duquesne
Research Duquesne Advisory delivers in-depth analyses of Information and Communications Technologies, their implementations and their markets. Research is based on critical observation of the market by the analysts and their on-going contacts with the vendor community, together with hands-on, practical experience in consulting engagements.

Outsourcing and Offshoring 2013 Part 2: The demand side perspective


The acceleration of innovation is driving an IT skills shortage and reshuffling the outsourcing and offshoring landscape. In the second note of this two part series, Daniel LeBourhis discusses the demand side perspective and in particular the need for renewed outsourcing management strategies.


Outsourcing and Offshoring 2013   Part 2: The demand side perspective
Whichever the suppliers, and despite the relatively smaller average size of contracts, we expect outsourcing and offshoring projects to become more critical and of renewed strategic importance in the near future, with a shift from legacy and operations offloading to digital transformation and innovation initiatives. To secure success, customers will need to carefully structure, contract and manage these projects.

Even more importantly, as they rely on external partners to accompany and enable such major changes, it becomes necessary to develop a much closer business relationship.

Customers need to make sure that this new business relationship is balanced and effective. While proper contractual formalization remains important, developing an in-depth mutual understanding and “intimacy” will prove paramount. This intimacy must be developed at all relevant organizational levels.


The limits of the “low key” approach to supplier management

In all sourcing endeavours, one of the difficulties stem from the “asymmetric” relationship between the supplier and the customer. On the one hand, selling projects, services, or technology is the core business of the vendor, who will mobilize all efforts and resources to this end. On the other hand, from a customer’s perspective, buying such services or products is not an on-going, core business task. Limited resources are available to carry it out, particularly in terms of high-level management attention.

While outsourcing initially enjoyed a high profile among corporate decision makers as a major opportunity to either resolve operational issues or, more often, to reduce IT costs, in the recent past it has largely become either an “IT-only” issue, or, even worse, a pure procurement and purchasing issue.

This “low key” approach to outsourcing contracts, while sub-optimal, may still work when applied to “vanilla” services procurement or even to the offshoring of stable back-end business processes. It will not work for innovation intensive, transformational initiatives.

Almost all outsourcers and service providers now claim to have capabilities in the “hot fields” of technology – virtualization, all flavours of cloud, mobility, social networks, big data, etc. However, in fact, most suppliers only cover part(s) of these domains, and only a handful of them are really equipped and organized to lead or accompany strategic innovation and transformation projects. This is likely to result in real capacity shortages even at outsourcers as such projects proliferate, particularly in the domain of mobility.

Such initiatives systematically involve business as well as IT decision-makers and project stakeholders, and they require top management sponsorship and support. They also need to be carefully planned and monitored.

“Two way” customer-supplier intimacy

Fundamentally, what is needed, especially for these innovation intensive, transformational initiative,- is real, two-way intimacy: while suppliers develop customer intimacy both to satisfy them and to sell more effectively, , customers should develop a high degree of supplier intimacy to ensure smooth cooperation, prompt issue resolution and value creation.

This involves understanding the real capabilities, strengths and weaknesses of the supplier ahead of project execution. It is also equally important to create the proper collaboration conditions during project execution. Beyond technical, organizational and contractual aspects, mutual understanding is needed up to the cultural level. This applies particularly to offshoring contracts. As a result, building this two-way intimacy represents a significant investment in time, efforts and costs. Organisations will find the returns rewarding but will also need to focus these efforts on a limited set of suppliers.

In offshoring contracts, it is particularly important to secure this two-way intimacy. Distance can easily mix with cultural differences to let a project “drift away” if proper “coupling” is not ensured between both parties. Leading offshorers address this issue by reinforcing their local presence, implementing global support resources networks, and adopting customer-centric reporting and management systems. Customers also need to adapt.

When offshore suppliers prove qualified for projects requiring agility, business alignment and responsiveness (i.e. most of today’s significant projects), customers will need to invest in developing the proper “two-way intimacy”, notably by making sure not to restrict contacts to the sole decision making layers, but rather involve all project stakeholders.

Seeing offshoring only as a low-cost option is no longer appropriate. Even previously stable applications or processes that could be candidates for offshoring are now affected by transformation pressures. When seeking to address skilled resources shortage via offshoring, customers bring in a geographically distant, but business-wise close and critical partner. This makes it worth building the proper ties and mutual intimacy, at the top and down to the operational levels.

Basic supplier management principles

Since many next generation outsourcing and offshoring projects will be highly strategic, we recommend some basic supplier management principles to maximize the chances of project success:

- Maintaining an in depth knowledge of key outsourcing suppliers, and a clear mapping of their capabilities: This may require significant effort, such as visiting supplier facilities and meeting the teams involved, even in an offshoring context. The quality of the supplier’s organisation and processes is just as critical as the availability of appropriate resources, and these organisation and processes must be compatible with, but not necessarily identical to, the customer’s own organisation.

- Keeping control of suppliers’ subcontractors: Customers should also insist on fully understanding the relationships between the primary supplier and any partner or contractor it may use. This supplier knowledge and mapping must be regularly updated and kept current. Securing broad and deep in-house consensus on supplier assessments at all involved hierarchical levels is equally essential.

- Making sure key suppliers earn a reasonable profit from working on the project: This conditions the suppliers’ durable involvement. While a full “open books” approach is generally difficult to implement and may have its own limits, customers should insist on ensuring a reasonably deep mutual understanding of cost drivers and cost variation factors on both sides. Such drivers and variation factors will vary heavily, depending on the contract nature as well as on the strategies of each partner. A sound degree of cost transparency as well as agreed benchmarking references remain important elements for proper contract governance. A strategic relationship supposes mutual benefits and these must be measurable.

- Decomposing large, complex projects into coherent, sizeable (for cost effectiveness) but manageable “parts”: beyond mere project manageability, this practice allows customers to select simpler, yet optimal metrics for each part of the project. Therefore, this decomposition should be the rule even when several or all of the overall project parts are awarded to the same supplier.

- Accepting relatively long engagement periods: Even though this may be seen as a more binding, riskier option, it enables the customer to better leverage the above-mentioned cost of establishing the necessary “two-way supplier intimacy” investment while it gives more visibility to the supplier. Proper contract governance and management processes, with regular reviews and “progress clauses” or other mechanisms to ensure performance and business alignment should be agreed upon to avoid “routine” and maintain supplier commitment.

- Focusing on early issue resolution mechanisms, not only on always difficult to execute exit clauses: Obviously, well-documented exit clauses must be built in the contracts to enable contract resolution if quality, delays or other metrics are not met. But it is even more important to formalise a problem-resolution process that enables early problem detection, escalation and resolution before a “no-return point “is attained. Such a process must take into account the particulars, notably organisational and cultural, of both organizations, and, when applicable, of their key subcontractors.

- Realising that the contracts regulating critical projects are integral part of IT architecture: They are not there only “in case of a conflict”, but must rather provide a clear, actionable framework for contract execution. Such contracts cannot be developed by legal professionals alone after the “technical deal” is signed; they must be developed concurrently with the project definition and negotiation. Special attention must be paid to avoiding contract lock-ins that may prevent future architectural evolutions or make them unduly costly. Customers should also pay particular attention to intellectual property (IP) issues in innovative projects, especially when these apply to core business knowledge on the customer’s side. In many cases, transformation initiatives result in embedding core business IP into systems, and may result in a transfer of this IP to the supplier. This may be acceptable under some conditions, provided it is the result of a conscious, well thought-out decision.

- Securing proper transfer of know-how to the customer: Such a transfer, especially on transformational or innovative projects, is a complementary key requirement when an organisation uses outsourcing or offshoring to address an in-house skills shortage. This is in the mutual interest of both parties to enable future cooperation. The nature and “perimeter” of the know-how transfer must be formalized in advance to ensure that key competencies are acquired, and this acquisition must be measured and validated.

- Organising the sourcing process around a permanent, multidisciplinary core team with effective executive-level sponsorship: Effective outsourcing cannot be reduced to a procurement process or a supplier management method. Even though cost optimization is almost always one of the key objectives, there are other equally important, or indeed more strategic, issues at stake. Maintaining strategic alignment of outsourced IT services requires high level sponsorship and the involvement of all interested parties. For this reason, it should not be left either in the hands of one particular corporate function, be it IT or procurement or another, but carefully organized as an essential, internal company-wide process. On the IT side, involving the Architecture and Program Management Office (PMO) functions, as well as IT Operations and/or Production, from the start is a wise approach.

Bottom Line

Accelerated change continues to forces organisations to outsource a substantial part of their IT activities, including transformational projects. To leverage external capabilities (including offshore) while retaining relevant key expertise and project control, user organizations should invest in “supplier intimacy” and implement corporate-wide, explicit outsourcing management processes.

Wednesday, August 21st 2013
Duquesne Advisory
Newsletter To subscribe to the Duquesne Advisory Newsletter, please enter your e-mail address.

Duquesne Advisory

Duquesne Advisory Ltd is a European firm, headquartered in the UK, dedicated to researching, understanding and advising clients worldwide on opportunities and trends in Information and Communications technology.

Research

Duquesne Advisory delivers in-depth analyses of Information and Communications Technologies, their implementations and their markets. Research is based on critical observation of the market by the analysts and their on-going contacts with the vendor community, together with hands-on, practical experience in consulting engagements.

Consulting

The analysts of Duquesne Advisory leverage the Firm’s ongoing market and technology research to undertake high added value consulting engagements for both ICT users and ICT providers. Focused on client service, their approach is rigorous and methodical, and at the same time pragmatic and operational.