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.
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.