Reimagining IT sourcing: How to improve agility, responsiveness and business alignment through a directional approach

Sourcing

Innovation, digitalisation and emerging technologies are top of mind for many CIOs. They are left stuck between a rock and a hard place: balancing maintenance of legacy environments and early generation outsourcing contracts with innovation and rapid change. Inevitably a contradiction emerges: the strive to secure maintenance of legacy environments through single sourcing agreements while at the same time requiring cost efficiency, flexibility and innovation. Finding the best sourcing solution in this scenario isn’t easy and requires great effort. But it’s an effort that is necessary to stay competitive. The gain is a leverage in terms of not only innovation and competitive advantage but also a better relationship to the business, something many IT organisations suffer from.

The traditional approach to sourcing is top down, waterfall style. The underlying purpose of the contract is to ensure service provider accountability for predefined requirements. This creates a ‘control and command’-focus, where the buyer monitors the service provider through various KPIs/SLAs with associated penalties. Traditionally, companies have approached IT sourcing through a sequential strategy development process; business strategy feeds IT strategy, which in turn defines the IT sourcing strategy. The sequential approach; cascading downwards to the service providers, doesn’t give room for input from the service provider, which means the outsourcing company loses the opportunity to benefit from the vendor’s expertise outside of what has been contracted. In 3gamma’s experience, IT sourcing strategies developed using this approach also lack alignment with business strategy. The strategies applied are often generic and provide limited support for the business strategy. The sequential approach is rigid and inflexible: it creates a false sense of certainty and leads organisations to lay detailed plans and principles for a large number of areas. In an ever-changing environment, these plans soon become obsolete and misaligned, causing missed opportunities and disjoint internal processes.

bimodal_sourcing_figure_1

Cascading strategy formulation is fraught with risk of misalignment. Each organisational unit involved in the strategy formulation process risk accentuating the misalignment following their interpretation of the overall objectives, its internal politics, existing legacy and external forces. In addition, it’s a slow process where misalignments are cemented into long sourcing contracts.

A symptom of this rigid and inflexible approach is that business units go directly to service providers, bypassing the IT organisation and IT sourcing team, in order to ensure fit-for-purpose buying. This way, business functions bypass the rigid processes connected to IT and sourcing. But more importantly, they’re able to source IT in line with their expectations. If this approach becomes a norm within an organisation, the IT sourcing landscape becomes fragmented and costs will increase. But if the IT organisation fails to drive innovation, the business will acquire it elsewhere.

Us versus them: the folly of an unbalanced contract

The traditional approach is not meant to be flexible. On the contrary, it’s meant to ensure that the service provider takes all the risk and has no leeway to create or cause increased costs. The relationship with the service provider in the traditional approach is characterised by an ‘us versus them’ mentality with constant monitoring of the service provider’s activities and a continuous quest to find faults in the delivery. To base the relationship with chosen service providers only on the terms of the purchase order or contract isn’t the way to go. Not only does this inhibit innovation, but it also creates friction that can lead to higher costs and disputes.

Three main symptoms derive from the traditional approach and are consequences of placing all the risk on the service providers:

  • Pricing model and legal terms and conditions are not challenged, the service provider is not questioned
  • The solution likely does not fit into the IT (target) architecture
  • The IT strategy is not adhered to. A parallel universe is created, piggybacking on the same IT landscape/environment but with different terms and conditions.

However, there is an option that enables—contrary to the traditional approach— more flexibility and can provide a platform for innovation.

Directional IT strategies – creating elasticity in IT sourcing

Bimodal IT is one of the top ten IT sourcing trends for 2016. Bimodal IT represents a new form of sourcing IT, driven by the need to align IT sourcing with business strategy. This new and adaptive approach to IT sourcing requires agility, strategy differentiation and stronger feedback mechanisms in order to reap the benefits of cost efficiency, flexibility and innovation that are desired:

  • Agility and responsiveness: Sequential strategies and low-frequency strategy updates create bull-whip effects and strategic misalignment. To create agility and responsiveness within IT, and IT sourcing in particular, companies need to revisit and redefine their approach to IT sourcing with a higher frequency. This means sacrificing the perceived safety of a detailed long-term plan and moving to a directional IT sourcing strategy outlining key effects to be achieved. It also means that companies need to work through the directional strategy with a higher frequency.
  • IT sourcing strategy differentiation: No business is homogenous and can be treated as such. Legacy systems can be maintained by the standard, long-term service providers as per normal practice and vendor management processes. But emerging innovative solutions closer to the customer should be handled by service providers that share the risk, have area expertise and who will learn with the buyer on the way. The key difference being maintaining versus innovating and getting things done.
  • Feedback: It’s critical with feedback, not only to support revising the IT and IT sourcing strategies, but also to capture input from service providers. As the market evolves, the solutions and practices offered by service providers can become the basis for strategy revision. Consequently, efforts should be shifted from upfront requirement definition to dialogue with service providers and upstream feedback.

bimodal_sourcing_figure_2

A directional strategy is only the first step – execution requires a new way of working

To succeed with directional IT sourcing, the operational model needs to be adapted. To fit this approach into existing processes—from strategic to operational level—a differentiated approach is required. Vendor management teams have to accept going past the normal process of procurement by “selectively circumventing traditional processes to get the job done with speed, agility and calculated risk”.

Another integral part of succeeding with the directional approach to IT sourcing is the service provider relationship. With the traditional approach, the relationship is characterized by an ‘us versus them’ mentality. The adaptive, directional approach demands a partnership rather than simply a contractual agreement. The primary building blocks of a successful partnership are chemistry and trust. It’s unlikely that the partnership will be long and prosperous if there’s no compatibility with the service provider. If there is no compatibility, it will be difficult to build trust. These two components are prerequisites to a partnership where mutual goals can be formulated, agreed upon and strived towards. This requires the relationship to be built before a contract is drafted and negotiated in order to ensure that any tough negotiations on terms don’t affect the working relationship, which needs to continue on after the IT sourcing process has been completed.

A fundamental difference between a contractual relationship and a partnership is the flexibility of the contract. The contract either stifles or enables organisations to be adaptive in their sourcing. A service provider relationship built on the terms of the contract won’t be flexible and the delivery from the service provider will be constantly measured against the contract. A partnership, however, allows for flexibility where adjustments can be made along the way as seen fit based on changing conditions, and always with an open dialogue between the partners.

Creating elasticity in IT sourcing through the contract

The new opportunities and threats of the digital economy are forcing organisations to focus on fast, flexible and collaborative innovation. To compete, the IT organisation must be built to adapt both to new technologies and opportunities, as well as to the demands of the customer and the supply chain. The traditional IT sourcing procedures aren’t sufficient to deliver the level of agility, speed and innovation that a multimodal delivery requires. Adhering to these demands is primarily achieved by adjusting the soft aspects of the adaptive approach, namely the relationship to the service provider, but contractual changes can also be made to enable agility and a directional approach to IT sourcing.

Adopting an IT sourcing strategy that allows the business to respond more quickly to changes in customer demand and harness opportunities in new sectors and markets can be achieved by creating flexibility. A concrete way of materialising the concept of adaptive sourcing is through the contract itself.

The key part of the contract is the end goal of the project. A predefined statement of the goal—the finished product—will be the initial building block of the subsequent clauses in the contract, which enables this goal to be realised. Defining a joint end goal becomes easier the better the relationship with the service provider is, why this is an integral part of the journey to becoming adaptive. Defining the end goal as partners create an environment where the joint vision is the driving force, creating an enabling environment rather than a constricting one. Once the end goal has been defined, there are some considerations to be made when defining the terms of the contract:

  • No exclusivity: tying buyer obligations to one or more preferred service providers becomes a constraint. To remain agile and responsive, it’s key to maintain contractual flexibility.
  • Governance: Consider having a governance structure that promotes frequency and ease of decision making, i.e. less hierarchy and more focus on tactical and operational collaboration.
  • Service level management: It may not be possible to measure service levels in the same way as with standard agreements/collaborations. Decide on what measurement needs there are, if any.
  • Pricing: Rely on the standard service catalogue and pricing model of the service provider as much as possible. Custom solutions tend to increase lock-in affect and reduce service delivery quality.
  • Intellectual property rights: Service providers that have developed something new will own the solution unless otherwise agreed. Evaluate what IP rights should be attained, and if not, consider having a pricing model where a proof of concept is provided for a smaller cost but the final price is output based.
  • Warranties: This is where the goal statement plays a key role in the agreement to be able to go back and verify that expectations have been met.

Changing mindset: beyond the contract

Transitioning to a more adaptive approach to IT sourcing is not to be taken lightly. It will be difficult, but the journey is worth it. The traditional approach gives rise to some of the most common and problematic conditions that companies experience; stifling and expensive sourcing contracts, bad relationship with the business customer, difficulties in terms of organisational change and operational instability to name a few.

Final recommendations integral to changing mindset and ensuring sustainability in the change.

  • Find new ways of working in close collaboration with the business and selecting external partners
  • Adapt delivery models to cater for the increased need for agility, speed and innovation
  • Adapt and integrate new IT sourcing strategies and practices (e.g. agile development, crowdsourcing and engaging new, smaller providers)
  • Single-sourcing is not an option, IT sourcing must be adapted to its purpose
  • Take a strategic view on service provider relationships and review the mix of vendors to better respond to digital opportunities and innovations
  • IT sourcing functions act as internal multi-sourcing integrators managing the eco-system of partners, rather than gatekeepers
  • Apply an iterative approach and continuously adapt the sourcing process

About the author

Natalie is an IT Management consultant with extensive experience of multi-sourcing environments. She is specialized in operational excellence with focus on vendor management and closing the gap between business and IT. Natalie holds degrees in International Relations and Informatics and is certified in ITIL and Prince2.


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