Jens Ekberg, Head of Group Insights (left) and Peter Wahlgren, PhD, CEO (right) at 3gamma, recently authored the article “A strategic view of service provider relationships: How to realise value in contemporary outsourcing”, about how organisations need to identify selected strategic vendor relationships and invest in these to ensure operational efficiency and long-term strategic alignment.
In this follow-up interview with the authors, we delve deeper into this highly relevant topic to learn more about how organisations must think and act to fully leverage the benefits of specialised capabilities. Jens and Peter were interviewed by Jesper Nordström, Head of Group Marketing at 3gamma.
You have both written a number of articles about the challenges and opportunities of IT sourcing from different perspectives. Why is this such a hot topic?
JE: The IT sourcing space is undergoing a major shift and the way companies acquire IT capabilities has changed dramatically in recent years. This is partly driven by the ongoing digitisation and new emerging technologies, but it’s also an effect of increased maturity and sophistication. The mindset has changed from “outsource because IT is not core to the business” to “get access to competitive technologies and solutions”. Basically, outsourcing is moving from being a cost reduction tool to become an integral lever to deliver business value.
PW: An interesting aspect of this shift is that we are seeing companies adopt a multi-speed IT approach to IT outsourcing. Companies look to differentiate their approach across the service provider portfolio depending on the type of services in scope. We are seeing a maturing view how buyers and service providers approach commercial relationships based on the new type of services acquired from sourcing. Historically, the level of investment in the relationship was decided by the deal size, whereas we now see more strategic and business-oriented considerations. This has prompted companies to revisit how they approach service provider relationships. Big is no longer equal to strategic.
“Big is no longer necessarily equal to strategic.”
JE: Indeed, with the increasing digitisation smaller start-ups and specialist service providers have become key enablers of business development and are therefore of higher strategic importance than providers of commodity services. However, this raises the complexity of managing the service provider portfolio as it becomes more volatile and requires a range of management techniques.
PW: A key factor for companies will be to optimise the setup. There is a balance to be struck between the number and types of service providers and the cost-efficiency of the service provider portfolio. Diversity will drive complexity in processes, IT architecture and organisation. This is what makes this such an interesting topic.
In your article you mention three key areas to consider for defining vendor relationships: business and IT integration, variety and volatility, and commercial and operational risk. Can you elaborate on that?
PW: Well, as we discussed earlier, it’s no longer just about the contractual amount or deal size. There are several factors to consider. A large deal is likely to be associated with at least some level of commercial and operational risk, but it may still be a commodity service. What we see is often that companies over-invest in some of these relationships. However, tightly integrated and fast-changing services can be highly strategic but still be undermanaged or challenged from a procurement department with low insight into the business value.
“Tightly integrated and fast-changing services can be highly strategic but still be undermanaged or challenged from a procurement department with low insight into the business value.”
JE: Consider the adoption of internet of things. There are several service providers in this space that can bring advanced capabilities with a direct impact on a company’s end-customer experience. Most of these are smaller start-ups or highly specialised. Not only do they typically become highly integrated, but the level and pace of change is also likely to be high as we are seeing rapid development in this area. As a consequence, this kind of service provider becomes strategic, regardless of the deal size. It then follows that companies, and IT organisations in particular, need to take a more fitting approach to these service providers.
PW: And to give some perspective: not considering these types of vendors in favour of relying on incumbent service providers can carry significant strategic risk for the business. Companies that neglect exploring these opportunities can miss out on material opportunities. Being able to gain access to competitive technologies and solutions brings tangible benefits to the business.
As deal size is not the primary input into how to configure the relationship, how do you decide on what type of relationship to develop with your vendors?
JE: The generic answer is that it’s critical to understand the business dynamics, risks and what value the service provider delivers. There is no one size fits all approach to achieve that. In our article we outline four dimensions to describe the characteristics of a typical setup to manage services in different contexts.
PW: We’ve looked at how business and IT integration, variety and volatility, and commercial and operational risk impact the commercial model, the retained organisation, the approach to IT architecture, and governance model. As we outline in the paper, the responsibility, level of investment and focus, shift quite significantly in these dimensions. The overall takeaway is that it’s a significant management challenge to successfully integrate a diverse set of services. It’s important to understand the overall implications on IT and the business as a whole to realise the planned benefits of the sourcing.
“It’s important to understand the overall implications on IT and the business as a whole to realise the planned benefits of the sourcing.”
JE: Outsourcing never exists in isolation. It’s an integrated part of an IT organisation’s overall delivery. Organisations need to consider their approach to the service provider relationship both before and after the contract signing, asking the questions: “do we have the capabilities to manage this relationship?” and, together with the service provider, “how do we set up a value-creating relationship?” Companies must continuously adapt and refine the setup and move away from a transactional approach where appropriate. Value realisation starts after the contract is signed.
A key theme, not only in this article, but also in other recent articles, is the need for a portfolio approach and an associated lifecycle based management approach. What are the challenges and benefits of switching to this mindset?
JE: Yes, and it’s somewhat a logical conclusion from our earlier discussion. Multi-sourcing is to a large extent the de facto standard in business today and companies need to manage several service providers. The fragmentation of the service provider base, the characteristics of the services they provide and how companies set up their relationships need to be managed. It’s not possible to make discrete decisions on a per service provider basis as this would drive significant complexity and fragmentation. In this context it’s important to consider the entire lifecycles of the relationships. As things change, either driven by emerging technologies, new service providers, or structural changes, the relationships need to change. As Peter noted earlier, there is also a need to balance the number of variants of service provider relationship to control the complexities.
“IT sourcing can no longer be a separate strategy focused on a subset of IT’s objectives.”
How should companies approach IT outsourcing in the digital economy?
PW: It all starts with the business. However, after that it’s very context-specific. What we see is that sourcing can no longer be a separate strategy focused on a subset of IT’s objectives: it can’t just be about cost as this is detrimental to the business. A starting point for any company looking to increase the value of their IT outsourcing would be to adopt a more explorative approach, allowing for revisits and adaptations to the sourcing strategy based on internal capabilities, available external capabilities, outsourcing scope and the IT architecture. As noted in the paper, it’s important to allow for adjustments in all these areas to maximise the value of the solution as a whole.