In this whitepaper, 3gamma explores how IT can support cost reduction and innovation strategies through a business-oriented, agile approach to IT sourcing. The IT sourcing strategy needs to be viewed as an enabler of the overall corporate strategy. IT sourcing is not something that can be isolated to IT.
- Time to market and business development requirements have made IT agility a top priority for large organisations. Acquiring new capabilities, in a flexible way, has become increasingly important.
- In today’s market, there is an abundance of highly specialized vendors and solutions available. IT needs to manage and integrate these into existing delivery models.
- To realize the true value of IT sourcing, the IT sourcing strategy needs to be linked to corporate objectives and not focus on isolated IT metrics. While the pressure on IT budgets remain, the need for IT driven innovation increases. IT can no longer be an isolated cost centre, IT needs to become a high-performing service integrator.
- IT sourcing should be leveraged to enhance the strategy execution on a corporate level, not be a strategic objective in itself.
Acquiring capabilities through an agile approach to IT sourcing, will enable IT to deliver increased value to the business. In achieving this and creating the necessary prerequisites, IT needs to revisit the setup of existing sourcing agreements, the current sourcing object definitions, internal ways of working, the interfaces towards the suppliers, the overall application strategy and IT architecture.
Time to market and business development requirements have made IT agility a top priority for large organisations. In 3gamma’s ‘the state of IT service management in agile organisations’ survey, over 90 % of the respondents stated that IT has become an integral part of business development. The vast majority also stated that robust and high-quality service delivery and cost efficiency were hygiene factors that could not be disregarded. Altogether, the picture was clear, IT is expected to enable business development while at the same time supporting continuous operations.
Gartner has identified the need for IT to work in a two-speed mode, to build ‘bimodal capability’; IT needs to support both traditional ways of working (waterfall development, known vendors, strong governance, and minimized risk) and a non-linear mode (agile development, small innovative partners, and lightweight governance). In essence, to be able to support both stable operations and deliver innovation, IT must excel in two quite different areas and modes of operation.
Operating in a two-speed mode creates new challenges in how IT organisations acquire, integrate and organize resources and capabilities. Second and third generation IT outsourcers have recognized these challenges and are revisiting their IT sourcing strategies. As noted in 3gamma’s survey, a common trait is that these companies are moving away from the notion of ‘one strong partner’ to an ‘ecosystem approach’ to IT sourcing. Ecosystem variety is an enabler of innovation, as new capabilities can be developed in multiple different ways; through a single supplier, by joining capabilities from different suppliers or through acquisitions of capabilities. In supporting an innovation agenda, IT organisations must make sure they can provide the right mix of services and delivery models to the business, using multiple suppliers to create a consistent IT service. IT becomes a service integrator.
- The business needs reduced cost within the business, not reduced IT costs.
- The business needs new and innovative IT services, not an increased focus on “an IT-free business”.
In today’s market, there is an abundance of highly specialised vendors and solutions available. IT needs to integrate these into existing delivery models.
The market for IT services is booming and there is an abundance of capabilities readily available to outsourcers – consider the dramatic rise in software as a service (SaaS) offerings during the last couple of years. Apart from general offerings such as Salesforce.com, ServiceNow and the like, there is a clear rise in so-called vertically focused vendors offering a differentiated service for a specific industry niche. These vertically focused services are offering highly tailored, industry-specific expertise that can be readily integrated into an IT service portfolio. This creates significant opportunities for outsourcers to acquire highly specialised capabilities.
In a fast-paced economy, innovation is likely to occur outside of the legal structure of the company. Innovative capabilities need to be acquired and incorporated into an organisation through an outside-in approach to support an organisation’s innovation agenda. Consider for example a start-up that uses open-source technologies deployed on a public cloud to build an app that uses other companies’ APIs – innovation through assembly of external capabilities. Although the approach can’t be directly scaled to an enterprise level, the mind set and strategy can be used by mature IT organizations to drive innovation and business development.
To realize the true value of IT sourcing, the IT sourcing strategy needs to be linked to corporate objectives and not focus on isolated IT metrics.
The key rationale for outsourcing is often to reduce IT spend and to enable focus on the core business. IT is viewed as a cost centre and is tasked with providing low cost IT services. The IT departments’ tactic becomes standardisation, automation of IT services and reduction of cost per resource through outsourcing. As was clearly shown in 3gamma’s survey, this is not good enough in today’s economy. IT needs to move from being a peripheral cost centre to becoming a part of the core business. A majority of Swedish companies hold that:
- The business needs reduced cost within the business, not reduced IT costs.
- The business needs new, innovative IT services – not an increased focus on ”an IT-free business”.
This is not to say IT spend is not important, it still is. But to create sustainable, long-term value for the business, it is critical for the business that there’s an alignment between the IT sourcing strategy and the overall corporate strategy. All too often, IT sourcing strategies are crafted to support IT’s own agenda – thereby undermining IT’s ability to realise business initiatives, create cost savings within the business and enable new business. This creates a significant risk of underperformance and sub-optimization.
While pressure on IT budgets remain, the need for IT driven innovation increases
From a business perspective, cost reduction is often achieved by;
- Reduction of the volume/amount of resources needed to deliver the products or services.
- Reduced cost of each resource in service delivery and production processes, either by direct cost reduction or improved utilisation.
- Increase throughput per resource.
A common strategy is to reduce process variance, often by reducing the number of services offered or activities performed within a company. Companies can acquire less costly resources and use them effectively and efficiently, e.g. through outsourcing. IT organisations in ”cost reduction mode” often share one or more of the following characteristics:
- ”Centre of excellences” that group similar resources together to improve utilisation across the company.
- Standardized IT services with a limited number of variations of each service that are offered to the business customers/users, often based on a consolidated enterprise resource planning system.
- Major part of IT outsourced to a single/prime vendor with a considerable off-shoring component to leverage deal volume and size to reduce cost.
The negative side-effect is often an inability to manage innovation. Standardisation of processes and services (internally and towards suppliers) reduces flexibility. A focus on ‘resource efficiency’ within IT creates a substantial risk of sub-optimization, as IT focuses on improving utilisation of its own resources, lowering the cost of its own resources and not optimising the potential of the business. Consider the lock-in effects of a long-term contract with an off-shore provider and how this will contradict the need for continuous development of the business processes in staying competitive.
In contrast, IT organisations in ”innovation mode”, often share one or more of the following characteristics:
- Advanced capabilities within project portfolio management and supplier portfolio management.
- Autonomous, self-organizing teams with ”good enough” processes.
- Modularized IT architecture, solution components and systems.
- Non-standardization, both from a process/governance point of view and a service point of view.
- A multi-sourcing strategy balanced with in-house development.
To drive business development and innovation, IT’s internal processes, development methods, resources and partners all need to be flexible and continually developing. From an IT sourcing perspective, three key practices are apparent:
- Business-oriented, flexible and agile ways of working are needed to support demands on shorter time to market.
- IT’s service integration capabilities are instrumental in ensuring a robust, cost-effective and stable service delivery while at the same time managing an evolving supplier portfolio.
- IT needs to have access to a portfolio of internal and external capabilities to support a wide variety of requirements – there is no ”one-stop-shop” available.
Viewing IT as a pure cost centre under these circumstances is detrimental to the strategy execution.
As a part of the outsourcing strategy, the company transferred all their existing IT assets and existing agreements to the new outsourcing partner. They signed a five-year ‘IT as a service’ contract. Three years into the contract none of the planned effects had been achieved:
- No access to a development roadmap; the company was required to finance all development activities directly as change requests to the existing services. All development was, in contrast to what was expected, custom development just for the company.
- The quality of the services was poor and not in line with the business requirements. The vendor focused on optimising its resource utilisation on the account. This resulted in poor service, long lead times and operational disturbances.
- The relationship was focused on reactive conflict management rather than service delivery. The company was required to invest heavily in managing IT, as opposed to focusing on its core business.
To rectify the situation, the company is transitioning to a new sourcing model where it can acquire external capabilities in a more flexible way.
- Moving from a single-sourcing model to a multi-sourcing model.
- Insourcing critical competencies within process management and service management.
- Establishing an IT architecture function to control the development roadmap across its new vendor portfolio.
The new sourcing strategy and its execution is driven by the corporate strategy rather than a strict focus on IT metrics and a set of goals defined solely for the outsourcing agreement.
IT sourcing should be leveraged to enhance the strategy execution on a corporate level and not be a strategic objective in itself
In order to stay competitive, support innovation and at the same time deliver cost-effective, stable IT services – flexibility and agility need to be built into the sourcing strategy. The following guidelines should be considered for IT to stay in tune with ever evolving business demands:
- Break up the monolith applications into more autonomous components, both legacy solutions and major sourcing contracts. Move in the direction of delivering more autonomous solution components and gradually transition to more flexible application and vendor portfolios. Major enterprise resource planning solutions are often coupled with a major sourcing commitment and don’t support flexible acquisition of capabilities.
- Revisit the existing definition and clustering of sourcing objects, their IT architecture and integrations. Make sure the definitions and the IT architecture are business centric and not vendor-specific.
- Manage and maintain the sourcing objects’ integrity during the contract life-cycle to avoid lock-in effects. Do not transfer the company’s technical strategy to the vendor(s) and implement governance for significant architectural decisions.
- Upon re-sourcing and renegotiation, focus on the exit strategy upfront and include the exit strategy in the contract.
- Regularly assess the organisation’s vendor shift readiness and maintain an up-to-date sourcing plan to avoid panic shifts.
- Regularly assess external capabilities and technologies that can be adopted within the organisation to support the business strategy.
- Develop and maintain execution capability within the organisation, i.e. ability to transfer services from one vendor to another (or insource).
True, an IT organisation following these guidelines will not have the lowest IT cost within its industry. It will, however, have the potential for cost reductions, reduced operational and strategic risks and the ability to deliver future-proof IT services for the business as a whole.
3gamma assists clients in defining and delivering IT sourcing strategies, transformations and transitions through a variety of offerings:
- IT sourcing vision workshop – an opportunity for the company to understand what sourcing strategy would suit their needs best and possible strengths and weaknesses for its implementation.
- Maturity assessment – an assessment of the current performance in order to understand where and how much effort it takes to reach a targeted performance level.
- Contract evaluation – a second opinion in commercial issues regarding contract scope, set-up and management.
- Sourcing object assessment – analysis of applications/objects in regard to suitable sourcing models, readiness and risk level.
- Application readiness assessment – a survey that shows in what shape applications are for being transitioned and what actions that are needed to be taken.
- Migration management – 3gamma manages the physical transition of systems and infrastructure between vendors and/or platforms.
- Governance review for optimal set-up – assisting the client in setting up the most suitable governance structure based on the sourcing strategy, maturity level and performance demands.