Putting Innovation on the Outsourcing Menu

Putting Innovation on the Outsourcing Menu

Outsourcing is becoming an increasingly complex task for CIOs – especially if you want it to be successful.

Originally, the idea of handing all or parts of your IT infrastructure to a third party was to exploit economies of scale and access to scarce skills to deliver services for lower cost. We’ve been through the phase of “transformational outsourcing” too, where customers looked to their suppliers to manage major IT change projects – not always with great 
success. And lately, outsourcers 
are increasingly being expected to innovate for their clients, while 
also cutting costs – never an easy combination to achieve.

So how should CIOs go about engaging with outsourcers in a way that meets their business objectives? After all, according to sourcing experts, if what you want is not clearly stipulated in the contract, you won’t get it.

According to analyst Forrester Research, the major US, Indian and European systems integrators (SIs) focus mainly on helping clients lower the cost of IT. This may be fine if they are contracted to run IT services cheaply – but what happens when the SIs are asked to innovate.

Types of contract

According to analyst Gartner, contracts can be categorised in three ways: to deliver efficiency, transformation, or agility.

Over time, the nature of the deal could evolve. For example, according to Garter distinguished analyst Frances Karamouzis, a contract for application management could start with a business that submits a large number of helpdesk tickets. “In the first 18 months, the supplier could be incentivised to reduce the turnaround from, say, six hours to three hours,” she says. This is an efficiency-based metric.

The supplier might also run an analysis on the 10 areas of functionality responsible for the most helpdesk tickets and invest time and money to fix the approach, leading to a decline in incidents reported. “You now have a higher level of 
effectiveness,” says Karamouzis.

Later in the contract, the CIO may want to focus on agility or business transformation, and will change the metrics for success accordingly. Karamouzis says such flexible approaches allow IT to say yes, rather than no, to the business as demands change.

An evolving landscape

SIs used to win big, monolithic contracts – now they have to build collaboration into their agreements. 
The outsourcing world is moving to multi-supplier models with well-defined services that are brought together by service integrators, or by the internal IT department.

“The vast majority of contracts are multi-sourcing. This means we are now seeing shorter-term and lower-value contracts,” says Steve Tuppen, partner at sourcing advisor Information Services Group.

A service integrator is key to success in multi-sourced contracts. Tuppen says the integrator’s role is to take well-defined services from multiple suppliers and provide a single service, based on metrics such as value for money, customer satisfaction, innovation and agility. In such an environment, cloud computing also becomes a realistic option.

“More mature clients are willing to move towards cloud computing. It is a more leveraged model, giving the provider more ability to control their margin. The cloud utility concept provides a win for the supplier,” he says.

When moving away from contracts based purely on cost control, Tuppen urges CIOs to avoid an open book model, which stipulates all pricing in advance. Open book pricing seems initially attractive, as it enables the supplier to set a fixed fee, and allows the customer to see whether the cost is competitive. But the supplier gets to drive their own benefits through deploying technologies such as virtualisation to improve margins – which is not always reflected in the price.

Outcome-based pricing

Getting suppliers to innovate is not easy, particularly if the contract with the systems integrator was put in place for different reasons
Forrester principal analyst Liz Herbert says companies are starting to explore contracts that include outcome-based pricing to incentivise suppliers. For example, one easy-to-measure outcome is reducing customer waiting times in call centres.

“Some companies are looking to shift call centre traffic to a self-service model, so you could create goals around this,” she says.

However, even this straightforward example demonstrates the potential pitfalls – given that customers are increasingly turning to the web before making a call, it is difficult to tie what the supplier is doing in with how the world is evolving.

But Herbert suggests that if you can narrow it down to between three and 10 metrics tied in to payment, you are more likely to have a “win-win systems integration”

Ollie Ross, head of research at The Corporate IT Forum, says CIOs should also look at how well their business fits with the supplier. “Look at the relative size of your company compared to the SI,” she says.

Cultural fit is equally important. “You have to up your game if you want to work with a big SI. There is no point getting them to do things your way. You’ll have to work their way,” says Ross. “You need to be clear about 
what type of organisation you are. If you don’t have the structure and culture for innovation and innovative processes, you won’t accept supplier innovation.”

She says innovation may not necessarily take the form of a major change: “Value may be derived from lots of small steps such as continuous service improvement.”

Getting suppliers to innovate is not easy, particularly if the contract with the SI was put in place for different reasons. A prescriptive contract equals no innovation. The Corporate IT Forum recommends running innovations workshops with key suppliers. The experts Computer Weekly spoke to agree that contracts should also be considered fair on both sides, and allow the SI to reap benefits from innovations.

The right people

Having the right people on board from the supplier is vital. Forrester recommends CIOs put specific names into the contract with the SI, especially for key roles, with an approval process to bring someone new on board.

The CIO should also assess the senior people from the supplier who will be working on the contract. These are the people who interface with your staff and executives – 
they determine the credibility of 
the contract.

“It takes a lot of overhead to manage the people on your account,” says Gartner’s Karamouzis. “Micro-management is not cost-efficient. Instead, focus on the outcomes. If you enforce proper service level agreements and the supplier does not perform, they don’t get paid – so they will be forced to do competency assessment on their people,” she says “Determine the key five people and spend your time vetting those people because they determine your destiny as they create synergies between the teams,” says Karamouzis.

If larger SIs are not a good fit, 
CIOs should not be afraid to try smaller local specialists which are able to offer niche expertise. But these specialist firms may be 
less well known and so the due 
diligence process to assess their 
suitability and financial stability will be harder.

Alternatively, CIOs may wish to consider becoming a reference customer or joining an early adopter programme, where suppliers provide recently developed software and support for the implementation.

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