5 Outsourcing Trends to Watch

The deals are getting smaller, with new pricing models, while security and cloud computing become hot topics.

1. Smaller Deals. A decade-long decline in the size of IT services contracts continues. While the number of mega-deals and midrange contracts awarded each year has remained fairly stable since 2002, the number of those worth $100 million or less has more than tripled, according to outsourcing consultancy Information Services Group (formerly TPI).

2. New Pricing Models. With continued pressure on their profit margins, outsourcing providers are considering more innovative–and often riskier–engagement models, including joint ventures, business-outcome-based pricing, revenue-sharing arrangements, and dedicated centers of excellence.

3. Multi-Sourcing Wranglers. CIOs have largely rejected broad, single-source deals in favor of a best-of-breed outsourcing model that uses a variety of specialty firms. But that doesn’t mean they’ve figured out how to manage the multi-sourcing beast. Some IT organizations are hiring people to bring the necessary management skills in-house. But IT service providers are also setting themselves up as services integrators that will oversee multiple providers and manage end-to-end delivery. Time will tell how well this fox-watching-the-henhouse model plays out.

4. Increased Focus on Security. It’s only a matter of time before a major IT service provider suffers a public security breach. Outsourcing companies are looking for new and better ways to protect data–their own and their customers’–says Mark Ruckman, an independent outsourcing consultant at Sanda Partners. In the meantime, security liability limits have become one of the most contentious negotiation issues between outsourcing customers and vendors today.

5. Cloudsourcing. The outsourcing deal pipeline is getting a boost from such next-generation delivery models as cloud offerings and remote infrastructure management, says consultancy Everest Group. Service providers are trying to address some of the technical and perception issues that have delayed widespread adoption of cloud services.

Source: CIO.com- 5 Outsourcing Trends to Watch By Stephanie Overby

Technologies to consider when renewing an IT services contract

Technology changes quickly, so organisations should ensure flexibility is built into IT services contracts to avoid missing out on the benefits of the latest advances

Cloud computing is perhaps the most overtly disruptive force in the IT outsourcing sector, but there are other technologies that make the next round of contract renewals an opportunity to do something different.

Figures from ISG show that there are billions of pounds, dollars and euros of IT outsourcing spending ready to be redirected, as thousands of contracts come up for renewal in the next few years. Some organisations might renew with existing suppliers or switch suppliers, while others, like the Driver & Vehicle Licensing Agency (DVLA), might take functions back in-house.
There will have been significant technology change since those contracts approaching renewal were signed. CIOs need to know how options such as cloud computing, automation and artificial intelligence can help them meet the aims of the business, but they also need to be able to spot a fad.

This is easier said than done as businesses enter new territory, otherwise known as digital business.

Many businesses are geared towards supporting digital business. If they are not, they probably should be. This technology-driven change transforms business at the front end, where they are connected to customers, and at the back end to process customer transactions in near real time.

For example, it is no good having a flashy customer app in the front end if customer queries are just sent to a call centre at the back. Transformation is required from front to back, and IT outsourcing (ITO) and business process outsourcing (BPO) must cater for this.

Then there are the high volumes of transactions made by customers who want the instant gratification digital brings. This has helped cloud computing gain a foothold, with software as a service (SaaS) and pay as you go filtering into down to most parts of the IT outsourcing sector.

Cloud computing

You only have to look at a company such as Netsuite to understand how cloud is encroaching on the enterprise sector. The SaaS company, which is taking on the traditional enterprise resource planning (ERP) and customer relationship management (CRM) suppliers, has grown quickly and boasts an impressive customer list. At its recent customer forum in London, the company announced new customers including WHSmith, Pret A Manger and Misys. Launched in 1998, Netsuite has 2,500 global staff and made sales worth more than $400m in 2014.

However, adoption is going beyond the software-as-a-service models of the likes of Netsuite.

Steve Tuppen, director at service integration firm Mozaic, which integrates multiple cloud services for CIOs, said almost every renewal contract today involves some element of cloud. The former UK president at sourcing consultancy Compass added that cloud computing has moved beyond development and testing for businesses and into production.

“This often means some public cloud use and a move towards transferring the application estate into the cloud,” said Tuppen.

He pointed out that the increased use of the cloud, which breaks services down between more suppliers, is leading to contracts with cloud brokerage companies that manage multiple cloud services for businesses.

Outsourcing consultant and former CIO Jean-Louis Bravard said disruptive technologies, including those based in the cloud, have allowed a move from fixed costs to variable costs for most processes.

“Even internal systems must be priced ‘by the drink’ and most often prices are going down. This presents a huge challenge on pricing and funding for both users and suppliers,” he said.

Bravard said this is changing the supplier landscape. “Despite near zero interest rates, the cost of funding a datacentre is still huge and only the biggest IT-based companies will probably be able to play the game. I would guess that today Amazon Web Services or Google’s IT parks are greater than BT’s or even IBM’s. Expect further entrants, such as Apple or Huawei.”

Automation and artificial intelligence

While cloud might be the biggest technology disruption in IT outsourcing, it might prove nothing compared with the changes happening now and what could happen in the future with automation and artificial intelligence.
“There are opportunities to identify candidate tasks for automation,” said Ilan Oshri, a professor at the Centre for Global Sourcing and Services at Loughborough University’s School of Business and Economics.

However, he adds that it is unlikely automation will be a significant chunk of renewal, at least not in the next five years. “The market size is still small and many client firms are sill experimenting with the concept.”

Software robots are being programmed to perform business processes, but artificial intelligence (AI) has already gone a step further and is offering business cognitive platforms that can complete a wide range of tasks and even learn as they go along.

For example, an AI platform from IPsoft known as Amelia is already in its second iteration.

Amelia can understand the semantics of language and learn to solve business process queries similar to a human. It initially learns using the same manuals as humans – it can read 300 pages in 30 seconds – and then learns through experience and by observing the interactions between human agents and customers.

If it can’t answer a question, it passes the query on to a human, but remains in the conversation to learn how to solve similar issues in future. It understands 20 languages, as well as context, and can apply logic and infer implications.

The software is already used for services such as technology helpdesks, contact centres, procurement processing and to advise field engineers, among other business processes. One customer using Amelia is a large US media company that has already realised the huge advantage of the system in a call centre agent context.

The company, which IPsoft would not name, receives around 65,000 calls to its contact centre every month. Prior to the adoption of Amelia, it was taking an average of 52 seconds to answer a call and 18 minutes for a satisfactory resolution. With Amelia in place, the calls are connected automatically and it now take an average of four-and-a-half minutes to reach a satisfactory resolution.

The benefits to the customer are clear, but less so for the supplier. Renewal is the perfect time to look at automation and AI technologies.

According to Homan Haghighi, director at sourcing advisory Alsbridge, there is a request for automation with almost every new contract.

“This can mean 30% less revenue for the supplier, which creates a conflict of interest,” said Haghighi.

However, he added that if a contract is up for renewal, businesses have the perfect opportunity: “Renewal is the catalyst for the introduction of things such as automation.”

One company that introduced AI through its IT services partner is Nationwide Building Society. It is using AI technology from Tata Consultancy Services (TCS) to reduce the complexity of back-end systems as it introduces more digital products. The building society is using TCS’s ignio neural automation system, initially for batch performance and capacity management. The software platform automates IT and business processes and can be on-premise or in the cloud.

Contracting for change

Renewing a contract to prepare for this type of rapid technology change is easier said than done, according to Mark Lewis, head of outsourcing at law firm Berwin Leighton Paisner.

What is available today, compared with even five years ago, includes public cloud systems, automation and robotics in both ITO and BPO, platform BPO, standardisation of business and process models and front-end digitisation tools and user interfaces, said Lewis.

“The main problem in all outsourcing contracts is how to mandate deployment, through the life of a current contract, of all or some of the above, without starting again or introducing projects – the cost of which wipe out the savings and efficiencies new technologies, computing and business models and processes might deliver.

“The best a customer can do – naturally with the provider and before committing to the contract – is to identify likely system developments and provide in detail in the contract when and how, if at all, the identified technologies, models and processes could be deployed, as well as the pricing principles for such deployment,” he said.

The CIO will play a key role in ensuring IT outsourcing contracts are written to meet the changing demands of the business.

Source: computerweekly-Technologies to consider when renewing an IT services contract by Karl Flinders

HP and IBM rated top IT outsourcing service providers

HP and IBM have received the highest industry Net Promotor Scores, meaning IT outsourcing customers are much more likely to recommend them than other service providers.

HP Outsourcing has the highest Net Promoter (NPS) score among IT service providers, according to a 2015 analysis of NPS scores among corporate technology vendors recently published by the Temkin Group.
A company’s NPS is considered a measure of customer loyalty and has been proven by some to be a leading indicator of corporate growth. Customers are asked to rank the likelihood they would recommend a brand to a friend or colleague on a scale of 1-10. Those who answer 9 or 10 are considered promoters: loyal enthusiasts who will keep buying and refer others to the company, thereby fueling growth. Respondents who answer 7 or 8 are considered passive customers: satisfied, but unenthusiastic and vulnerable to competitive offerings. Those who answer between 0 and 6 are detractors: unhappy customers who can damage a brand and impede growth with their negative word of mouth. The NPS is a straightforward calculation achieved by subtracting the percentage of detractors from the percentage of promoters, ranging range from -100 (all detractors) to 100 (all promoters).

HP Outsourcing had a score of 52, according to the Temkin Group, which has been evaluating NPS results for 62 vendors for the past four years. The top IT vendor overall was SAS Institute, which scored a 57. Other outperforming IT service providers were IBM Global Services, Oracle Outsourcing, and Dell Outsourcing, all of which scored at least five points above the IT vendor average.
HP, particularly the company’s legacy EDS outsourcing unit (which HP acquired in 2008), and IBM Global Services have had consistently high NPS results relative to their peers for some time, says Bruce Temkin, managing partner of the Temkin Group.

Accenture finishes at the bottom

Accenture Consulting had the lowest NPS score, not just among IT service providers but among all the technology vendors in the report, with a score of just one. In fact, the other four lowest scoring vendors were also IT service providers: CA Technologies, Hitachi, Wipro and Deloitte all had NPS scores below 10.

While the scores for IT vendors overall improved to an average of 31.8 in 2015—an increase of more than eight points after two straight years of declining scores—many IT service providers (including Unisys, Capgemini, CSC, Cognizant, Infosys, ACS and Tata Consultancy Services) ended up on the bottom half of the list, according to Temkin.

The Temkin group also surveyed 800 IT decision-makers from large North American firms to learn about their relationships with their technology providers in order to determine the link between NPS and customer loyalty, customer satisfaction and other aspects of a good customer experience. “We often find a strong correlation between NPS and satisfaction if the satisfaction score is calculated in a similar manner to the NPS score. What’s a more telling question is whether or not NPS correlates to customer loyalty,” says Temkin.

The research revealed that promoters are much more likely than detractors to spend more money with tech vendors, try new products and services when they are announced, and forgive their tech vendors after a bad experience. The report also revealed that SAS Institute and Cognizant were the top companies for purchase momentum and customers of HP outsourcing and Intel were most likely to forgive them for mistakes.

“If tech vendors use NPS to identify and do less of what causes detractors and identify and more of what causes promoters, then they should see a lift in both NPS and sales,” Temkin says.

Source: CIO.com-HP and IBM rated top IT outsourcing service providers by Stephanie Overby

Why Companies Have Stopped Outsourcing IT

Since the mid-1980s, when information-technology outsourcing began to take off, companies have been pursuing it as a means of cutting costs, reducing capital budgets and increasing efficiency. A broad range of IT services were frequently outsourced, from data-center operations to application development to user support. IT outsourcing still drives about 60% of the entire services sourcing industry, according to a Deloitte survey.

But it is a practice that is in decline for all but the most commoditized IT activities—and even the outsourcing of those is at risk.

Why has the tide turned against IT outsourcing? The idea only made sense when companies viewed technology as a cost of doing business. The rise of digitization, big data analytics and cognitive technologies has made IT strategic again. And it is often difficult to get innovative, differentiated outcomes when you turn IT over to someone else.

Even in the heyday of outsourcing, some companies realized this. For example, when a consumer-products company outsourced IT seven years ago, it exempted key functions from the deal. The company held on to such responsibilities as IT innovation, system design and architecture, and decision-oriented applications. The company’s chief information officer felt that they were too critical to its success to outsource.

Now some of the biggest previous proponents of outsourcing have reversed course. One manufacturer, for example, brought its application development activities back in-house a couple of years ago after decades of outsourced IT. It resulted in the hiring—or rehiring—of about 10,000 IT workers at the company. That company’s chief information officer argues that true innovation results from IT professionals being tightly aligned with the company’s strategy, and that is difficult to pull off when IT people work for a different company.

Data-center operations and end-user support are perhaps the last frontiers for outsourcing, and indeed these have become commodity activities. Keeping servers and networks running, as long as it is done in a reliable and secure fashion, doesn’t offer many opportunities for competitive advantage. And does it matter who helps a user recover a lost password?

Even these activities, however, are moving away from outsourcing. It is not that they are viewed as strategic, but that technology is providing other options. Software-as-a-service and cloud-based operations mean that companies decreasingly have data centers, so there isn’t anything to outsource. And both data-center operations and user support are increasingly being automated, so there is much less need for outsourced human support. “IT process automation” capabilities are offered by a variety of vendors both large and startup. And cognitive vendors are beginning to offer automated user interaction capabilities—like Siri for getting your computer working again.

If your company simply doesn’t believe there is value from doing IT differently and better than your competitors, then outsourcing may still be for you. But it is getting more difficult to defend that argument.

If we live in the digital age, do you want your digits to be the same as everyone else’s?

Source: Wall Street Journal-Why Companies Have Stopped Outsourcing IT by Tom Davenport

How to build IT innovation, flexibility into your IT outsourcing deals

Learn how to draw IT innovation from your IT outsourcing vendors and structure your contracts to cover new technology models like cloud and SaaS.

Enterprise CIOs seeking IT innovation from their IT outsourcing providers must be prepared to give a bit, too.
Specifically, CIOs must be willing to share their problems with IT vendors, get comfortable with emerging, innovative technologies like cloud computing and Software as a Service (SaaS), and structure their IT outsourcing contracts in a way that rewards vendors for their IT innovation efforts.
This advice, stemming from Forrester Research Inc.’s recent Services & Sourcing Forum in Chicago, is especially pertinent in the current economy, in which many CIOs are looking to innovate IT and restructure long-term outsourcing deals with an eye toward both cost savings and future growth.
Speakers advised that CIOs beware of locking themselves into long-term IT outsourcing contracts that do not provide the wiggle room to take advantage of new, more efficient and less expensive technologies — particularly if they want vendors working on their behalf to stir up more IT innovation.

But doing so isn’t easy. A Forrester survey of 710 enterprise IT decision makers in the second quarter of 2009 found that 38% complained of a lack of IT innovation or continuous service-level improvements by their IT vendors.

According to Sudin Apte, a senior analyst at Cambridge, Mass.-based Forrester, as IT sourcing professionals struggle to cut costs in a down economy, they are also determined to extract the maximum value possible from their service providers. However, many are unsure how to justify change requests and demand flexibility in their contracts.

Share your organization’s problems with your IT outsourcing provider

Conference speakers said while IT shops sometimes expect their service providers to go the extra mile and solve their problems for them, vendors aren’t mind readers. An organization that wants to draw IT innovation from its providers must be willing to undergo a transformation of its own, pushing the business to take bigger risks and transform its approach to IT outsourcing, said Dev Mukherjee, senior vice president and president of toys and seasonal items at Sears Holdings Corp. This includes getting over any mental roadblocks that prevent IT from openly discussing problems with an IT vendor — or even several IT vendors at once.

“I would rather have an innovative organization than just a risk management IT organization,” Mukherjee said, adding, “I appreciate how much work it takes to get the lights on, but you’re not getting credit for it.”

Mukherjee advises making a list of the five biggest problems in not only IT, but also your entire organization. Then, go to your vendor management team members and ask them to address these problems with IT sourcing partners. It’s important to ask your service providers not only what they can do for you, but what you should stop doing, he said.

To achieve IT innovation, you will have to recast the IT dialogue so the business side can understand it. “Talk the language the business wants you to talk,” Mukherjee said. (See sidebar for buzzwords to avoid.)

Eric Cohan, director of IT procurement at Dell Inc., agreed, saying it’s important to speak openly with your vendors about your organization’s IT problems. In other words, “take the mystique out,” he said.

Structure your outsourcing contract with an IT innovation margin for cloud, SaaS

It’s unrealistic to expect service providers to provide IT innovation on your organization’s behalf for free, so be prepared to structure your IT outsourcing contracts to pay for this progress, speakers and attendees said.

NASA, for example, is revamping its IT sourcing strategy spanning 100 contracts and 10 NASA locations. As part of the process, IT has implemented fixed-price contracts for stable, utility-based services and implemented a cost-incentive model for larger, transformative work that rewards maximum vendor flexibility, said Jonathan Pettus, director of NASA Marshall Space Flight Center’s Office of the CIO.

NASA is also including emerging delivery models such as cloud in the requests for proposals it sends out for services for its five IT towers — desktop services, enterprise applications, Web services, network services and data center services.

“It’s given vendors the opportunity to share other innovations they’d propose,” Pettus said.

Stephanie Moore, chief marketing officer at UST Global Inc., an outsourcing services firm, said one of the key challenges customers face is fear of being “hoodwinked” when paying for innovative services like cloud or SaaS.
Paying for managed or outcome-based services is difficult, Moore said, as it’s hard to know what qualifies as a good deal, how to validate what you’ve spent and what metrics to use in validating and payment. Thus, she stressed the importance of trust in a managed service relationship.
Still, opinions among attendees differed on the best payment model for extracting IT innovation from providers.

Courtney McCoy, manager of worldwide preferred vendors at Cummins Inc., a 37,000-employee company that designs, manufactures, distributes and services engines and related technologies, said he believes a lack of innovation can cost a company in the long run.

At the moment, McCoy is looking to improve IT innovation while also procuring a good price by moving to a fixed-bid model for some IT services.

“Now we can say [to the vendor],’You’re in here, be creative and bring something to the table,'” he said.

But Miguel Medina, manager of global procurement at Mattel Inc., a toy company with 25,000 employees worldwide, said he believes focusing on a set price could lead to problems.

“If you’re concentrating on cost, there’s only a small amount of margin,” he said. “They’re not going to come back with the dashboards that are going to allow you to sell to your business.”

IT often faces a problem when the CFO or others on the business side want to see more savings. However, “if we push [vendors] to the edge, we’ll sacrifice innovation,” he said. “The CFO is saying, ‘I don’t need innovation. I need [to cut] cost.’ But I think that premise is flawed.”

In managing relationships, it’s important to understand costs on both sides, look toward future gains and reward vendors appropriately for those gains, Medina said.

“If you improve, that’s the whole point,” he said.

Source: TechTarget- How to build IT innovation, flexibility into your IT outsourcing deals by  Rachel Lebeaux  

European IT budgets expected to fall in 2016, research reveals

IT professionals in Europe anticipate their IT budgets decreasing by almost $700, according to a survey by Spiceworks

IT departments have plenty to plan for in 2016 with Windows 10 upgrades and Microsoft SQL Server and Server 2003 refreshes, yet their budgets are expected to barely budge over the coming year, according to a survey by Spiceworks.

While North American IT professionals anticipate a slight lift in their 2016 budget, European IT pros predict no increase at all.

The survey of more than 800 IT professionals on the Spiceworks social network revealed that 38% of IT professionals think their budgets will increase in 2016, while 42% believe there will be no change and 10% anticipate a drop in funds, with the other 10% not sure.

Globally, annual budgets for IT were expected to increase on average by just $2,000, from $291,062 in 2015 to $293,094 in 2016, while in Europe IT budgets were projected to decrease by an average of $668.

Despite this, the survey revealed that IT professionals have plans for major migrations in 2016, with 64% claiming that end of support for products would be the driving force behind new hardware, software and services spending.

A total of 60% of IT professionals surveyed said they do not expect their IT staff to increase in 2016.

According to Spiceworks, the top operating system initiatives for 2016 are upgrading to Windows 10 and migrating from Windows Server 2003. In addition, surveyed IT professionals who have allocated budget to operating system upgrades expect to upgrade older hardware during these projects.

Some 53% of European IT professionals said they plan to invest in Windows 10, which is 6% higher than the global average. Additionally, 28% said they are planning a Windows Server 2003 migration and 8% said they are planning a Microsoft SQL Server 2005 migration, which Microsoft will no longer support after April 2016.

The largest chunk of IT budget – 37% – is expected to be spent on hardware, which is 4% less than in 2015. Software is predicted to account for 31% of IT spending, compared with 33% in 2015. Managed services spending is expected to increase by 3% to 13% in 2016, while cloud spending is set to increase by 2% to 14%.

As previously reported by Computer Weekly, CIOs’ IT budgets have also been heavily affected by the strong US dollar, which has made hardware 20% more expensive. Some IT departments have acquired servers in the current quarter to avoid even higher costs in 2016, when the strength of the dollar could increase further.

Meanwhile, the Spiceworks survey also revealed that 54% of IT professionals in Europe do not feel their organisation is adequately investing in security.

Source: computerweekly- European IT budgets expected to fall in 2016, research reveals by Cliff Saran

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Former GM CIO says BPO/ITO mega-deals wrong for current IT climate

This year’s World BPO/ITO Forum will focus on how the cloud is shaking up IT outsourcing. Conference chairman Jim Noble talks to SearchCIO about why mega-deals are a losing proposition for CIOs.

Jim Noble, former CIO at General Motors, AOL Time Warner, and Philip Morris and former chief strategy officer at BP, has done his share of IT outsourcing deals. So when Noble, who recently launched his own CIO coaching business, says that IT outsourcing mega-deals kill innovation and may actually put a CIO career in jeopardy, readers might want to take note.

Noble is the conference chair of the World BPO/ITO Forum’s 8th annual summit in New York City, June 16-17, where he will address this year’s theme: harnessing the cloud for successful transformation.

  • Your keynote talk at the BPO/ITO Forum is titled, “The Technology Climate: Clouds and Shadows.” I assume this is a not about global climate change — or is it?
  • Jim Noble: No, it is about winners and losers in the IT function.
  • What about the current technology climate will result in winners and losers?
  • Jim Noble, former CIO at General Motors, AOL Time Warner, and Philip Morris and former chief strategy officer at BP, has done his share of IT outsourcing deals. So when Noble, who recently launched his own CIO coaching business, says that IT outsourcing mega-deals kill innovation and may actually put a CIO career in jeopardy, readers might want to take note.
  • What about the current technology climate will result in winners and losers?
  • Noble: Well, the traditional concept was nobody ever got fired for outsourcing to — put in a name — Big Blue, or HP or Capgemini. The strategy was based on having a small number of very large providers. For example, when I was head of IT strategy for a big oil and gas company, we decided to standardize on six global, third-party IT services companies, and we would parse out the work to them. I know that is also the case with a number of Wall Street firms. For example, Deutsche Bank announced recently that they are awarding a very large infrastructure contract to HP. And so, the mega-deal is not dead. But, in my view, the ability of these companies to continue to innovate will be more than a little restricted by these mega-deals. And I much prefer the concept of a large number of small relationships rather than a small number of large relationships.

That’s pretty radical for a BPO/ITO strategy.

  • Noble: It’s hard to do, because it requires a very different skill set on the part of the client company. If you put all your eggs into one basket, you just have to watch that one basket. But after a while, that supplier becomes complacent, they have run out of good ideas, they probably used up all of their marketing investment money to delight their customers, and eventually it becomes engrained. A lot of these contracts are renegotiated after a few years because they have become obsolete.

You can’t really surround yourself with people who are thought leaders and also great at execution. At least, I’ve never found that there are many people like that in the world.
Jim Noble
conference chair, World BPO/ITO Forum
Now, if you believe in the cloud, which I do, then you don’t need to have these large mega-deals. You can engage with much smaller niche suppliers — boutique suppliers, if you like, best-of-breed — and you keep them agile by having an easy exit strategy. So, for example, if you were to use Box for your cloud storage then you could easily move your data to Microsoft or Amazon or Apple or Dropbox or whatever — and avoid the lock in. It keeps your third-party suppliers agile and innovative and fresh and best-of-breed. But, it is very hard to do, and you shouldn’t underestimate the difficulty of making it work.

Just making the decisions about who to go to, I would imagine, requires a tremendous amount of judgment.

  • Noble: Tremendous amount of judgment and dedication to understanding the supply side. I just wonder how many CIOs — or chief IT strategy officers or chief enterprise architects — how many of them are in touch with what is available on the supply side. How do they stay current, and how do they stay aware of new products and services? That is really tough.

The obvious answer is the advisory firms, like Gartner and Forrester and, of course, my own group [The Advisory Council International]. I have a vested interest here. And if you seek advice from these third parties, you’ll at least know who the major players are, and then you have to make a decision. But the good news is these decisions are not career-ending decisions. If you get it wrong, you can change it. It’s not a $100 million deal you’re doing; it’s maybe a $5 million dollar deal you’re doing, and so it’s relatively easy to change horses in midstream.

The reality today is you have to be alert to products and services out there; you have to piece them together. It’s like a jigsaw puzzle, and you have to be able to orchestrate. I use the word ‘orchestrate’ not in the technical sense as it’s used in service-oriented architecture, but more in a supplier management sense: How do you orchestrate 10 different vendors who are part of a business process? If you outsource a business process to a third party, you don’t have to orchestrate anything; but if you choose best-of-breed for the different links in the chain, then you’ve got to be pretty good at making them sing in harmony.

IT soft skills essential to ‘operating model 2.0’
What attributes do you need to have to do that orchestration? Or, is there technology out there that will help?

  • Noble: The technology is called ITSM — information technology service management — and some of the big players like BMC and CA Technologies and some others have good ITSM tools. That’s part of the solution space. BMC has Remedy. CA has Clarity, and there are others.

These are OK, but they don’t deal with the human skills you need to manage and orchestrate. I compare it to what I call operating model 2.0. The IT operating model 1.0 is conventional wisdom. IT’s all the usual stuff of holding meetings with our suppliers and having a good contract and having good incentives — all the normal conventional wisdom. Operating model 2.0 says you’ve got to make the orchestra sing together: the percussion instruments, the wood instruments, the string instruments — you get it. That is a soft skill and IT people are hopeless at soft skills. We’re good at hard skills — we can tell you how to do C++ and Java, but we cannot make two business partners pull together. And that is what the IT operating model 2.0 should be about.

CIO as systems integrator: Surround yourself with thought leaders

If you think about all the things a CIO has to be expert in — one year it is social media, and the next year big data, and the next year cybersecurity, machine learning– it seems like the CIO job is being stretched to the breaking point. Any thoughts on how the role of the CIO is evolving or what the CIO role should be?

Noble: My first thought is if you don’t step up, then you will become irrelevant. The end-user community is now much more sophisticated than when I was young. When I was young, the business people didn’t understand computers and they needed to come to us because they couldn’t do it any other way. That is no longer true. Today they can go to Salesforce and get their CRM. They can go to Workday and get their HR. They can go to Box and get their cloud storage. And they don’t need approval from the IT function. So, if the IT leadership doesn’t step up, then they will be marginalized — and that is shadow IT, run riot.

My other observation is this: There’s a saying, ‘You’re only as good as the people you surround yourself with.’ Jack Welch at GE knew that, and all of the great business leaders I’ve ever worked for, they knew that. They knew that they couldn’t possibly know everything but they had to have a team of direct reports who were really good in their disciplines. [In IT] it might be cloud, it might be big data, predictive analytics or whatever.

You can’t really surround yourself with people who are thought leaders and also great at execution. At least, I’ve never found that there are many people like that in the world.

And so, what I would advise an IT leader to do today is to surround themselves with thought leaders and then engage third parties to do the work, and the IT leadership team of the company coordinates that work. It puts us back in the role of SI — systems integrators — and it is a much more complicated, multi-dimensional, fast-moving job and that’s what makes it so exciting.

Source: TechTarget- Former GM CIO says BPO/ITO mega-deals wrong for current IT climate by Linda Tucci

Signs that your outsourcing contract is on the rocks. Part 2

What are the warning signs that outsourcing contracts are going bad? How can you mitigate the risks? Experts offer advice in this second of two articles.

Companies did not sit on their hands and watch their outsourcing agreements sail by in 2009. As reported in part one of our series, on outsourcing contracts’ danger signs, nearly 50% of companies told Stamford, Conn.-based Gartner Inc. that the economic crisis caused a sharp increase in contract renegotiations to save money. But paradoxically, such renegotiations leave a lot of room for costly mistakes.

“A recession causes [outsourcing] providers to sign bad deals that are not sustainable and do not give them the profits they need to stay in business, ultimately putting the CIO’s company at risk,” said Allie Young, research vice president and distinguished analyst in Gartner’s technology and service provider group.

And CIOs intent on cutting costs introduce risks when they agree to more lenient service-level agreements, which could result, for example, in lower-quality workers being assigned to their contract. This also is not an arrangement the business can tolerate over the long term, Young said.

In part one of this series, TPI’s Thomas Young dissected the ways in which outsourcing relationships can fail to meet expectations, from poorly documented contracts to lapses in governance after the deal is signed. In part two, Young and Forrester Research Inc. Vice President and Research Director Christina Ferrusi Ross focus on outsourcing contract risks: the overlooked danger signs that can torpedo a CIO, the deal and even the company; and, on a brighter note, the risks that with insight can be used to your company’s benefit.

Imbalances in outsourcing contracts

Imbalances between costs and control of the deal are a sure sign that an outsourcing contract is in trouble, Gartner’s Young said. An obvious imbalance is when the CEO is saying the provider is the “greatest thing since sliced bread” because the contract has lowered IT costs by 10%, while the company’s employees are complaining that IT is no longer supporting their needs.

Other imbalances, however, are more subtle and often reflect a defect in the CIO, rather than the provider. “Before you find the speck in another’s eye, look for the log in your own,” Young advised. To wit: If the organization is having cultural miscommunications with their offshore provider, that means the CIO does not have the right process or methodology in place to manage cultural differences and should consider reducing the number of offshore workers, she said.

Another danger sign is when the outsourcing vendor comes armed with “all kinds of ideas about innovation,” Young said. CIOs can partner with external providers on innovation and bat ideas about. But to cede a vision for the future, or not to have a point of view about architecture, means the CIO’s operations are not aligned with the business, she said “There are certain things you don’t want to lose control of — innovation and architectural standards,” she added.

Another imbalance: too many vendors. Gartner has long been a proponent of multivendor sourcing — choosing the right vendor for the job at hand rather than doing one-stop shopping: “It’s one thing to have two or three different providers helping with applications versus a provider list of 50 different application providers, which does happen,” Young said.

‘Operationalizing’ vendor risk

One of the biggest complaints auditors have with IT departments is their lack of governance of third-party providers, said Ferrusi Ross, who leads Cambridge, Mass.-based Forrester’s vendor sourcing team. Clients often tell her that they don’t have the resources to track every business change at a provider company, much less interpret what these changes mean. “The recession has stretched them so that the due diligence that is done is done upfront, and they can’t keep up with all the ins and outs at their providers,” she said.
For example, an outsourcing vendor that is experiencing financial trouble poses a risk to the deal. But should the alarm bells go off when the provider experiences one bad quarter, or a single- or double-digit loss, or a loss for the year? Ferrusi Ross asked. “The question is, how do you operationalize that?” she said. One bad quarter of revenue in an otherwise stable company might put the outsourcing contract into yellow mode, for example, until the next quarter, and perhaps warrant a conversation at the next steering committee meeting, she added.

Even when you know what to look for, red flags can come with many nuances. Take employee turnover: “If the vendor is in line with the industry standard for turnover, but your turnover is higher than the standard, that is a red flag that your deal is going bad,” Ferrusi Ross said. If your account manager is taken off the job without your approval, that is another red flag that needs to be addressed. On the other hand, if the turnover is high for all customers, the problem is with the vendor, and might be sign enough to take your contract elsewhere, she said.

Mapping the outsourcing contract to enterprise risk

But vendor losses can also be exploited for gain. Ferrusi Ross cited a CIO whose outsourcing vendor had lost business in the wake of the Wall Street meltdown. Rather than scurry to find a new vendor, the CIO picked up the phone and told the outsourcer to move its A-list talent, who had been working on Wall Street financial services contracts, to her account. “She basically said, ‘You have a lot of people on the bench. Swap mine out for them,'” Ferrusi Ross said. The CIO was able to do that because she was a huge client of the outsourcer, and she knew the outsourcer was not going to go out of business. The risk was well worth the upside for this CIO.

CIOs tend to see their outsourcing contracts through the lens of IT operations, Ferrusi Ross said. “One of the biggest red flags is a risk that can damage a company brand without the vendor ever breaching any part of the contract,” she said. Consumers associate lead paint in toys with Mattel, not the outsourcing vendor who used the paint. “The biggest risk is not that the deal fails, but the red flags you didn’t know were there,” she added.

CIOs should start with their company’s enterprise risk portfolios, Ferrusi Ross advised. That might require going to the chief risk officer or CFO or whoever has an enterprise-wide view of risk. For each enterprise risk, ask where the outsourcing vendor helps or hurts. One company she worked with had an outsourcing provider who did background checks on workers going seven years back. The company, however, had a 10-year policy. “My client made the provider do a 10-year check on employees; sure enough, in year nine, one of the employees had been arrested for money laundering,” she said.

Source: TechTarget- A dozen danger signs that your outsourcing contract is on the rocks (2) by Linda Tucci

A dozen danger signs that your outsourcing contract is on the rocks

Outsourcing contract renegotiations were up sharply last year. Most of that activity focused on cost cuts, which spells trouble. Experts offer advice, in the first of two articles.

During the past year, 50% of 1,073 organizations worldwide saw a sharp uptick in outsourcing contract renegotiations, according to recent research from Gartner Inc. in Stamford, Conn. Many of those contracts were renegotiated in a bid to cut costs, due to the recession.

“The recession causes bad behavior on both sides of the coin, the client and the supplier,” said analyst Allie Young, research vice president and distinguished analyst in Gartner’s technology and service provider group.

This seemed like a good time to look for the warning signs of an outsourcing deal gone bad. We spoke with three experts on the misconceptions, missteps and mistakes that spell trouble. In this first article of a two-part series, TPI’s Thomas Young, explains how lack of innovation and productivity gains, as well as culture miscommunications, can break down an outsourcing contract. Be prepared for self-examination. Many of the telltale signs have more to do with your organization than the provider.

Thomas Young is a partner and managing director with the CIO Services-Infrastructure at TPI, an IT consulting firm based in The Woodlands, Texas. Prior to joining TPI, Young was financial director at AT&T Labs, another TPI client. “When it comes to outsourcing deals, I’ve seen every bad movie you can imagine,” he said.

Innovation vs. continuous improvement in outsourcing contracts

Young said one of the biggest complaints he hears from CIOs is they aren’t getting innovation out of their deals. “My question is, ‘What did you think you were going to get?’ There is no provision in the contract for innovation,” he said. The CIO will mumble something about the sales meeting where promises were made, Young said.

The key to a successful outsourcing contract is documentation, he explained.

Innovation is difficult to document in an outsourcing agreement, and real innovation in any case is quite rare in mature industries. “That is why everyone is mesmerized by Apple,” Young said. CIOs tend to think that because they’re doing $100 million worth of business with a major outsourcing provider, they are going to get special access to some cool new technology. But that is not the case.

“About the best we have been able to do is dedicate a pool of resources from the supplier side, whose job is to sit in the client’s business and look for new opportunities to bring new projects to bear,” Young said. But that solution may be no better and worse than seeding one’s own research and development.

“Is the IBM guy better than what you could buy in the open market? That’s mixed,” he said, adding that in his view, innovation is better bred into the company culture.

Continuous improvement is another matter. Normal (and nominal) productivity is about 3%, maybe 4% in IT, Young said. Productivity gains greater than that usually require investment on both the client and provider side, and both kinds should be explicitly articulated in the contract. Providers that can bring 5% to 10% productivity gains are investing in the tools, automation and methods that bring continuous improvement. An application development outsourcing project with code that’s undocumented, buggy and expensive to maintain, for example, will require the client to invest in retooling the software to achieve meaningful productivity gains. “Over time, the defects go from 1,000 per million to low single digits, because the software is retooled, and we put that into the contract,” he said.

Company culture and outsourcing contracts

Beware the productivity gains that will not happen at any cost because of company culture. Young gave the recent example of a very large outsourcing firm brought in to consolidate the IT environment as part of a business transformation project. The environment in play: 3,500 servers, running at a 15% utilization rate. “The provider comes in and says we can virtualize the environment, stack it up and get them down to 20:1 on big boxes. We said, ‘[There’s] no way are you are going to do it,'” he said. The provider guaranteed the work.

Technically, the supplier could absolutely do it, but Young said he knew the political environment jeopardized, if not precluded, success. The CIO did not have control of his app dev teams and could not get them to consent to any changes for recompiling or adjusting the code, or freezing the code so it could be tested. “It was a dynamic environment where they were constantly making changes to applications, so they would not agree, right or wrong,” he said. Plus, the CIO did not have application performance metrics, so any change in response time was attributed to the virtualization efforts, and there was no documentation to prove otherwise.

The job was not done. The supplier did not, as promised “eat the costs,” choosing instead to be the “bad partner.” The contract was readjusted, but the experience was “not good,” he said.

Optimizing price but ignoring quantity in outsourcing contracts

CIOs focused on cutting costs do a good job of optimizing price by using outsourcing, but they tend to ignore consumption of services by users. They need to do both, or what Young calls “minding your p’s and q’s” — price and quantity.

The recession causes bad behavior on both sides of the coin, the client and the supplier.

When Young was at AT&T in the late 1990s, chairman Mike Armstrong wanted to reduce the $3.2 billion IT spend by half, in two years. The CFO’s answer was more outsourcing. “That will get you 15% to 20% and you are done, because you are locked into a contract and can’t go much further,” he said. Outsourcing providers are not incentivized to reduce costs when you sign a contract. Young’s team launched a parallel effort to reduce consumption by introducing a rigorous chargeback methodology so people could see the cost of what they were asking for — and pay the bill.

“We never made it to 50%, but we reduced costs a lot,” he said. “When I tell clients to take costs out, I tell them to focus on the Qs.”

The cost of writing out the terms of an outsourcing contract can come out to about 1% to 2% of the total contract value, counting attorney fees. The bigger the deal, the lower the cost — but not low enough to renegotiate annually. Good contracts are written to be as flexible as possible, to accommodate changes in the business and technology and the provider’s business. The trend for a while has been toward five-year deals, but many companies don’t make it that long, and cloud computing could lead to even shorter agreements.

Young said a big mistake people make is that after doing a yeoman’s job on the initial contract, they neglect governance and contract “maintenance” that will keep the contract fresh. Even CIOs with $200 million of external spend on 20 outsourcing contracts will put their “C” students on invoice verification. A $12 million per year contract that the CIO agonized over will creep to $18 million because managing the invoice and the contract was the employees’ “night job,” an afterthought, Young said. “Vendors love the afterthought mode,” he said.

Source: TechTarget-  A dozen danger signs that your outsourcing contract is on the rocks by Linda Tucci