative Considerations

The costs of outsourcing incurred by the company would include contract
management costs, costs incurred due to the lack of understanding of
the project objectives and inadequately defined requirements and costs
incurred while accessing skills and expertise that are not available
internally.

1.2.2.1 Hard Costs

The total dollar cost remains one of the primary drivers behind the
management's interest in outsourcing. Cutting costs is not the only
reason behind offshore outsourcing as there could be a number of other
reasons to go in for outsourcing. For example, while sustaining
engineering projects, outsourcing has enabled cost savings, but
application development and system integration projects tend to rely
heavily on the need of expertise and resources and can be just as
expensive, if not more, than the use of internal resources. Ongoing
operational costs that could be avoided though outsourcing should be
identified. The type of outsourcing used could help in avoiding these
costs. Simple methods to avoid costs would include avoiding the hiring
of additional resources to support an application that is already in
production, avoiding significant investments in newer technology, etc.

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Outsourcing: A Decision of trust

1.2.2.2 Soft Costs

Soft costs would include intangible costs that have an important
bearing on the outsourcing decision and are often ignored. An
organization must take these qualitative costs into consideration while
evaluating the option. These soft costs would include the impact on the
staff, on other organizations, the legal environment, security
involved, the sensitivity, the planning-time, project time, the
operational risk, the technology risk, the relationship-risk, etc.

1.3 Moving Outsourcing Relationships Up the Value Chain

Many outsourcing relationships begin with optimism and mutual
amiability. Both sides profess the need for the client to focus on its
core-competencies while the outsourcer's commitment should be in
leveraging its technical expertise to deliver strategic value.
Outsourcing alliances are generally based on certain key business
drivers, as exhibited in the following table that details a
comparative-grid that should be used while deciding on your outsourcing
strategy. While transactional-alliances are dictated with outsourcing
motivators for building strategic alliances, a four-step model is
detailed in the following paragraphs. An outsourcing alliance begins
with the outsourcer exhibiting its specialized qualities. At the time
the contract is signed the outsourcer projects excellent performance
capabilities. But, after a year or so problems arise. The client's
objectives of becoming more focused are hindered. Cost reductions and
efficiency enhancements are not up to the mark. The outsourcer
struggles to address the clients obscure business objectives, meet
aggressive performance targets and also focus on its own profit
margins. Figure 1: Comparative Grid for deciding transactional
outsourcing strategy.

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This white paper addresses a four-step model that must be followed for
building strategic alliances. Offshore Outsourcing is not a typical
buying or selling transaction but a case of building long-term
relationships, where both the parties are convinced of mutual benefits.
From carefully selecting the right-vendor, establishing contract
measurements, managing and evaluating the contract, to identifying the
outcome measurement criteria, every facet of outsourcing needs planning
and diligent execution to make the relationship a successful alliance.

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Outsourcing: A Decision of trust

1.3.1 Selecting the Vendor

Outsourcing skeptics believe that an outsider cannot provide the same
attention as the in-house team. Therefore, a thorough vendor scrutiny
becomes vital before assigning critical technical roadmaps and
confidential information to him. Understanding the emphasis of a
vendor's business, or what it is that drives the vendor, is essential
while choosing the appropriate vendor to meet the specific needs. A
vendor selection team should be developed that would recognize business
areas for the project. The vendor selection team should comprise senior
management, legal staff with contract expertise, technical staff, end
users and financial staff. HSS proposes a vendor selection checklist.
The parameters on which the vendor should be assessed have been
carefully chosen, and it is advised that before entering into a
relationship, the vendor selection checklist must be completed.
Further, while taking a decision based on our vendor selection
checklist, it is advisable to assign weights to the parameters
mentioned. According, to a survey conducted by The Outsourcing
Institute, the three most important factors considered while choosing
an outsourcing vendor included price, quality and flexibility.

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It should be borne in mind that a vendor's business goals are always
different from those of the client. The client and the vendor must be
prepared to identify and resolve the differences that might arise. It
should be acknowledged that somewhere the external vendors would be
making money on the outsourcing agreement, otherwise they would not be
willing to enter into an agreement. Signing a contract in haste could
lead to working with a vendor who is not responsive to the company's
needs and who sticks precisely to the contract letter, charging the
agency for any additional services provided.

1.3.2 Establishing Contract Measurements

Measurements are the primary means by which the success or failure of
the offshore outsourcing process can be determined. Measurements ensure
the accountability of the vendor and also determines the success of the
offshore outsourcing effort. If measurements are not in place at the
time the program begins, the contract cannot be managed effectively. -
Start with measures identified in the cost-benefit analysis. These
describe critical success factors where improvement should be seen.
Measurements must reflect the specific objectives of the offshore
outsourcing effort and must be readily obtainable through business
processes and procedures Metrics should be considered in three
different areas: outcome and performance based metrics, quality
assurance metrics and work and operational metrics. The objective is to
measure the success of the vendor in meeting the business requirements
of the agency. These measurements would be the tracking mechanisms for
contract. Contracts should include specific clauses about what would
happen if the vendor's performance were not up to
expectations.Understand what is being measured to ensure that the
appropriate business needs are being met and that an analysis could be
performed on the measurements selected. For example, tracking total
costs does not allow for a breakdown of why costs increased. It will be
important to know whether an increase was due to non-performance or due
to an increase in functionality that improved operating efficiency. -
Define expectations in the contract. Metrics establish what is expected
and what happens if expectations are not met. Use metrics that support
business goals. If cost-effectiveness is a major decision driver,
include contract provisions to encourage the vendor to reduce costs for
the agency. Ensure that measurements can be tracked consistently.

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Outsourcing: A Decision of trust

1.3.3 Managing and Evaluating Contracts

Once a project has been outsourced, the agency is not absolved of the
responsibility for the service/ process and its success. Many
organizations experiencing offshore outsourcing complications have not
paid enough attention to managing the contract. Contract management
requires the ongoing participation of internal staff in the outsourced
project. Areas of involvement include strategic planning, quality
assurance, phase containment, change management, and defining and
monitoring the measurements. Consider the following nine factors in the
course of managing and evaluating and outsourcing contract.

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Outsourcing: A Decision of trust

1.3.4 Designing and Managing the Management Mechanism

The support and commitment of the senior management is essential while
developing a strategic outsourcing alliance. Senior executives who
consider sustaining assignments a burden are more likely to view
offshore outsourcing solely as a cost-cutting tool or would neglect the
relationship altogether. Conversely, the senior management that sees
potential value and competitive advantage in their alliance with the
vendor are more willing to take ownership of the outsourcing
relationship, and would dedicate the resources needed to identify
opportunities for enhancing value and scouting for furthering the
relationship. Both clients and outsourcing vendors have incentives to
make the alliance work. For clients, the costs of switching vendors or
of taking projects in-house are exorbitant; for vendors, being dropped
by a client means a loss of revenue, loss of more business and also a
blemish on their reputation. The stakes are even higher with strategic
outsourcing partnerships. To make things work, the vendors should have
a well-defined internal organizational structure managing the offshore
outsourcing relationship. As would be mentioned in detail in the
following sections, HSS encourages organizations to go in for a well-
defined Partnership Model. HSS has institutionalized a strong
relationship model, which has proven itself in our growing business
with customers like Nokia and NEC. The model has an amalgamation of
all-essential risks, roles and responsibilities of executives driving
it - Relationship Owner, Relationship Manager and Program Manager.
These are well framed and are shared with the client.

1.4 HSS: A Proven and Mature Outsourcer

HSS, a subsidiary of Hughes Network Systems, USA (GM group company),
specializes in providing outsourcing services to Fortune 500 companies.
Our reputation in the telecom industry attaches substantial weight and
credibility to the outsourcing models and offshore services we provide.
Another white paper titled 'HSS: A Proven and Mature Outsourcer'
enumerates HSS's experience with executing offshore outsourcing
assignments. The white paper details the key success factors, which has
helped HSS establish its credibility as a sought after provider of
offshore outsourcing services to the explosive communications industry.
The paper also covers the HSS outsourcing process flow from the
Contract / SLA Signing stage to the Offshore Project Execution phase.
The white paper is supplemented with the numerous risk-mitigation
measures HSS undertakes ensuring the smooth execution of offshore
projects. Finally, the paper elicits a case study bringing out how HSS
was able to instill faith in its client and thereby transitioned a
transactional relationship to a long-term strategic relationship.

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