IT outsourcing has changed, but have you?

IT outsourcing was once a choice between doing it or not, but with maturing cloud-based services and new suppliers, there is more to consider

Once upon a time, IT outsourcing was a choice between doing it or not, but with maturing cloud based services and the arrival of new suppliers, there are now more options to consider and hurdles to overcome.

At the same time, the stakes have risen because IT has become more critical to the efficiency and competitiveness of businesses. As IT outsourcing increases, procurement teams are growing as IT departments shrink.

Cost, consumerisation, commoditisation and digitisation are all considerations today. And there are many more people involved. Procurement teams, supplier relationship management operations, the chief financial officer (CFO) and even the IT end-users in a business might all exert their influence on an outsourcing programme.

While "My Mess for Less" – where businesses contract a supplier to run a service at a lower cost – might remain the biggest reason for outsourcing, its importance is diminishing. Do you want to cut cost? Do you want to innovate? Or do you want both? In the past, it was purely about cutting fixed costs.

Decisions, decisions, decisions

Today, executives involved in the sourcing have multiple options for every aspect of their IT.

Mark Lewis, outsourcing lawyer at Berwin Leighton Paisner, said the biggest decision facing businesses is whether to move to the cloud or use traditional IT outsourcing.

If a traditional IT outsourcing model is chosen, decisions about the shape and scope of the deal are always a challenge, said Lewis. But the options are now better known, as are the supplier offerings, suppliers themselves and their delivery models. 

But the cloud brings different challenges. 

“With cloud, the decision process is still complex and difficult for buyers," said Lewis. "First, do they understand cloud offerings? Then, public or private?  How do they manage the data and other risks in public cloud that they keep hearing about? How easy will it be for them to integrate cloud in their IT environment? And who are the best cloud suppliers for them?” 

He added that the cloud advisory and integrator market is not as developed as in the IT outsourcing market, so there is still a high level of complexity for buyers.

The digitisation of business, which is being driven by cloud computing, is another example of an industry change that, while promising massive benefits, is giving sourcing professionals headaches.

New technologies in the digital arena, such as cloud, mobile and business intelligence (BI) add complexity to sourcing. 

According to a Forrester survey of global sourcing executives, 65% said they are excited about the changes that these digital technologies will bring, but 62% said the business lacks the skills to make the change and 68% said they do not have the right policies and business practices.

Forrester analyst Liz Herbert said supplier management teams need a new approach if they are to harness the skills of a plethora of often little-known suppliers. She said businesses have to change the rules of engagement with suppliers by rebalancing risk and value.

Tridip Saha, head of sales in Europe at Indian IT services firm Mindtree, blogged recently about the confusion being caused for CIOs by digitisation, because of the different approaches IT services firms take.

He said large, consulting-led IT service providers see digitisation as being “all about the strategy to transform your business, with IT on top; the digital agencies view it as being all about user experience/customer journey, and they don't bother about technology.”

Saha said: “The platform providers see it as all about having the right underlying technology platform, with no need for writing custom code ever again. [While] domain-centric IT service providers believe they have the golden solution created exactly for your industry and ask the customer how much of it they want?” 

He said most of the other suppliers take one of these approaches, depending on who you talk to.

Managing multiples

Digitisation and cloud computing stimulate competition between suppliers and today, it is highly unlikely that a business will sign an all-encompassing long-term contract with one, or even a small consortium of suppliers. Today, a big business might have thousands of suppliers, many of which are unofficial and arrive through end-user choice.

Not every business has the resources available to micro-manage a huge multi-sourced IT delivery model in the same vein as a company such as BP. The oil giant has the financial clout to not only make multiple suppliers deliver over and above expectations, but also has the resources to make sure they do.

BP managed to cut hundreds of millions in costs in a couple of years, while retaining a multi-supplier IT outsourcing environment. Most of the $800m savings on IT is the result of the company's sourcing strategy.

It wanted to reduce the cost and complexity of working with thousands of IT suppliers. It now has seven IT service providers in its multi-supplier environment and has shaken up its supplier management capabilities to ensure it gets the most from them.

BP has a big stick to keep suppliers in line and a huge resource to manage them. Not all businesses have this and there is a growing trend for businesses to outsource the service integration role.

“We have several service integrator templates ourselves,” said Lewis at Berwin Leighton Paisner. “So, in a relatively short time, I would expect to see service integrator/management contracts becoming standardised as well.”

Forrester analyst Lutz Peichert said service integration is usually an internal responsibility.

“Service integration is not a new thing because it has been done by in-house teams for years,” Peichert said. He said there is now a trend to outsource the role.

Do you know what you want?

All suppliers have different stories. This is making it tough for businesses to get exactly what they want. But it is critical businesses do so because, according to Forrester, 69% of CIOs do not believe they get what they asked for.

Change as the ultimate good in IT services contracts is over-estimated. The problem is more basic: actually getting what the customer thought it was buying in the first place.
Mark LewisBerwin Leighton Paisner

“But it is not that the supplier is not delivering, but the contract does not reflect reality,” said Peichert.

Understanding what you want and getting this supported in a contract is vital if the service is to live up to and even go beyond expectations.

Part of the problem is a disconnect between the business and the buyers. Lewis said IT and the wider business functions are not joined up enough and that business does not usually drive IT services procurement. 

“Procurement functions often do and that may introduce another element into the buying process that is not always helpful, especially where cost is the only driver. Change as the ultimate good in IT services contracts is over-estimated. The problem is more basic: actually getting what the customer thought it was buying in the first place.” 

Even IT experts and not just business buyers are to blame, according to Lewis.  

“In some cases, even IT professionals on the customer side go fishing for possible solutions to their business problems without knowing what they want or what is out there in the market," he said. "They then accept the most approximate solution and struggle to adapt it to their business needs.”

He said standardisation is helping. 

“We have started seeing a level of standardisation in both the legal and commercial terms of ITO contracts, as well as the service descriptions, service levels and even charges schedules. This makes drafting and negotiating deals shorter and less complex."

The other side is feeling change

IT buyers are not alone in feeling change. Suppliers are experiencing a massive shift in outsourcing behavior and are transforming in response. Sam Kingston, UK head at T-Systems said there are buying trends that are shaking up IT outsourcing.

Businesses are buying smaller modules of service to help them control and lower costs. 

“Services are being broken up and suppliers are being asked to take on specific parts of IT rather than end-to-end services,” said Kingston. This is increasing the number of suppliers used and committing less to individual companies.

Kingston also says there has been a shift in the key discussion with customers. Although he says the trend of suppliers to take on a service at a huge discount – known as "My Mess for Less” – is still alive and well, there is more importance put on making the user experience better.

Kingston said trends such as the increased involvement of the businesses and the breaking up of services is seeing procurement departments grow as IT departments shrink.

More voices and more choices

There are more people involved in the IT services procurement and there are more options available. But there is also more noise, not all of which is helpful. 

Sourcing skills are valuable assets to any organisation, but even the best are being put to the test when it comes to IT sourcing today.

This was last published in June 2013

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