Lessons Learned from Sun’s Outsourcing Initiatives

Hello once again, Sun Inner Circle readers. It was a pleasure to have met some of you in person at the Inner Circle breakfast at JavaOne in San Francisco on May 10. If you missed this event, look for videotaped highlights in the August edition of Sun Inner Circle.

In last month's Sun Inner Circle newsletter, you may recall that I made the case that over time, IT organizations will become the aggregator of secure, Internet-based services instead of writing applications as they do today. This conclusion was based on my belief that IT’s role is to help focus on core competencies. That’s why it occurred to me that it might be a good idea to look at the related subject of outsourcing, which has now become a mature business process at companies like Sun.

To better understand the state of outsourcing today, I turned to my colleague Matthew Ricks, a 19-year Sun veteran. In his position as senior director of our vendor management organization, Matthew is responsible for our four largest outsourcing contracts, a process that began in 1999 and covers areas such as datacenter support, network management, our internal helpdesk, and application development and maintenance.

As you can imagine, Matthew’s experience in all areas of outsourcing is quite broad, and in a recent conversation, we talked about lessons learned from Sun’s experiences in using outsourcing as a critical part of operations.

WORRALL: Let’s start by asking the most important question: Are we seeing tangible savings and productivity gains through our outsourcing efforts?

RICKS: The areas Sun has outsourced — datacenter support, ERP support, network infrastructure management, internal helpdesk, and application development — have become less costly and more efficient. For example, after transition costs, we’re seeing about 30 percent run-rate savings through the outsourcing of our application maintenance and development function. As far as productivity goes, the returns depend on the outsourcing contract, but the productivity improvements average somewhere between 3 and 5 percent annually.

WORRALL: How has Sun managed to attain these efficiencies through outsourcing?

RICKS: Outsourcing objectives usually revolve around cost and operational efficiencies, and with our most recent outsourcing initiative, we identified four key and interdependent objectives in these areas. First, we wanted to achieve significant operational cost savings through labor arbitrage. That’s just part of the picture, though, because our second objective has always been to find outsourcing opportunities that give Sun more variability and flexibility to meet changing business conditions — and allow us to ramp up or ramp down, depending on the market.

This flexibility allows us to tap into a vast reserve of talent — and leads us to our third objective, which is to gain access to skilled IT resources to enable Sun to concentrate on its core and strategic objectives. By tapping into this pool of talent, Sun is also able to meet its fourth outsourcing objective of leveraging the operational and risk mitigation best practices that our outsourced vendors provide through service-level agreements. This gives us new levels of efficiency because process discipline is usually easier to maintain when working with outsourced vendors.

WORRALL: How has Sun put these four outsourcing objectives into action?

RICKS: A quick look at our outsourcing history helps explain how Sun has successfully pursued an evolutionary outsourcing strategy. Seven years ago, in 2000, Sun really started executing on big outsourcing initiatives with EDS and AT&T. With EDS, we began outsourcing datacenter support, as well as support of our ERP applications — much in the same, you recently suggested enterprises will eventually do with most business-critical applications.

WORRALL: We concluded that operating the IT infrastructure really isn't a core competency for us, can you describe how we came to that conclusion?

RICKS: That’s the conclusion Sun reached in 2000 when we entered into a fairly comprehensive network management contract with AT&T. As you’ve pointed out, Sun is not in the business of managing and supporting its wide area network, or local area networks. Other companies, however, are in that particular line of business — and are expert in providing network management with telcos worldwide — so we outsourced these activities to AT&T.

A few years later in 2004, Sun handed over its internal help desk to EDS specialists in India. And then, if we fast-forward to 2005, we turned over support of over 800 applications to Computer Sciences Corporation (CSC), which now performs application coding, testing, implementation, and support for Sun.

WORRALL: So where do you draw the line? What can be outsourced — and which functions are best kept in-house?

RICKS: Figuring out what to outsource and what to keep usually starts with identifying your core competencies and which internal IT activities can be done best by third parties. We rely heavily on the Control Objectives for Information and Related Technology — or COBIT for short — best practices laid out by the Information Technology Governance Institute (ITGI). In addition to providing a superb framework for identifying IT shop activities where third parties might be better than using Sun-badged employees, COBIT standards help identify the attributes of the appropriate outsourced vendors. Once these areas are identified, you have to take a step back and consider how much proprietary and sensitive information the enterprise should make available to an outside vendor. Here at Sun, we’ve held on to functions such as business engagement, security, compliance, architecture, business planning, and vendor management.

WORRALL: Once areas with the potential to be outsourced are identified, how does Sun find suitable vendor candidates to run these processes?

RICKS: We employ standard RFI/RFP processes. We issue a request for information (RFI) to a number of potential vendors to get a read on their capabilities on the functions being considered for outsourcing. Once we meet with these vendors and review their responses, we downselect to a fewer number of vendors to then issue a request for proposal (RFP) to. In the RFP, we ask for the vendors' plans on how they would meet our requirements, including initial pricing and their responses to our standard terms and conditions.

We also meet with these vendors multiple times to answer their questions about the bid and to get a preview of their proposal. Due diligence is also a key part of this process. We allow the vendors to come in and inspect our environment and to ask more detailed questions. We also perform due diligence on the vendors by visiting their delivery centers and interviewing their customer references.

WORRALL: At Sun, we use dynamic bids for many things — does dynamic bidding come in to play in IT outsourcing as well?

RICKS: Yes it does; we actually employ this quite extensively within IT. The dynamic bidding event — or DBE as we call it — is very much like a reverse auction where sellers compete with each other for a slice of the business pie. Through the DBE, vendors submit pricing with both fixed and variable components of the deal across a range of scenarios we create. This contributes to the efficiency of the selection process significantly.

WORRALL: How do you manage radical change so the transition is as nondisruptive as possible?

RICKS: Honestly, some functions are easier to outsource than others. Technical knowledge is generally easier to source, but functional domain knowledge of business processes is usually harder to replace. One way to reduce disruption is to have the outsourced provider hire some of the staff whose jobs are being affected — and at Sun we’ve seen that this creates a valuable bridge between organizations.

No matter how you do it, there will always be some level of disruption, so the goal is to try to minimize the disruption or get through the disruption more quickly. This is a real balancing act — too short and there is not enough time to get everything done, and too long and there is a delay in getting to steady state.

WORRALL: As you’ve just mentioned, part of the transition process includes outsourcing someone’s job. Are there best practices with employees that make the transition more efficient?

RICKS: Over the last seven years, Sun has outsourced around 1200 IT positions, and a commitment to being very open about outsourcing plans has made handing over functions to outside vendors run more smoothly. We typically make internal announcements when a function is being considered for outsourcing, and then keep people informed about every milestone in the project with face-to-face meetings, teleconferences, postings on Web sites, FAQs, Webinars, e-mail, staff meetings — you name it.

In addition to openness and doing what we can to find jobs at outsourced companies or within other areas at Sun, we also provide incentives to people whose functions are being impacted.

WORRALL: And how do you maintain operational efficiency once the transition to outsourcing a function is complete?

RICKS: It’s important to remember that outsourcing is not the only element of IT efficiency in the enterprise. At Sun, we try to look at the entire IT picture to see where we can improve teamwork globally and across companies. This includes being able to let go of micromanaging tendencies by telling vendors what to do about something, rather than how to do it. In-house attitudes toward organizational discipline also need to change. You can’t just call your buddy in IT with a request anymore, because the cost implications of each service are very clearly spelled out in outsourced contracts. Processes must be followed much more closely, which drive discipline and standardization, and ultimately lead to enhanced quality.

WORRALL: What are the pros and cons of setting up shop offshore yourself as opposed to leveraging offshore outsourcing opportunities?

RICKS: In either area, you’ve got to do your homework. This includes substantial research on individual vendor performance, along with countrywide attributes in education, infrastructure, and business culture. India gets high marks in all of these areas, which is why it still remains one of the best destinations for offshoring. And for a primarily English-speaking company like Sun, the fact that English is spoken so well in India makes the country even more attractive.

WORRALL: Do you have a sense of what portion of our work today is being done offshore?

RICKS: Overall, I would say about 30 percent of the overall IT workforce at Sun is now offshore. This includes vendors and Sun-badged employees. But as for the exact percentage of work now done by people in outsourced companies, it all depends, because we often use our resources on an as-needed basis.

WORRALL: Is wage inflation in India making other outsourcing destinations worthy of consideration?

RICKS: There has been wage inflation in India, but it has been manageable. India still has numerous cost-effective outsourcing possibilities. Places like China, the Czech Republic, Russia, and South America are certainly interesting places to watch, but India remains very attractive because of high levels of English proficiency and a nationwide commitment to IP protection.

WORRALL: How do the distant locations of outsourced vendors impact operations at Sun?

RICKS: Distance is a huge help in keeping us continually operating. Sun’s headquarters is on Pacific Time, and our Indian outsourcers operate in a time zone 12½ hours away, so along with our European and Far East locations, outsourcing provides us with a multiple-shift model that follows the sun. Occasionally the time zone differences get in the way of scheduling meetings, but that’s a very small price to pay for the overall gains in efficiency.

WORRALL: Any closing words of wisdom for companies just entering the outsourcing game?

RICKS: Number one, set the strategy and goals up front, and use them as your guidepost and focus throughout your outsourcing initiative. Second, be sure to have executive-level championship for the outsourcing effort. This will ensure active involvement and help from key stakeholders in functions that will be affected. And finally, make sure you have an engagement model and governance framework in place so the outsourcing relationship can be monitored and measured — and meet the objectives you identify at the outset of the outsourcing initiative. Overall, outsourcing is a viable and sustainable strategy for companies, as long as their objectives are clear.

Bob Worrall
CIO, Sun Microsystems, Inc.
cio@sun.com