Flexibility is becoming the most important driving factor for outsourcing
Sourcing and outsourcing of IT are established tools to achieve different business objectives. Outsourcing is increasing, but in some areas such as service desk, some organisations also consider insourcing. To tackle the sweeping changes in IT and business, managers will be forced to re-evaluate their sourcing practices, according to Gartner. Two areas of change that organisations need to address are new technologies and delivery models. Cloud services are an example of both.
Each year, 3gamma conducts an insight survey among CIOs and IT leaders with the purpose of gaining a better understanding of how companies successfully can source IT. Results from the 2014 survey show that outsourcing of IT is growing in importance and will continue to increase (see figure 1: “Future of Outsourcing”).
The principal driver for outsourcing IT remains cost reduction. However, flexibility in various forms is becoming increasingly important. 34% of respondents in the survey consider flexibility to be the principal driver and many IT organisations feel trapped in fixed agreements (see figure 2: “Driving Factors”). The flexibility aspect considered most important is the ability to rapidly adjust volumes and costs. Other key aspects include the ability to change service content and levels, and being able to capture opportunities for innovation by readily applying new technologies. This means that second and third generations of outsourcing will require a more agile delivery and an agile outsourcing. Research by Gartner also confirms that organisations will continue to make agility a priority.
Realising the value of outsourcing through an agile approach
To see how agile thinking can be applied to ensure flexibility in an outsourced delivery, we first need to define what agility is. In a business context, agility is the ability of an organisation to rapidly respond to change by adapting to market and environmental changes in productive and cost-effective ways (Wikipedia). In software development, agility has formed a philosophy summarised in The Manifesto for Agile Software Development:
We are uncovering better ways of developing software by doing it and helping others do it. Through this work we have come to value:
- Individuals and interactions over processes and tools
- Working software over comprehensive documentation
- Customer collaboration over contract negotiation
- Responding to change over following a plan
That is, while there is value in the items on the right, we value the items on the left more.
Hence, agility is about attitudes and behaviours. For the purpose of this whitepaper, we define agility as the ability to achieve the flexibility required in outsourcing.
Agile software development has successfully been used by IT organisations for years. Benefits include rapid delivery of measurable outcomes, the ability to focus on highest priority first, transparency in status tracking and greater employee retention. Today however, agile thinking is not restricted to software development, but has found its way into a number of different fields where it has been shown to successfully increase efficiency when managing projects. In the book Agil projektledning, the author Tomas Gustavsson discusses factors when agile project management is particularly valid, such as in managing change and bringing value to the customer during the entire project. He also sets out criteria for when an agile methodology will be successful: when objectives are unclear, the environment is changing, project objectives are complex and when a fast result is required.
These factors and criteria are important even in outsourcing, why an agile approach to outsourcing is indeed valid. Outsourcing as such is a complex project, and with prerequisites often changing during the contract period, it is essential not to wait until the end of the period to achieve the desired value. Figure 3 above shows how agile thinking can be translated to outsourcing.
Applying agile IT outsourcing requires a new approach to each step
Outsourcing is typically done in four steps. As the outsourcing market is maturing, the process is becoming more standardised. To achieve an agile outsourcing, a number of actions need to be taken in each phase of the process. Step by step, this white paper provides tangible recommendations and actions to consider.
The outsourcing process
Phase 1, Strategy: The first phase involves reviewing the sourcing strategy and available options. This means deciding why and what to outsource. A clear decision and management commitment is essential.
Phase 2, Commercial: The second phase involves preparing the outsourcing by designing the delivery model, planning the outsourcing and starting the commercial transaction process. It also includes specifying and issuing an RFP (Request for Proposal), evaluating vendors and negotiating and signing a contract.
Phase 3, Transition: People, assets, third party contracts and knowledge must be transferred to the new vendor before the service commencement (handover to the vendor). Interim procedures, processes and governance must also be put in place. During this phase, excellent communication is key.
Phase 4, Transformation: The final phase is where the real work begins. It involves transforming the service delivery with technology, processes and organisational matters into the desired state to achieve the objectives of the outsourcing.
There are a number of key considerations and measures companies can use to achieve agile outsourcing. The following sections present insights for each phase – Strategy, Commercial, Transition and Transformation.
The strategy phase is about defining why and what to outsource. To be successful in outsourcing, it is key to understand and express what you want to achieve and how objectives should be prioritised. Examples of flexibility objectives that promote an agile approach are:
- Scalability: Ability to scale up in growth and scale down in downturn.
- Cost flexibility: Ability to adapt costs depending on changing business needs.
- Flexible service levels: Ability to increase or decrease service levels depending on the shift in business demand.
- Innovation: Ability to easily and proactively bring in new innovative technologies and services.
A trend in outsourcing is a shift to more outcome based managed services and solutions. Using a result oriented sourcing strategy instead of a traditional transaction oriented approach will facilitate agile outsourcing. It will also impact your strategy for scoping and defining what services to source.
Approach for achieving objectives
The objectives above are typical drivers in outsourcing, but few managers ask themselves how these will affect their way of working. Furthermore, managers need to ensure that the measures taken are being followed up.
After the transition, in the beginning of the execution of the contract, the client often feels that reality differs considerably from the outsourcing objectives. The client’s way of working has a significant impact on the delivery, and to improve fulfilment of the objectives, the measures outlined in figure 4 “Client strategy to reach objectives” below, should be taken.
Case Study 1: Including Internal measures into the strategy
After outsourcing, a large insurance company understood that the weakest link of their IT process was the demand and requirement process. They were also pressured by a major systems release that needed to take place during the outsourcing transition. It was crucial to ensure clear interfaces between the vendor, business and IT. The company took a number of measures to improve their ability to manage the new situation.
One immediate action was to implement a tool for securing the workflow that kept track of requirements, thus avoiding any misunderstanding regarding the status of the requirements and when they turned into an order. The order was then priced by the vendor and finally agreed upon
The next step was to set up a training program for IT managers, business managers and project managers. The training focused on how to manage the commercial process and write requirements, but also included a forum for sharing experiences and highlighting role models.
After the training, it was clear that this change process would take time. The establishment of a centre of excellence was initiated to be the focal point for improving the demand and requirements process, and to address concerns from both vendor and employees.
In conclusion, internal changes must be considered up-front when defining the outsourcing strategy and objectives to ensure that the benefits of agility and flexibility are fulfilled.
For more detailed recommendations, see 3gamma’s whitepaper Unleashing IT’s potential – delivering corporate value through agile IT sourcing. For managing a multi-vendor sourced setup, we recommend reading the whitepaper Are you getting stuck in the blame game? Service Integration in a multi-sourcing environment.
This phase is about driving the commercial transaction process to a signed agreement. It also involves preparing the internal organisation for change. An effective partnership requires understanding, trust and relationship that are essential to start building as early as possible.
Approach for collaboration
A tool we recommend is the collaborative negotiation approach. This involves not specifying the details of the solution in the RFP, but instead asking the vendor to propose how they would deliver the services. In the negotiation that follows, the details are then outlined together with the vendor before signing the contract. This approach enables the vendor to positively influence processes and solutions, enabling an efficient service delivery. One drawback of the approach is difficulty in comparing different offers, which may lead to limited competition. The process can also be lengthy depending on how many vendors you invite to the process.
Another collaborative approach is co-sourcing, where a vendor first is selected on a number of general criteria. Then a frame agreement is signed and the outsourcing plan is developed in close collaboration with the vendor. Outsourcing is then executed step by step, sometimes starting with one or two projects or only staff augmentation, with the intention of growing according to the plan. This reduces competition and the possibility of gaining the lowest price, but can be beneficial when sourcing maturity is low or the scope is unclear. Co-sourcing can be a suitable first step in the outsourcing journey, to be replaced by a more competitive procurement after a year or two.
Formulating a contract to enable flexibility
Although collaboration is more important than contract negotiation, a contract is still needed as a base for the delivery. For a successful implementation, certain principles and cornerstones are critical for the contract. Flexibility can be achieved by building an outcome focused relationship and collaboration with the vendor. This method is the building block of the Vested way of sourcing and is summarised in five simple rules:
- Focus on outcomes, not transactions. Base the compensation to the vendor on objective achievements rather than transactions.
- Focus on the what, not the how. Statements of work that in detail describe how to deliver a service inhibit innovation and flexibility.
- Clearly defined and measurable desired commercial results.
- A reasonable pricing model with incentives. Use a pricing model where the price changes if the prerequisites for the model change. Also include incentives for the vendor to achieve the desired results.
- A collaborative governance model that provides insights and not just overview. The model should support changes and development of the agreement and enable innovation.
Similar to the fourth rule, Gartner recommends implementing a gain-share strategy to motivate vendors to improve performance.
Other contract terms, such as effective exit clauses, are today standard and should be included in any outsourcing contract. However, an exit clause is not effective in creating agile behaviour in the daily delivery.
Evaluation of vendor proposals is typically based on a combination of price and a set of evaluation criteria. The criteria should reflect how well the vendor proposal meets the outsourcing needs such as delivery solution, compliance to processes, principles and commercial terms. Another area that should be included in the evaluation criteria is cultural fit. This can be difficult to evaluate, but the basic question is: “How well will we be able to co-operate and together develop the delivery after contract signing?”
Gartner recommends that organisations share their technology plan and road map with vendors, and require the same from them. The purpose is to avoid lock-in to standard technology and to ensure implementation of expected changes, such as cloud technology.
Governance of relationship
The agile manifesto values collaboration over contract negotiation. To set a good base for relationship and successful collaboration, include game rules with client principles and relationship intentions in the contract (see case study 2 on the next page). In addition, contract schedules such as governance structure, change control procedure, transition and transformation plan play an important role.
Relationship is difficult to prescribe in a contract. However, it is of utmost importance to build relationships between vendor and client on many levels as this will enable easier issue resolution, contract changes, and delivery improvement. Sharing strategic views and values is important and relationship development should start early in the process. Continuity of people involved in the different phases is also fundamental.
Building a positive relationship early in the process is essential. Worst-case scenario is when the customer has a sourcing team negotiating with a vendor bid team and none of the participants represent the delivery capability. Ensure continuity, involve your service manager and require that the vendor include their delivery manager in both the transaction process and negotiation.
Case Study 2: Using the contract to foster good relationships
An international company in the pharmaceutical industry sought to improve service delivery as current performance did not meet expectations. The company decided to move into a multi-source solution, including insourcing of critical activities to ensure control across the delivery of end-to-end services. They established a new service delivery model to transform services and to provide a solid platform for investment and growth. The current infrastructure vendor was replaced by five new ones. The objectives of the multi-sourcing were to give the company more agility in shifting vendor and to get the best of breed in different key areas. After the new agreements with the five infrastructure vendors, they ended up with a total of eight vendors as they already had contracts with three vendors for application management. To manage the relationships, the company defined an ecosystem with the purpose to encourage co-operation, foster good behaviour and make each stakeholder understand its contribution to the system.
They aligned the current contracts to have one common co-operation policy across the vendor base, which incorporated the following guidelines:
- Put the client first: Resolve the business problem first and disagreements later.
- Be accountable: Demonstrate accountability and demand accountability.
- Share knowledge: No change is successful if the entire ecosystem is not prepared.
- Non-solicitation: The client succeeds when we bring new talent and play within our space.
- Work collaboratively: We collectively make the client succeed or collectively fail.
- Demonstrate thought leadership: Challenge the client to do the right thing.
- Think long term: The ecosystem will grow if we all have a shared long-term vision.
The co-operation policy put a focus on fostering good behaviour and the company followed up KPIs on how well the parties in the system contributed. The company regarded itself as one of the parties that should follow the guidelines.
Transition involves preparing the new set-up and the handover of people, knowledge, assets and contracts to the vendor. Key elements in an agile outsourcing arrangement include governance and relationship. A clear governance structure is essential. It should be defined in the contract and established during the commercial phase. A best practice governance structure typically consists of operational, management and executive levels.
To achieve an agile outsourcing, a commercial committee should be formed as a preparation for a strategic monthly/quarterly management meeting. In the commercial committee, a contract manager from the customer and an account manager from the vendor prepare all requests for additions and changes to the contract. It is normal that requests for change occur even before signing the original contract.
Other committees that should be established are an innovation committee and an operational development committee. The innovation committee has an external outlook and considers potential hinders for parties to reach the objectives. The operational development committee is internally focused on the design of IT processes and continuous improvement. Both committees support the delivery and the relationship to achieve business objectives, rather than pure contract fulfilment.
Good communication is essential in every phase of the transition. As soon as the contract is signed, the communication between vendor and client must be aligned. We strongly recommend a common approach to communication, especially if the deal includes the transfer of people.
Transformation and onwards
Describe and agree upon desired changes in a transformation plan. However, agile outsourcing is about adjusting to new requirements along the way. An outsourcing contract is typically 3-7 years while a transformation plan is 1-2 years. Both are long time periods during which the business and environment will change.
Completion of the agreed basic changes in the IT environment is key to gain the efficiency that the vendor has anticipated in its commercial offer and to achieve the cost, time and quality objectives set up in the project. Since technology and business continuously change the conditions and prioritisation, the transformation project should jointly be reassessed by the client and the vendor. Agile project management is suitable for a long and complex project such as a transformation project.
Moving forward, it is important to ensure correct prioritisation based on business needs. This requires a common view on strategy and vision, which is especially important in a multi-vendor environment. Ways of achieving this include conducting strategy sessions, establishing shared business objectives, designing a scorecard and building vendor-customer teams. See also figure 4 regarding approach for achieving objectives.
It is crucial to understand that change takes time and expected results will not come automatically. A clear strategy must be in place for the transformation regarding retained organisation, vendor management, governance structure, adoption of processes, new capabilities etc. Do not assume that the line organisation will solve this without guidelines and training. After the transition, the organisation will require support to work with optimisations in parallel with securing delivery. These areas are imperative for success and will cause significant problems in the future if left ignored.
Management needs to ensure stable performance from the organisation despite any uncertainty employees may feel during the outsourcing. This means working to increase understanding, predictability and continuity of the change process. There are five key guidelines for management to achieve this:
- Continue to work with adopting processes to outsourcing in a planned way
- Give employees extensive training in the new way of working
- Put mechanisms in place to encourage ethical behaviour from all parties
- Use role models for change behaviour
- Support the organisation and line managers in the change
This paper has explored how agile thinking successfully can be translated to outsourcing. The advice and insights offered do not represent a complete guide of how to achieve agile outsourcing, but they support a suitable start on the process to achieve agility and your sourcing objectives. Agility is about attitudes and behaviour. Consider how to interact and collaborate with your outsourcing partner to attain the flexibility, scalability, cost reduction and innovation that you target.