Why digitisation transforms supplier relationships

As the economy moves forward, CEOs are looking for the next wave of innovation to fuel growth. But are IT service providers ready?

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As the economy moves forward, CEOs are looking for the next wave of innovation to fuel growth. But are IT service providers ready?

According to Gartner, service providers are not ready because their existing delivery models will not effectively address new demands for exploratory digital pursuits.

Gartner predicts that buyers will look for business outcomes that complement the decisions they make.

Instead of simply selling more services, service providers need to position their services in a digital business context aligned to IT spending priorities, Gartner said.

In many ways, service providers are seeing their margins eroded by low-cost labour and cloud-based alternatives to traditional outsourcing.

Digital transformation of IT services

Digitisation promises to help business leaders run their organisations in a more agile way, and compete with the likes of Amazon. It is also the biggest opportunity that service providers have had in years to re-establish their relevance in the business value chain.

In the McKinsey article Accelerating the digitization of business processes, McKinsey associate principal Shahar Markovitch urged organisations to reinvent their entire business process to meet high customer expectations.

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This includes cutting the number of steps required, reducing the number of documents, developing automated decision-making, and dealing with regulatory and fraud issues.

In the past, a business would have turned to a service provider to run these processes more efficiently, through business process outsourcing. Susan Tan, research vice-president at Gartner, said: "Service providers have announced new digital leaders and investments to organically build or acquire digital skills/assets and many have launched innovation centres."

David Howie at ISG said: "Service providers see digitisation as a genuine opportunity. For many years, they have been forced to compete in competitive processes where buyers could run a [tender] process, which forces a competition on price."

But he believes that in the current climate, buyers do not really know what they want. "They need the service providers to educate them," he said. According to Howie, this represents an opportunity for service providers to compete on value, by helping buyers in a non-commoditised way.

Businesses may not have experience of dealing with service providers in a way in which results or outcomes cannot be easily defined.

As Computer Weekly has previously reported, according to Gartner, service providers’ existing delivery models may not effectively address new demands for exploratory digital pursuits.

Buyers and services providers are used to discussions based on time and material calculations, rather than perceived value.

Can such metrics be applied to digitisation? Howie said it is possible to provide certain metrics in digitisation contracts. "There can be a tangible deliverable, with clear metrics such as shifting transactional activity away from a branch network or moving away from paper-based to digital transactions," he said.

Given the opportunity that digitisation offers, analyst Forrester believes service providers will need to move out of the traditional outsourcing market. In the Forrester paper Next-Generation Services Offer A New Path To Digital Transformation, the analyst firm noted that most IT service providers cannot escape the long-term erosion of their margins.

In the report, analyst Frederic Giron wrote: "Large outsourcers like IBM, CSC and HP have lost a massive amount of market share to their Indian counterparts and cloud-based SaaS offerings over the past few years. In turn, Forrester expects large Indian outsourcers to haemorrhage red ink in the near term due to the unrealistic promises of savings they are making to their clients. The automation arms race currently under way will provide limited relief if they cannot help their clients transform legacy systems into more value-driven, standardised, digital-ready platforms."

Change from CIO focus

Traditionally, service providers sold outsourced datacentre or IT services to a CIO. But, as ISG’s Howie points out: "Digital is about working directly with the client. The buy relationship will need to be more closely mediated with the business [leader] than with the CIO." 

He said some service providers would struggle because they do not have such a close relationship with the business. However, there is a big opportunity for niche providers to deliver tailored services.

According to ISG, buyers are moving from monolithic to multi-sourced service provider contracts, in which individual providers are selected based on their individual competencies. "Multi-sourced contracts are here to stay, because clients are more confident they can manage and integrate the services," said Howie.

Such contracts are a good fit for digitisation, Howie added.

The experts agree that service providers will struggle to remain relevant in the era of digitisation unless they can offer businesses more flexible contracts.

Multi-sourcing, cloud and Saas means the CIO can choose the service that best meets business needs. And while IT relies on sound infrastructure, which has traditionally been the mainstay of IT outsourcing contracts, digitisation is driven by opportunities powered by social media, cloud, analytics and big data.

For instance, said Howie, a service provider could develop an analytics service for a bank’s mortgage customers to follow the lifecycle of the mortgage product through branch, online and call centre to build an integrated customer journey.

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