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Sourcing must adapt to digital business goals, says Gartner

Businesses need to change their sourcing strategies if they are to keep pace with the digital revolution, says analyst organisation Gartner

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Automated nappies, smart shoes and autonomous cars are just a few of the IT-enabled products and services businesses are developing – but what does this mean to IT departments?

Lots of outsourcing – but a different type of outsourcing, according to Gartner. 

At the company's annual outsourcing event in London, keynotes and presentations were dominated by the speakers' emphasis on the need to digitise business and the sourcing challenges that brings.

The Gartner Sourcing & Strategic Supplier Relationships Summit 2015 opened with the announcement that 2015 is all about digital business.

Gartner analyst Helen Huntley began her keynote with figures demonstrating the rapid onset of digital business expected over the next few years.

According to the analyst, CIOs said that, in 2014, 22% of revenue was generated by digital products and services – and this will reach 41% by 2019.

'The next Kodak' – digitisation brings rapid disruption

She said most companies don’t even know who their main competition will be in a few years’ time, because new entrants are arriving from outside. Several Gartner analysts referred to Kodak when warning businesses to harness digital. The once-mighty company that brought photography to the masses filed for Chapter 11 bankruptcy protection in 2012. Simply, Kodak failed to change quickly enough in reaction to the rapid changes in its market brought on by digital technology.

And becoming “the next Kodak” is a fear for any business leader and CIO.

CIOs will play a critical role as the delivery of any digital product requires significant integration work.

But at a time when the importance of IT and the CIO to the business is on the rise, the CIO controls less of the IT budget.

Gartner's research shows that, in 2015, 38% of IT spend will fall under the control of the business, rising to 50% in 2019.

It is not only the purse strings the CIO will have to relinquish but a lot of development as well. In fact, when it comes to digital business development, only 15% of CIOs expect their organisations to undertake it in-house.

But despite the loss of control of finances and development, 2015 will be the “time in the sun” for CIOs because IT enables all digital business, said Huntley.

IT and the business now work together more than ever, with a relentless pace of change.

'Roads? Where we're going, we don't need roads'

Guest speaker, Peter Hinssen, an author and entrepreneur, took the digital theme further. He told an audience that grew up watching the Back to the Future films that, when Marty McFly and Dr. Emmett "Doc" Brown set the dial on the DeLorean car for the future, the date was October 21, 2015.

“We are in the future,” Hinssen told the audience.

He said businesses have to adapt because, under current models – including sourcing – they cannot keep up with the pace of change and react to threats to their markets from previously unknown competitors.

“You must think like a startup, not a structure.”

Hinssen said that, if CIOs are to be involved, they will have to “start swimming the other way”.

Sourcing will be more critical than ever and CIOs and their procurement teams will have to learn new tricks. The large IT services giants that have served businesses for years will claim they can do the digital work as well as the current enterprise IT services – but CIOs must look beyond them, said Hinssen.

Two-track outsourcing teams

Like the increasingly talked-about concept of two-speed IT – where businesses have to combine the need to develop IT to meet customer demands quickly and support the legacy core IT at the same time – businesses need two different approaches to outsourcing in the digital era, said Gartner.

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Gartner analyst, Ruby Jivan, gave Gartner’s take on what it calls “bimodal sourcing”. This is running different teams to procure services to support the different speeds of IT.

Two-speed IT is more entrenched in enterprise IT strategies, but bimodal sourcing is just emerging.

Jivan said Gartner found 25% of CIOs have bimodel sourcing models in place and another 30% have started implementing it.

She said all organisations will have to do it eventually, just to stay in business: “If sourcing does not change, IT will fail." She said CIOs are unable to keep in-house skills relevant. “We are already past the digital business era and are in the autonomous business age.”

According to Gartner 42% of CIOs admit they do not have the right skills in-house to allow them to keep up and over half (51%) cannot react quick enough to change.

Jivan said sourcing teams need to split in two. The first – which she described as mode 1 – will support core legacy systems and their modernisation. This is the larger of the two with knowledgeable staff working with enterprise suppliers. Meanwhile, the mode 2 team will be dealing with lots of small suppliers using agile techniques. This team will have a deep understanding of the business needs and will be able to react to changing requirements quickly. It will probably sit with the business.

IT's future in augmentation, not separation

She said these groups must work together so the mode 1 team can ensure the IT is ready for what is coming from mode 2.

But Robert Morgan, director at sourcing consultancy at Burnt Oak Partners, said there should be greater emphasis on integrating business knowledge into the existing IT recruitment teams, rather than separating them.

“There are probably only a few clients large enough to have separate teams but, for most, it is not feasible,” said Morgan. “It is about augmentation, not separation.

“It could also be quite divisive and create a ‘them and us situation’.”

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