The US arm of a Japanese multinational Consumer Electronics company required Strategic Sourcing support to tailor its centralized IT organization’s Service costs to match its new revenue structure after a key business unit (BU) exited the US market. Due to the shared nature of the IT organization, initial IT cost reductions accompanying the BU exit were not proportional with the revenue reduction. The situation caused a ‘stranded cost’ issue that impacted the remaining BUs profitability going-forward. This issue was made more difficult by an IT expense allocation methodology that was overly complex.
The company engaged Tony Raimundo, a member of the OnDemand Professional Network with Strategic Sourcing / IT Category Expertise and an extensive IT Operations background, to participate as a member of a steering committee with the CIO, CFO and representatives from the going forward BUs to address the ‘stranded cost’ issue. The team was given 90 days to consider all options including outsourcing the IT function.
DISCOVERY & EVALUATION
After establishing a working team that included the CIO, the Finance team, and representatives from each BU, business requirements were defined and roles & responsibilities were communicated to the project team. The team agreed that the following deliverables would be required.
- Articulation of a complete IT Service Catalog illustrating delivery costs for each service
- Commitments from BUs for IT Services & volume
- Detailed Sourcing plan (including a detailed RFI document) to solicit proposals from IT Outsource (ITO) providers
The team assembled internal & external data and analyzed IT spend for the previous 18 months clearly mapping relationships of costs to existing Services in the existing IT cost allocation methodology.
The team discovered that imprecise allocation of IT costs was causing essential allocations of IT Services such the firm’s SAP ERP infrastructure to be overstated due to the inclusion of unrelated IT Services, such as – Business Compliance & Security, BU specific projects and Application Support. Consequently, the inflated allocations limited BU’s ability to opt out of the underlying Services and caused Services like the SAP ERP infrastructure to come in above industry benchmarks.
Armed with this insight the team developed a new IT Service Catalog that presented BUs with a differentiated set of IT Services and corresponding costs. This provided a more granular model from which BUs could select IT Services levels and budget required. With this input from the BUs, the CIO was able to aggregate BU requirements and develop a baseline IT budget for the coming year.
A two-pronged Sourcing Strategy was agreed which would include an RFI round, and an RFP round soliciting IT Outsourcing options along with targeted IT Sourcing support that would allow the existing CIO organization to submit its own proposal to continue providing IT support.
RFI Round – Using the new IT Service Catalog as a platform, an RFI was conducted to collect data and recommendation for optimization from six potential ITO providers – Fujitsu, InfoSys, Knack Systems, NTT Data, SoftTek, and Tata Consulting Services.
RFP Rounds – Five ITO providers were invited to participate in the RFP round. They were all measured on business viability (2%), service excellence (5%), people and relationships (5%), professionalism (3%), transition (10%), solution implementation (10%), business/product strategy/use of technology (8%), budgetary discipline/predictability (12%), and economic evaluation (45%), with a heavy weighting on the proposal economics as defined by the steering committee.
Given the quality of the pre-work done by the project team prior to the RFP, demand management resulting from the IT Service Catalog exercise, and the participation of the CIO organization as an aggressive sixth “bidder,” the team went into the RFP with a “floor” budget that included a minimum savings of $3.15MM (19.5%) over the baseline budget.
The RFP process resulted in proposals that would potentially reduce the “floor” budget by an incremental $1.1MM (9%) to $1.7MM (13%).
- Steering Committee opted for a hybrid CIO ‘floor’ proposal with $800K of additional optimizations based on insights gained from the RFP process
- IT Budget reduced by $3.95MM (24.5%)
CRITICAL SUCCESS FACTORS
- Effective partnership between CIO, Finance, and BU teams around clear project objectives led to successful project outcomes.
- Fact-based and data-driven IT Service Catalog enabled crucial decisions to be made around IT service consumption and crisp planning by the CIO organization.
- CIO, Finance, and BU gained exposure and strongly bought in to a procurement IT category management process.
- Deep preparation in understanding existing IT services and costs enabled client to be highly credible and effective in interactions with bidders driving significant reductions in successive proposals through the three round bidding process.
MEET TONY RAIMUNDO
OnDemand Professional Network Member Since 2020
Tony has over 20 years of experience as a senior strategic sourcing, IT & operations leader. He is known as a results oriented, and delivery driven strategic thinker that consistently achieves above average savings for his clients.
He has extensive international experience in Procurement, Strategic Sourcing, IT and Operations Management and has sourced hundreds of millions of dollars worth of goods & services globally across many industries in such categories as IT Hardware & Software, Telecommunications, Real Estate & Facilities, Benefits & Insurance, Packaging, Professional Services, Legal, Fleet Management, etc.
Prior to his consulting career Tony held senior roles at AT&T, Lucent Technologies, Citigroup, and Bridgewater Associates. Tony is fluent in English and Portuguese and holds a BS degree in Information Systems from New Jersey Institute of Technology and a BA degree in Economics Rutgers University.